Study Notes: Winding Up of Companies

Introduction

Winding up a company under the Companies Act, 2013, is the process through which a company’s legal existence is brought to an end. This involves selling off the company’s assets to pay its liabilities and distributing any remaining assets to shareholders. The process can be either voluntary or compulsory. According to section 2(94A) of Companies Act, 2013, “Winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016. Thus, winding up ultimately leads to the dissolution of the company. In between winding up and dissolution, the legal entity of the company remains, and it can be sued in a Tribunal of law.  Winding up does not necessarily mean that the company is insolvent. A perfectly solvent company may be wound up with the approval of members in a general meeting.

Chapter XX of the Companies Act, 2013 deals with the winding up of a company. Part I provides for winding up by the tribunal, while Part II provides provisions for the voluntary winding up of a company. However, Part II has been omitted by the Insolvency and Bankruptcy Code, 2016.

Winding Up and Dissolution

A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the company’s name shall be struck off by the Registrar from the Register of Companies and he shall also get this fact published in the Official Gazette. The dissolution thus puts an end to the existence of the company. Generally, the terms ‘winding up’ and ‘dissolution’ used to mean the same thing, but according to Companies Act, these two terms are quite different by their legal procedures. The differences between them are as below:

Modes for Winding Up

Winding up under the Companies Act 2013:

1. Winding up by tribunal

Chapter XX of the Companies Act, 2013 in part I deals with the winding up of a company by a court or tribunal. When a company is wound up by the order of a court or tribunal, it is called winding up by the court or tribunal. This mode of winding up is also called compulsory winding up of a company.

A petition to the NCLT can begin the process of winding down a firm. Only the NCLT will accept a petition for winding up. Since going out of business is a last resort, there needs to be good justification for it. The petition for winding up proceedings can be withdrawn if the court determines that there is no valid basis for doing so.[1]

The Tribunal has the authority to dissolve a company if certain conditions are met. The Tribunal may order the liquidation of a firm under Section 271 if:

• Company is unable to pay its debts, According to Section 271(1) of the 2013 Companies Act, if a creditor to whom a company owes an amount greater than Rs. 1 lakh served a notice at the company’s registered office by registered mail or another means requiring the company to pay the due amount and the company failed to pay the sum within 21 days or if any execution or other process issued by decree of court or order in creditor’s favour is returned unsatisfied in whole or in part or if the tribunal is not satisfied.[2] or;
• If a decree or order issued by a Tribunal/court in favour of a creditor of the company on execution remains unsatisfied on its execution. or;
• It is proved to the satisfaction of the Tribunal that the company cannot pay its debts. This implies commercial insolvency (when a company’s assets are insufficient to meet its existing liabilities) of the company as is disclosed by its balance sheet. The mere fact that the company is incurring losses does not mean that it is unable to pay its debts, for its assets may be more than its liabilities. Liabilities for this purpose will include all contingent and prospective liabilities and even if the debt relied upon in the petition is disputed bona fide, the company may be wound up if the applicant can prove the insolvency of the company. However, non-payment of a bona fide disputed claim is no proof of insolvency.

The petition for winding up can be given under Section 272 of the Companies Act, 2013 by:

a)  The company; or Any creditor or creditors, including any contingent or prospective creditor or creditors; or

b)  Any contributory; or

c)  All or any of the above three specified parties; or

d)  The Registrar; or

e)  Any person authorised by Central Government in this behalf;

f)   By the Central Government or State Government in case of Company acting against the interest of sovereignty and integrity of India.[3]

Section 274[4] of the Companies Act, 2013 states that a petition for winding up of a company may be filed by a person other than the company, and that the court may give the company notice of 30 days, which may be extended for another 30 days under certain conditions:

• If the firm’s shareholders have requested in a special resolution that the company be dissolved by the Tribunal; If the corporation has engaged in activities that threaten India’s national security, international peace and stability, or public safety.
• If the Tribunal has issued a Chapter XIX winding-up order;
• If the tribunal rules that the company’s affairs have been conducted fraudulently, that it was formed for a fraudulent or unlawful purpose, or that the persons involved in the formation have engaged in misfeasance or misconduct in connection with those matters, then the Registrar or any other person authorised by the Central Government by notification under this Act may apply to have the company dissolved.
• If the company has not submitted its annual reports or financial statements to the Registrar for the five most recent fiscal years;
• If the court decides that the company’s dissolution is fair and just.[5]
• The Tribunal may order for the winding up of a company if it thinks that there are just and equitable grounds for doing so. The Tribunal has very large discretionary power in this case. This power has been given to the Tribunal to safeguard the interests of the minority and the weaker group of members. The Tribunal, before passing such an order, will consider the interest of the shareholders, creditors, employees and, also the general public. Tribunal may also refuse to grant an order for the compulsory winding up of the company if it is of the opinion that some other remedy is available to the petitioner to redress his grievances and that the demand for the winding up of the company is unreasonable. A few of the examples of ‘just and equitable’ grounds based on which the Tribunal may order for the winding up of the company are given:

a)  Oppression of minority: In cases where those who control the company abuse their power to such an extent that it seriously prejudices the interests of minority shareholders, the Tribunal may order for the winding up of the company.

b)  Deadlock in management: Where there is a complete deadlock in the management of the company, the company may be ordered to be wound up.

