(..13 ..)

WINDING UP[1]

Table of Contents

QUESTION BANK

Q.1 Discuss the Winding up of a company and the power of the liquidator; under what circumstances does a Tribunal order to wind up a company?

2 What are the different kinds or modes of winding up of a company.
3. Define winding up. Explain the consequences of winding up. Elaborate the role of the Tribunal and liquidator in winding up.
4. What is the scope and importance of the inability to pay debts and just and equitable causes as grounds for compulsory winding up?

SHORT NOTES

1) Winding up

2) Dissolution

3) Powers of Liquidator

I] MEANING OF WINDING UP OF A COMPANY:-

According to Gower- “Winding up is the process whereby the life of the company is ended, and its property is administered for the benefit of its creditors and members”[2]. The liquidator[3] is appointed, and he takes over the control of the company, collects and sells its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights”.

In short, winding up is the process by which a company’s life comes to an end. However, a company’s legal personality does not ‘dissolve’ immediately with the beginning of the winding up of the process but continues till the completion of the liquidation process. In other words, the company’s legal personality gets dissolved after the liquidation process is completed. Therefore, it is said that ‘winding up’ precedes dissolution[4]. “Winding up” is also called ‘liquidation’.

II] MODES OF WINDING UP OF A COMPANY:-

A company may be wound up by any of the following modes-

A) Winding up by the Tribunal (S. 271 to 303):-

Winding up by the Tribunal is also known as “compulsory winding up”. In the following circumstances, at its discretion, the Tribunal can order winding up (S. 271), viz.

1) Circumstances in which Tribunal orders winding up:-

a) Special Resolution[5]:-

If a company, by special resolution, resolves that the company may be wound up by the Tribunal, the Tribunal order the winding up of the company. However, it is within the discretion of the Tribunal either to order or not the winding up of a company.[6].

b) Acted against the sovereignty and integrity of India:-

Suppose 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. In that case, it may be compulsorily wound up.

c) For revival and rehabilitation of Sick Companies:-

The tribunal may order the winding up of the company under Chapter XIX, i.e. for the revival and rehabilitation of sick companies.

d) Default in filing financial statements or annual returns:-

If the company has made a default in filing its financial statements or annual returns with the Registrar for the immediately preceding five consecutive financial years, it may be ordered to be wound up.

e) Fraudulent or unlawful purpose:-

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 are 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 that, it is proper that the company be wound up.

f) Just and Equitable[7]:-

The Tribunal may order winding up if it thinks it is just and equitable. We may say that it is a residuary clause that allows winding up on any ground other than the above discussed.

The Tribunal issues order of winding up in a number of circumstances, like (i) cessation of substratum or main object of its formation, (ii) mismanagement of company by directors, (iii) if the company continuously incurs huge losses, (v) if the company is formed for, or carries fraudulent or illegal purpose, (vi) if there is the oppression of minority of shareholders, and (vii) if the private company in its essence or substance seems to be a partnership.

2) Who can apply for winding up (S. 272):-

Any of the following may present a petition for winding up before the Tribunal.

(i) Petition by a Company:-

The company may file a petition for winding up if it has passed a special resolution for filing a winding up petition in a general meeting of the members. Such petition shall be accompanied by a statement of affairs in such form and in such manner as may be prescribed.[8].

(ii) Petition by contributory:-

When a company’s winding up commences, its shareholders are called ‘contributors’; such shares may have been partly or fully paid up. A contributory shareholder is entitled to present a petition for winding up.

a) even though the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities,
b) even though the share in respect of which he is a contributory either was originally allotted to him or has been held by him and registered in his name for at least six months during the eighteen months immediately before the commencement of winding up, or have devolved on him through the death of a former holder.

(iii) Joint petition:-

All or any of the persons specified above can file a petition for winding up.

(iv) Petition by registrar:-

The Registrar of the companies is entitled to apply on all grounds specified earlier except winding up by special resolution for the revival of the seeking company under just and equitable grounds. The registrar may present the petition only after giving the company an opportunity to be heard and getting sanction from the Central Government.

