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Winding up a Company in India

Introduction

The winding up of a company is considered as the end stage of a company’s’ existence. There may be multiple reasons for winding up of the company including loss, death of promoters, mutual agreement among stakeholders, bankruptcy, etc. Winding up is the process by which the existence of a company comes to an end. It is the process through which its corporate existence is ended and it is henceforth finally dissolved. As per section 270 of the Companies Act, 2013 a company can be liquidated either by way of voluntary winding up or by a tribunal. The provisions of the act have laid down proper conducts for the winding up of a company.

Winding Up By A Tribunal

Winding up of a company takes place by a tribunal by designating a liquidator in case, the company is unable to pay its debts or the company is acting against the interest or morality of India, security of state or, the company has undertaken fraudulent activities or any other unlawful business or any person or management connected with the formation of the company is found guilty of fraud or any kind of misconduct or it is deemed just and equitable to the tribunal to wind up the company or the company has passed a special resolution to that effect or has spoiled any kind of friendly relations with foreign or neighboring countries or the company has not filed its financial statements or annual returns for preceding for five consecutive years.

Under section 272 of the companies act, the application for winding up of a company in any of the circumstances stated above can be put in place by any of the following parties-

All such winding up petitions shall be filed in form no. 1, 2 or 3, as required along with the statement of affairs in form no. 4. The statement of affairs shall include facts up to specific date which shall not be more than 15 days prior to the date on which the statement of affairs is put in place. Also, it ought to be certified by a certified chartered accountant.

Voluntary Winding Up

Voluntary winding up of a company takes place by mutual agreement of the members of the company. Voluntary winding up may take place either by the passing of a special resolution or by passing an ordinary resolution by the members as a result of the expiry of its time period as fixed by the Articles of Association or the completion of the project or event for which it was constituted. The companies have to comply with the following procedure for winding up as provided by the Companies Act, 2013

  • The company shall conduct a meeting with the majority of the Directors with the agenda to initiate winding up of the company. The directors shall ensure that the company does not have any third party debts or it will be able to repay its debts in case it’s wound up and also the company is not liquidated to defraud any person.
  • The company shall issue a written notice in this regard to conduct a general meeting to all the shareholders for passing a resolution for the same.
  • The company in the general meeting shall pass an ordinary resolution to wind up the company by simple majority or special majority of 3/4th members.
  • After passing the resolution, the company shall conduct a meeting of all the creditors. If the majority of creditors in values are of the opinion that winding up would be beneficial for the company, the company may proceed with the same.
  • Within 10 days of the passing of the resolution, the company shall file a notice of winding up with the registrar of companies for appointment of an official liquidator.
  • Within 14 days of the passing of the resolution, the company shall give a notice regarding winding up of the company in the official gazette as well as advertise it in the newspaper.
  • Within 30 days of the passing of the resolution, the company shall file the certified copies of ordinary or special resolution passed in the general meeting as the case may be.
  • The company shall wind up the affairs of the company and prepare the liquidators account and get the same audited.
  • The company shall again conduct a general meeting in furtherance of the winding-up objective.
  • In the general meeting, the company shall pass a special resolution for the disposal of books and all necessary documents.
  • With 15 days of the passing of the resolution, the company shall submit the copy of accounts and file an application for winding up in the tribunal for passing the order for dissolution of the company.
  • The tribunal shall, if satisfied with the documents submitted by the company, pass an order within 60 days to effect of dissolution of the company.
  • After the order to this effect has been passed by the tribunal, the official liquidator shall file a copy of the order with the registrar of companies.
  • After receiving the order passed by tribunal, the registrar shall then publish a notice in the official Gazette declaring that the company is dissolved.

Winding up subject to Supervision of the Court

Winding up under the supervision of the court if often confused with winding up by a tribunal. In such a situation, the court only supervises the winding-up proceedings subject to certain terms and conditions imposed by the court. The court gives the liberty to the stakeholders to file a winding up petition even when the company is being wound up voluntarily. However, the Petitioner must prove that voluntary winding up cannot continue with fairness to all concerned parties. The liquidator then appointed by the court must submit a report with the registrar of companies in every three months showing the progress of liquation.

