Winding up of the Company is a legal mechanism of permanently shutting down a company. It is a process by which the Company's corporate existence comes to an end post which the Company goes in for dissolution under the surveillance of a Liquidator. The Liquidator monitors and administers the Company's assets during this crucial stage of the Company's lifetime, to make sure the stakeholders' interest is not hampered. Ultimately, dissolution kicks in, wherein the Company is dissolved and the name is struck off by the Registrar of Companies. Hence, the Company's life comes to an end.
Evolution of Winding Up Laws
The provisions of winding up for the first time were introduced into the legal fraternity through the Companies Act, 1956, and later were retained by the Companies Act, 2013. Under the Companies Act, 1956 there were three modes of winding up:
- Winding Up by Court or Compulsory Winding Up;
- Voluntary Winding Up and
- Winding Up subject to the supervision of the Court
But through the Companies (Second Amendment) Act, 2002, the third provision was omitted, and the word 'Court' was substituted by 'Tribunal'.
A circumstance under which a company is unable to pay its debts used to fall under the category of winding up by Court. The Company's inability to pay debts was considered when it failed to pay off debt amounting to more than Rs.500 (Five Hundred Rupees), which was subsequently changed to a sum exceeding Rs.1,00,000 (One Lakh rupees) through the Companies (Second Amendment) Act, 2002.
Under such a situation, the creditors initially used to issue a demand notice, which the Company had to reply within 21 days. Still, if the Company fails and neglects to pay the due amount, the winding-up proceedings would initiate.
The Companies Act, 1956 was revised, and an amended Companies Act was introduced as the Companies Act, 2013 ('Act'), but the winding up provisions remained the same, till the Legislature introduced the new Code i.e. Insolvency and Bankruptcy Code, 2016 ('IBC/ Code'). Interestingly, neither the Companies Act, 1956 nor the Companies Act, 2013 ever defined the term winding up. It was only on 15th November 2016; a definition section was inserted under the Companies Act, 2013, when IBC was introduced, as Section 2(94A) of the Act, which now defines winding up as "winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable."
Winding Up Under Companies Act, 2013
Prior to IBC, companies were wound up under the Act through following two modes:
- Voluntary Winding Up
- Compulsory Winding i.e. Winding Up by Tribunal
Voluntary winding up and winding up by Tribunal on the ground of inability to pay debts were omitted from the Act and placed under the Code under Section 59 and Sections 33 to 54, respectively. Simultaneously, winding up by the Tribunal, other than the inability to pay debts as per Section 271 of the Act, Section 255 of IBC have also been amended following Schedule XI of the Code. Presently, there are 5 circumstances mentioned under section 271 of the Act, under which winding up by Tribunal may be carried out. The conditions for filing a petition of winding up are:
- If the Company by special resolution has resolved that it should be wound up by the Tribunal;
- 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 and morality;
- If on an application made by the Registrar or any other person authorized 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 a 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 it is proper that the Company be wound up;
- If the Company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial fiscal years; or
- If the Tribunal is of the opinion that it is just and equitable that the Company should be wound up.
According, to section 272 of the Act, following shall present the petition for winding up of the Company:
- Company: it may present the petition if a special resolution is passed to that effect.
- Contributory or Contributories: it may present the petition, notwithstanding, that he is 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 shareholders after satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were initially allotted to him or have been held by him and registered in his name, for at least six months during the 18 months immediately before the commencement of the winding-up or the shares have been devolved on such contributory because of death of a former holder.
- Registrar: it may
present the petition after obtaining approval of the Central
Government, wherein the Central Government must give a reasonable
opportunity to the Company before granting such sanction to the
Registrar. The Registrar can file a petition under section 271 (b)
to (d) i.e. when:
- The Company acts against the security of the country; or
- The affairs of the Company has been conducted in a fraudulent manner; or
- The Company fails to file financial statements or annual returns
- Any person authroised by the Central Government or by the Central Government or a State Government: a petition may be filed in a case under Section 271(b) i.e. where the Company acts against the interest, security of the State.
This section clarifies that a copy of every petition made to the Tribunal for winding up shall also be provided to the Registrar, to which the Registrar shall submit its view within a period of 60 days of receipt of petition.
The Tribunal under section 273 of the Act can pass following orders on receipt of a petition for winding up of the Company, by any of the persons authorized as per section 272 of the Act:
- Dismiss the petition (with or without costs);
- Make an interim order, as it thinks fit;
- Appoint a Provisional Liquidator , till the making of a winding-up order;
- Make an order for Winding Up (with or without costs); or
- Any other order, as it thinks fit
Further such an order has to be made within a period of 90 days from the date of presentation of such petition. The Act also empowers the Tribunal to give the Company a reasonable opportunity to make its representation, before appointing a provisional liquidator.