Moreover, the Registrar shall not present the petition on the ground that the company cannot pay its debts unless this appears to him either from the company’s financial condition as disclosed in its balance sheet or from an inspector’s report.

(v) Petition by the Government:-

The central or State Government may file a petition to wind up a company if it has acted against the interests of India’s sovereignty and integrity, security, friendly relations with foreign states, public order, decency, or morality.

(vi) Person authorised by the Government:-

Any person authorised by the Government for that purpose may file a petition for the winding up of a company.

Views of Registrar- A copy of the petition made under this section shall also be filed with the Registrar, and the Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal within sixty days of receipt of such petition.

3) Effect of winding up order:-

Winding up order operates as follows-

i) Operates in favour of creditors and contributories (S. 278):-

The order for the winding up of a company shall operate in favour of all the creditors and all company contributors as if it were made out on the joint petition of creditors and contributors.

ii) Stay of suits, etc. (S. 279):-

When a winding-up order has been passed, or a provisional liquidator has been appointed, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding-up order, be proceeded with by or against the company, except with the leave of the Tribunal and subject to such terms as the Tribunal may impose. However, it would not affect the proceedings pending before the Supreme Court or a High Court.

iii) Appointment of Liquidator (S. 275):-

To wind up of a company by the Tribunal, the Tribunal at the time of passing of the order of winding up shall appoint an Official Liquidator[9] from the panel maintained as the Company Liquidator. (Discussed in detail in ‘note’)

iv) Settlement of list of contributors and application of assets (S. 285):-

As soon as may be, after the passing of a winding up order by the Tribunal, the Tribunal shall settle a list of contributors, cause rectification of the register of members in all cases where rectification is required in pursuance of this Act and shall cause the assets of the company to be applied for the discharge of its liabilities.

v) Custody of company’s properties (S. 283):-

The company Liquidator, on the order of the Tribunal, forthwith takes into his custody all the property, effects and actionable claims to which the company is or appears to be entitled and takes such steps and measures as may be necessary to protect and preserve the properties of the company.

4) Sale of assets and recovery of debts due to company (S. 362):-

The official Liquidator shall expeditiously dispose of all the assets, whether movable or immovable, within sixty days of his appointment.

5) Settlement of claims of creditors by Official Liquidator (S. 363):-

Within thirty days of his appointment, the official Liquidator shall call upon the company’s creditors to prove their claims as prescribed.

6) Order of dissolution of Company (S. 302):-

When the affairs of a company have been completely wound up, the Company Liquidator shall apply to the Tribunal for dissolution of the company.

The Tribunal shall, on such application or when it is of the opinion that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company should be made, make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly.[10].

SHORT NOTES

A) Official Liquidator[11]:-

1) Appointment of Liquidators (S. 275):-

For the purpose of winding up of a company by the Tribunal, the Tribunal, at the time of passing of the order of winding up shall appoint an Official Liquidator or Provisional Liquidator from the panel maintained under the Insolvency and Bankruptcy Code 2016[12].

The Central Government may appoint as many Official Liquidators, Joint, Deputy or Assistant Official Liquidators as it may consider necessary to discharge the functions of the Official Liquidators (S. 359).

2) Powers of Provisional Liquidator:-

Where a provisional liquidator is appointed by the Tribunal, the Tribunal may limit and restrict his powers by the order appointing him or it or by a subsequent order, but otherwise, he shall have the same powers as a liquidator.

3) Terms, conditions and fees of the Liquidator:-

The terms and conditions of appointment of a provisional liquidator or Company liquidator and the fee payable to him shall be specified by the Tribunal on the basis of the task required to be performed, experience, qualification of such liquidator and size of the company.

4) Declaration of Liquidator:-

On appointment as provisional liquidator or Company Liquidator, as the case may be, such a liquidator shall file a declaration within seven days from the date of appointment in the prescribed form disclosing conflict of interest or lack of independence in respect of his appointment, if any, to the Tribunal and such obligation shall continue throughout the term of his appointment.

5) Removal and replacement of liquidator (S. 276):-

The Tribunal may remove the provisional liquidator or the Company Liquidator on a reasonable cause being shown and for reasons to be recorded in writing. Such causes are (a) misconduct; (b) fraud or misfeasance, (c) professional incompetence or failure to exercise due care and diligence in the performance of the powers and functions, (d) inability to act as Liquidator, (e)conflict of interests or lack of independence.