Liquidation under Insolvency and Bankruptcy Code 2016:

The Insolvency and Bankruptcy Code, 2016 relates to re-organization and insolvency resolution of companies, partnership firms, and individuals in a time-bound manner. The IBC, 2016 applies to matters that relate to both the insolvency as well as liquidation of a company where the minimum amount of the default is Rs. one lakh (this may be increased up to Rs.1 cr by the Government, through an official notification).

The Code lays down two stages:

Insolvency Resolution Process

It is the stage during which financial creditors assess whether the debtor’s business is viable to continue and the options for its reorganization and restructuring are suggested; and

Liquidation

In case, the insolvency resolution process is not successful, the liquidation process shall begin in which the assets of the company are realized in order to pay off the creditors.

Modes of Dissolution:

The various ways of Dissolution of a company are:

  1. Through a change of possession of a company’s undertaking to another as per the scheme of reconstruction or amalgamation. Under the case of transfer, the company will be dissolved by an order of the Tribunal without being wound up.
  2. Due to the winding up of the company, wherein assets of the company are first realized and then applied towards the payment of its liabilities. The surplus, in case any is appropriated to the members of the company, as per their rights.

When can’t a company commence a Members’ Voluntary Winding Up?

It is not possible to wound up every company in a members’ voluntary winding up. The first exception is insolvent companies. The company must be solvent at the time and the directors must have executed a Declaration of Solvency stating so and setting out the assets and liabilities.

The Act sets out 3 more exceptions:

  1. If an application has been filed for the winding up of the company on the basis that the company is insolvent (whether it is or not); and
  2. The court has already wound up the company. Once the Court has made that order, the directors and members lose the power to make any other appointment.
  3. A third exception is where the company is the corporate trustee of a number of trusts, and one or more of these trusts are continuing.

The directors do not appoint the liquidators and the company is not wound up because of the meeting of directors. The directors will generally nominate liquidators to be appointed by the members, but the actual appointment of liquidators and the winding up occur by resolution of the members. The directors and members may also bypass the meeting process and pass resolutions without the need for the meeting, as long as all directors or members agree to the resolution being passed. They may do this by executing a certificate of resolutions which is passed when the last person executed the certificate.

The directors must have made proper inquiries and actually believe that the company is solvent (that it will be able to pay all of its creditors within 12 months after the commencement of the winding up). Then only they can resolve that the company is solvent and the Declaration of Solvency can be executed. Once the directors have executed that Declaration of Solvency and have resolved to call a meeting of members to consider the appointment of liquidators, the declaration of solvency will be filed with ASIC and notices calling a meeting of the members will be issued to all members.

Conclusion

However, giving a restrictive meaning to section 397/398 of the Companies Act, 1956 is not in the interests of the minority shareholders. It is also equally true that the frivolous litigation misusing section 397/398 of the Companies Act, 1956 is to be discouraged at the initial stage itself considering the market dynamics and the impact.

  1. The CLB can certainly look into the concluded proceedings, but, can not give a different finding on the same issue concluded by a Competent Court.
  2. The Petitioners approaching the CLB can refer to the concluded proceedings; however, the petitioner may not be able to get relief with the similar or same grievances raised in the concluded proceedings.
  3. Irrespective of pendency of any proceedings between the majority and the minority, the CLB can entertain a petition under section 397/398 of the Act and the CLB will take an appropriate decision as to the issue of grant of relief or the maintainability of a petition under those circumstances.
  4. When it comes to the issue of applicability of settled legal principles like Res Judicata or Res Judice, the CLB will exercise its discretion based on the facts of the case and no hard and fast rule can be laid in this regard.
By | 2019-07-19T17:18:15+05:30 July 19th, 2019|Insolvency Education Series, Uncategorized|0 Comments

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