It is to be noted that the Tribunal shall not refuse to make an order of winding up only on the ground that the assets of the Company have been mortgaged for an amount equal or more than those assets, or that Company has no assets.
The Tribunal doesn't randomly order liquidation when a petition is filed under the ground of just and equitable. Instead, it looks into other remedies available to the petitioners instead of merely seeking an unreasonable relief of winding up of the Company.
The Procedure of Winding Up (Section 274 to Section 365):
It is essential to understand a stepwise procedure of winding up under the Act. The procedure laid down under the statute is as follows:
- The Tribunal may direct the Company to be wound up, if it is satisfied that a prima facie case exists. The Tribunal further directs the Company to file its objections along with a statement of its affairs within 30 days of such order (this timeline may be extended under special circumstances).
- Further, the Tribunal at the time of passing an order shall also appoint a provisional liquidator or company liquidator. The Liquidator on its appointment shall file a declaration within seven days from the date of appointment in the prescribed form, disclosing a conflict of interest or lack of independence in respect to his appointment.
- If the Tribunal has passed an order of winding up, then the directors and such other officers have to submit the completed and audited books of the Company mandatorily, within 30 days of such order to the provisional Liquidator. If the director or such other officers fails to submit the required audited books, then they shall be personally liable for fine and imprisonment for contravening the provisions of the Act.
- The Tribunal within 7 days of passing an order for appointment of provisional Liquidator shall intimate the same to the Liquidator and the Registrar. On receipt of the copy of order, the Registrar shall endorse the same and notify about the order in the Official Gazette. In case of a listed company, the Registrar shall intimate about the order to the stock exchange or exchanges where the securities of the Company are listed.
- The winding-up order shall be deemed to be a notice of discharge to the officers, employees, and workmen of the Company, except when the business of the Company is continued.
- Within 3 weeks from the date of passing of winding up order, the company liquidator shall make an application to the Tribunal for the constitution of a winding-up committee to assist and monitor the progress of liquidation. Such committee would comprise of the Liquidator, the nominee of secured creditors, and a professional nominated by the Tribunal.
- When the order of winding-up is passed, no suit or other legal proceedings shall be commenced, or is pending, shall be proceeded with, by or against the Company, except with the leave of the Tribunal.
- On passing the order of winding up, the Tribunal shall pass an order to set up an advisory committee to assist the Liquidator and report the Tribunal regarding the matters as the Tribunal may direct. The committee should not exceed more than 12 members which is headed by the company liquidator and consisting of creditors and contributories of the Company, or other persons in such proportion as the Tribunal may direct.
- The Liquidator has to submit a report to the Tribunal within 60 days of passing of the order of winding up. The report should be an exhaustive one, consisting of nature and details of the assets, valuation of the assets, amount of capital issued, existing and contingent liabilities, etc. The Liquidator shall also make a report on the steps to be taken for maximizing the value of the assets. The Liquidator should place periodical reports before the Tribunal to update about the Company's progress from time to time.
- The Tribunal, after scrutinizing the report by the Liquidator, shall fix a time within which the entire proceedings shall be completed, and the Company is to be dissolved, or the Tribunal may on examination of the report order sale of the Company as a going concern or its assets or part thereof. Accordingly, to assist the Liquidator in the sale, a sale committee is set up comprising of creditors, promoters, and officers of the Company.
- Thereafter, the company liquidator on the order of winding up shall take into custody and control all the property, effects and actionable claims to which the Company is or appears to be entitled. The property shall be deemed to be in the custody of the Tribunal from the date of order of winding up.
- The Liquidator is under mandatory obligation to present the Tribunal with account of receipts and payments of the Company, which will be audited and copy of such audit report should be filed with the Tribunal, and other copies be delivered to the Registrar, which shall be open to inspection by any creditor, contributory or person interested.
- The Tribunal then, orders the contributories to pay any money due to the Company from him. If any money is due from the Company towards the contributory and the contributory has not paid in full share amount, is allowed set off. Further, the Tribunal may issue summons to those, who are suspected of having Company's property and examine such persons. Apart from this, if any other person has some property of the Company, a report of the same has to be filed by the Liquidator.
- The company liquidator has the power to call the creditors to prove their claims, upon which the Liquidator prepares a list of creditors. Each creditor is then communicated about their claims being accepted or rejected. The Liquidator also ensures that every invoice, order or business letter issued by or on behalf of the Company, should contain a statement that Company is being wound up.
- After all the formalities are over, the affairs of the Company has been completely wound up, the Liquidator shall submit an application to the Tribunal for dissolving the Company. If the Tribunal after the receipt of the application is of the opinion that it is just and reasonable to dissolve the Company, an order of dissolution is passed. A copy of such order shall be forwarded by the Liquidator to the Registrar.
Part 2 will deliberate upon winding up of a Company under the Insolvency and Bankruptcy Code, 2016, and Winding up rules, 2020.
This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.