6) Powers and Duties of Liquidator (S. 290):-

The liquidator can exercise the following powers subject to the overall control of the Tribunal, namely-

a) to institute or defend any suit, prosecution, or other legal proceedings, civil or criminal, in the name and on behalf of the company;
b) to carry on the business of the company so far as may be necessary for the beneficial winding up of the company;
c) to sell the immovable and movable property and actionable claims of the company by public auction or private contract;
d) to sell the whole of the undertaking of the company as a going concern:
e) to raise loans on the security of the assets of the company;
f) to do all such other things as may be necessary for the winding up of the affairs of the company and to distribute its assets.
g) to do all acts and to execute, on behalf of the company all deeds, receipts, and other documents. For that purpose, when necessary, he can use the company’s seal.
h) to inspect the records and returns of the company on the files of the Registrar without payment of any fee.
i) to prove and claim in the insolvency of any contributory for any balance against his estate and to receive dividends in the insolvency;
j) to draw, accept and endorse any negotiable instrument on behalf of the company;
k) to take out, in his official name, letters of administration to any deceased contributory and to do, in his official name, any other act necessary for obtaining payment of any money due from a contributory or his estate;
l) to appoint an agent to do any business that the liquidator is unable to do himself.
m) to appoint security guards to protect the property of the company.
n) to appoint value, chartered surveyor or chartered accountant to assess the value of the company’s assets;
o) to give inviting advertisement bids for the sale of the company’s assets;
p) to issue a notice requiring any persons to submit and verify the statement of affairs of the company, and such notice shall be served by the liquidator;
q) to apply to the Tribunal for an order directing persons concerned to make statements;
r) to call any person to record any statement for the purpose of investigating the affairs of the company.
s) to invite and settle the claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this Act.

8) Exercise and Control on liquidator’s powers (S. 292):-

Following controls act on Liquidator’s powers, viz.

i) Control by Tribunal:-

The liquidator has to exercise his powers and functions under the supervision and control of the Tribunal.

ii) Resolutions of creditors and contributors:-

The liquidator is also required to take into consideration directions given to him by resolutions of creditors or contributory or by a committee of inspection.

iii) Control by Central Government:-

The Central Government shall take cognisance of the conduct of a Liquidator and, if he does not faithfully perform his duties, enquire into such matter and take such action as it thinks fit.

However, any person aggrieved by any decision of the liquidator may apply to the Tribunal, and the Tribunal may confirm, reverse or modify the act or decision complained of and make such further order as it thinks just.

*****

[1] कंपणी कायमची बंद करने / कंपणीचा गाष्या गुंडाळनेची प्रक्रीया [कंपनी के स्थायी परिसमापन/समापन की प्रक्रिया]

[2] वाइंडिंग-अप (समेटना) वह प्रक्रिया है जिस के द्वारा कंपनी की संपत्ति को उसके लेनदारों और सदस्यों के लाभ के लिए प्रशासित किया जाता है| उसके बाद कंपनीका विघटन (जिवन समाप्त) होता है|

[3] कंपणीचे वतीने देणे घेणे पुर्ण करणारा अधिकारी /ऋणषोधन अधिकारी [परिसमापक]

[4] प्रत्यक्ष कंपणीचे अस्तीत्व संपण्यापुर्वी तिचे बंद करण्याचे /गाषागुडाळन्याचे कामकाल चालु होते.

[विघटन से पहले समेटने कि प्रक्रिया होती है|]

[5] विषिष्ठ ठरावाने [विशेष प्रस्ताव]

[6] The Content in bracket is removed by the 2016 Amendment, this removed provision is now dealt within Ss. 7 to 9 of the Insolvency and Bankruptcy Code, 2016 [b] Inability to pay debts:-

If a company is unable to pay its debts, it may be wound-up. A company is deemed to be unable to pay its debts-

(i) if a creditor to whom the company owes Rs 1 lac or more, has served notice, on the company demanding payment and the debt has not been paid within twenty one days, or

(ii) if an execution on a decrees returns unsatisfied, or

(iii) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts.

