WINDING UP OF A COMPANY

Written by: Sonali Khanna, Amity Law School, AUUP

A company is the association of a number of people for some common object or objects. In common parlance, the word company is normally reserved for those associated with an economic purpose that is to carry on business for gain. The business can be shut down by winding up of a company there can be several other reasons for winding up of the company they can be a loss, bankruptcy, passing away of promoters, and many other.

Introduction

The winding up or liquidation of a company is the process by which a company’s assets are collected and sold in order to pay debts. Any money remaining after all debts, expenses and costs have been paid off are to be distributed amongst the shareholder of the company. When the winding up has been completed, the company is formally dissolved and it ceases to exist.

The liquidation or Winding up of the company is the process whereby its life is ended and its property is administered for the benefits of its creditors and members. An administrator is called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debt and finally distributes any surplus among the members in accordance with their right

Section 2(94A) of the Companies Act, 2013, give the provision of ‘winding up’ means winding up under this Act or liquidation under the insolvency and Bankruptcy Code,2016.

The Procedure of Winding up of Company is regulated under Section 270 of the Companies Act, 2013. A company can be wounded up in one of two ways. First, the Court can compulsorily wind up a company. Secondly, the shareholder or the creditors of the company can themselves apply to wind up the company can themselves apply to wind up the company proceedings known as “voluntary winding up”.

Compulsory Winding Up

The compulsory winding up is done through the tribunal, Section 271 of Companies Act, 2013 states the circumstances under the which the Company will be wounded up. The following are the circumstances

  •  If a company is unable to pay its debts.
  • The company has by special resolution resolved that the company be wound up by the Tribunal.
  • It has acted against the interest of the sovereignty and integrity of India, the security of the State, friendly relations with foreign states, public order, decency or morality.
  • The Tribunal has ordered the winding up of the company under Chapter XIX.
  • If the company has not filed financial statements or annual returns for the preceding five consecutive financial years.
  • If the Tribunal is of the opinion that it is just and equitable that a company should be wound up.
  • If the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purposes or the persons concerned in the formation or management of its affairs have been guilty of fraud or misconduct.

Who can be a party?

Section 272 of Companies Act, 2013 gives the provision who can file the petition in the tribunal

i. Petition by the Company– A company can file a petition to the Tribunal for its winding up when the members of the company have resolved by passing a Special Resolution to wind up the affairs of the company. Managing Director or the directors cannot file such a petition on their own account unless they do it on behalf of the company and with the proper authority of the members in the General Meeting.

ii. Petition by the Contributors– A contributory shall be entitled to present a petition for the winding up of the company, notwithstanding that he may be the holder of fully paid-up shares or that the company may have no assets at all, or may have no surplus assets left for distribution among the holders after the satisfaction of its liabilities. It is no more required of a contributory making petition to have a tangible interest in the assets of the company

iii. Petition by the Registrar – Registrar may with the previous sanction of the Central Government make a petition to the Tribunal for the winding up the company only in the following cases:

(a) If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years;

(b) If the company has acted against the interests of the sovereignty and integrity of India the security of the State friendly relations with foreign States, public order, decency or morality;

(c) If on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up.

 

  1. Petition by the Central Government or a State Government on the ground that company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.
  2. Any person authorized by the Central Government in that behalf

Voluntary Winding Up

Voluntary winding up is affected by the passing of a special resolution by the members of the company. The winding up commences at the time of passing the resolution.

The two types of voluntary winding up are:

1.Members’ Voluntary Winding Up

For this to happen, a company must be in a position to pay its debts in full within 12 months after the commencement of winding up. The directors of the company are required to file a declaration of solvency to the above effect. The liquidator will be appointed by the company.

2. Creditors’ Voluntary Winding Up

Where a company is unable to pay its debts and wishes to be wound up, it may do so by way of a creditors’ voluntary winding up. In addition to the requirement of a members’ resolution to wind up the company, the company must also convene a meeting of its creditors to consider the proposal for a voluntary winding up. The company will appoint a liquidator, subject to any preference the creditors may have as to the choice of a liquidator.

If no declaration of solvency is filed or if the liquidator is satisfied that the company is unable to pay its debts within the specified period of 12 months after the commencement of winding up, the winding up will proceed as a creditors’ voluntary winding up.