However a winding up proceeding will not be allowed in each and every case to recover disputed debts.]

[7] इतर न्याय व योग्य कारण [न्याय और न्याय कारण]

[8] The earlier provision of filing petition by creditor is removed by the 2016 amendment. The removed portion is…[(ii) Petition by creditor:-

Most petitions for winding up are filed by the creditors. Filing winding up petition by the creditor is effective mode of recovery of his debt.

A secured creditor, the holder of any debentures[8] and the trustee for the holders of debentures shall be deemed to be creditors.

The term ‘creditor’ also includes any contingent or prospective creditor or creditors. However, before a petition for winding up of a company presented by a contingent or prospective creditor is admitted, the leave of the Tribunal shall be obtained for the admission of the petition and such leave shall not be granted unless in the opinion of the Tribunal there is a prima facie case for the winding up of the company, and until such security for costs has been given as the Tribunal thinks reasonable.]

[9] शासकीय ऋणषोधण अधिकारी [सरकारी परिसमापक]

[10] The provisions as to voluntarily winding up are removed by the 2016 amendment. Now the provisions are dealt with under S. 59 of the Insolvency and Bankruptcy Act, 2016. Removed provisions are

[B) Voluntary Winding Up (S. 304 to 323):-

1) Object of voluntary winding up:-

The main object of voluntary winding up is to enable company and its creditors to settle their affairs without intervention of Tribunal. The main advantage of voluntary winging-up over winding up by Tribunal is that it does not have to comply with so many formalities.

2) Circumstances in which the company may be wound up voluntarily (S. 304):-

A company may be wound up voluntarily in the following circumstances viz.-

a) By ordinary resolution:-

When- (i) the period, if any, fixed for the dissolution of the company by the article has expired, or

(ii) the event, if any, has occurred, on the occurrence of which the article provide that the company is to be dissolved, and the company in general meeting passes a resolution to be wound up voluntarily.

b) By special resolution:-

If the company passes a special resolution that it is to be wound up voluntarily, the company should publish such resolution within 14 days of its passing in the official Gazette, and also in some newspaper (circulating in the district where the registered office of the company is situated)

3) Declaration of solvency (S. 305):-

Where it is proposed to wind up a company voluntarily, its director or directors shall at a meeting of the Board, make a declaration verified by an affidavit to the effect that they have made a full inquiry into the affairs of the company and they have formed an opinion that the company has no debt, or whether it will be able to pay its debts in full, from the proceeds of assets sold in voluntary winding up?

4) Meeting of Creditors (S. 306):-

The company shall, along with the calling of a meeting of the company at which the resolution for the voluntary winding up is to be proposed, cause a meeting of its creditors either on the same day or on the next day and shall cause a notice of such meeting to be sent by registered post to the creditors.

Where two-thirds in value of creditors of the company are of the opinion that-

It is in the interest of all parties that the company be wound up voluntarily, the company shall be wound up voluntarily; or
The company may not be able to pay its debts in full from the proceeds of assets sold in voluntary winding up and pass a resolution that it shall be in the interest of all parities if the company is wound up by the Tribunal. The company shall file an application before the Tribunal within fourteen days thereafter.

5) Publication of resolution to wound up voluntarily (S. 307):-

Where a company and creditors have passed a resolution for voluntary winding up, the company shall, within fourteen days of the passing of the resolution, give notice of the resolution by advertisement in the Official Gazette and also in a newspaper which is in circulation in the district where the registered office or the principal office of the company situate.

6) Commencement of voluntary winding up (S. 308):-

A voluntary winding up shall be deemed to commence on the date of passing of the resolution for voluntary winding up by the company.

7) Effect of voluntary winding up (S. 309):-

In the case of a voluntary winding up, the company shall from the commencement of the winding up cease to carryon its business except as far as required for the beneficial winding up of its business. However, the corporate state and corporate powers (existence) of the company shall continue until it is dissolved.

8) Appointment of Company Liquidator (S. 310):-

The company in its general meeting, where a resolution of voluntary winding up is passed, shall appoint a Company Liquidator, from the panel prepared by the Central Government for the purpose of winding up of its affairs, and recommend the fee to be paid to be Company Liquidator.

Where the creditors have passed a resolution for winding up of the company (as above), the appointment of the Company Liquidator shall be effective only after it is approved by the majority of creditors in value of the company. However, if such creditors do not approve the appointment of such company Liquidator, creditors shall appoint another Company Liquidator.

Such liquidator may be removed by the company or creditors as the case may be in certain circumstance (S. 311).

9) Cessation of Board’s Powers (S. 313):-

On duly appointment of the Company Liquidator, all the powers of the Board of Directors, Managing Directors, whole time directors and manager etc. stands ceased.

10)Powers and duties of Company Liquidator in voluntary winding up (S. 314):-

The Company Liquidator shall perform such function and discharge such duties as may be determined from time to time by the company or the creditors, as the case may be, along with following-

a) Settle the List of contributories:-

The Company Liquidator shall settle the list of contributories, which shall be prima facie evidence of the liability of the persons named therein to be contributories.

b) Calling general meeting of the Company:-

The Liquidator shall call general meeting of the company for the purpose of obtaining the sanction of the company by ordinary or special resolution, as the case may require, or for any other purpose he may consider necessary.

c) Maintaining books of account:-

The Liquidator shall maintain regular and proper books of account in such form and manner as may be prescribed. The members and creditors and any officer authorised by the Central Government may inspect such books of account.

d) Preparation of quarterly statement of account:-

The company Liquidator is required to prepare quarterly statement of accounts and file duly audited statements of accounts within thirty days from the close of each quarter with the Registerar of Companies.

e) Paying debts of the Company:-

It is a statutory obligation of the Company Liquidator to pay the company’s debts and shall adjust the rights of the contributors among themselves.

f) Due care and diligence:-

The Company Liquidator shall observe due care and diligence in discharging his duties.

g) To submit a progress report (S. 316):-

The Liquidator must submit a quarterly report to the company’s members and creditors.

11) Committee to supervise voluntarily Liquidation (315):-

Where there are no creditors of a company, such company in its general meeting and, where a meeting of creditors is held under S. 306, such creditors, as the case may appoint such committee as considered appropriate to supervise the voluntary liquidation and assist the Company Liquidator in discharging his functions.

12) Final meeting and dissolution of Company (S. 318):-

As soon as the affairs of the company are fully wound up, the Company Liquidator shall prepare a report of the winding up showing that the property and assets of the company have been disposed of and its debt is fully discharged or discharged to the satisfaction of the creditors and thereafter call a general meeting of the company for the purpose of laying the final winding up accounts before it and giving any explanation therefore.

If the majority of the members of the company after considering the report of the Company Liquidator are satisfied that the company shall be wound up, they may pass a resolution for its dissolution.

The Company Liquidator, within two weeks after the meeting, shall send to the Registrar (a) a copy of the final winding up accounts of the company and shall make a return in respect of each meeting and of the date thereof; and (ii) copy of resolution for winding up passed in the meeting, (iii) an application along with his report, with the books and papers of the company relating to the winding up, before the Tribunal for passing an order of dissolution of the Company.

If the Tribunal is satisfied, after considering the report of the Company Liquidator that the process of winding up has been just and fair, the Tribunal shall pass an order dissolving the company within sixty days of the receipt of the application.

The Registrar on receiving the copy of the order passed by the Tribunal, shall forthwith publish a notice in the Official Gazette that the company is dissolved.]

[11] प्रशासकीय परिसमापक- की जो कंपणीची विक्री, देणे, घेणे पुर्ण करतो. [एडमिनिस्ट्रेटिव लिक्विडेटर- वह व्यक्ति जो कंपनी की बिक्री, निपटान, अधिग्रहण पूरा करता है।]

[12] The matter in bracket is deleated by 2016 amendment [2] Qualification of Liquidator:-

Official or Provisional Liquidator shall be appointed from a panel of insolvency professionals maintained by the Central Government consisting of the names of chartered accountants, advocates, company secretaries, cost accountants or firms or bodies corporate of such persons, or such other professionals as may be prescribed and having at least ten years’ experience in company matters.]