In Re Yenidje Tobacco Co[6], there were two equal shareholders and directors. Relations between them had broken down to such an extent that they were in continuous argument and would not speak to each other. Drawing on partnership principles, the court ordered the company to be wound up. Lord Cozens-Hardy MR observed that having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, the company should not be allowed to continue. It has treated as a partnership, and under the Partnership Act of course the application for dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form of the guise of a private company? It is a private company, and there is no way to put an end to the state of things which now exists except by means of a compulsory order.[7]

c)  Loss of substratum: Where the objects for which a company was constituted have either failed or become substantially impossible to be carried out, i.e., ‘substratum of the company’ is lost.

The petitioner will need to establish that the commercial object for which the company was formed has failed or has been fulfilled. In Re German Date Coffee Co[8] the company was registered with the object of acquiring a German patent for manufacturing dates as a substitute for coffee. The patent was not granted. The Court of Appeal held that the whole substratum of the company had gone and it ought to be wound up.[9]

In Seth Mohan lal v Grain Chambers Ltd[10], Justice Shah of the Supreme Court observed, “The substratum of the company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In that case owing to a long-drawn-out litigation the business of a company had come to a standstill and a part of its business was banned by the legislation.” So, he held that we cannot on that ground direct that the company be wound up. The company could always restart business with assets it possessed.[11]

d)  Losses: When the business of a company cannot be carried on except at a loss, the company may be wound up by an order of the Tribunal on just and equitable grounds. But mere apprehension on the part of some shareholders that the company will not be able to earn profits cannot be just and equitable ground for the winding up order.

e)   Fraudulent object: If the business or the objects of the company are fraudulent or illegal or have become illegal with the changes in the law, the Tribunal may order the company to be wound up on just and equitable grounds. However, the mere fact of having been a fraud in the promotion or fraudulent misrepresentation in the prospectus will not be sufficient ground for a winding up order, for the majority of shareholders may waive the fraud.

Procedure for Compulsory Winding Up

a)  Petition Filing (Under section 272 of the Act)[12]: A petition for winding up can be filed by

• The company itself
• Creditors
• Contributories (shareholders)
• The Registrar of Companies (with the approval of the Central Government).
• Any person authorized by the Central Government in cases of the company’s activities being against public interest.

Forms to fill:

Form WIN 1: Petition for winding up (by persons other than the company).

Form WIN 2: Petition for winding up (by the company).

b)  Admission of Petition and Hearing (Sections 273-274 of the Act)

• Initial Scrutiny: The NCLT examines the petition for compliance.
• Issuance of Notice: If the petition is maintainable, the tribunal issues a notice to the company and other relevant parties within 14 days of petition filing. 

Forms:

Form WIN 3: Notice of Petition.

c)  Tribunal Hearing (Under section 273-277 of the Act)

• The tribunal first determines whether the petition is maintainable and if the grounds cited are valid.[13]
• If the petition is admitted, a notice is issued to the company, and a hearing date is set. Hearing typically occurs within 30-60 days of the notice issuance.
• The tribunal may appoint a provisional liquidator to protect the assets of the company during the pendency of the petition.[14]

Forms:

Form WIN 4: Order appointing Provisional Liquidator.

Form WIN 6: Affidavit verifying the statement of affairs.

d)   Winding Up Order (Section 278-279 of the Act)

• After hearing the petition, if the tribunal is satisfied that the grounds for winding up are met, it passes an order for winding up of the company. Order typically issued within 90 days of the initial hearing.
• The tribunal may dismiss the petition if it finds no merit.

e)  Appointment of Liquidator (Section 275 of the Act)

• The tribunal appoints an official liquidator from a panel maintained by the Central Government.[15]
• The liquidator takes control of the company’s assets, books, and records.

Forms:

Form WIN 7: Notice of appointment of the liquidator.

f)   Public Notice

• A public notice of the winding-up order is published in the Official Gazette and in newspapers as directed by the tribunal. Public notice is issued within 14 days of the order.

Forms:

Form WIN 5: Advertisement of winding-up order.

g)  Realization and Distribution of Assets (Section 281-282 of the Act)

      Appointment of Liquidator:

The official liquidator is an officer who is appointed to proceed with the winding up of a company and its affairs. Section 275 provides that to wind up a company, the tribunal will appoint an official liquidator from a panel maintained by the Central Government which consists of names of advocates, Chartered Accountants, Company Secretaries, Cost Accountants etc. having at least ten years of experience in the matters related to the company. However, if a provisional liquidator is appointed, his powers will be restricted by an order of appointment by the tribunal. A provisional liquidator is a person appointed by the court or tribunal to carry on the process of winding up of a company.[16] 

The central government also has the power to remove the name of any person from the panel on the grounds of misconduct, fraud, breach of duties, professional incompetence etc, but before doing so an opportunity to be heard must be given to him. The liquidator so appointed must within seven days of appointment make a declaration regarding conflict of interest or lack of independence with respect to his appointment with the tribunal. 

According to Section 276, a provisional liquidator or a company liquidator appointed by the tribunal can be removed by the tribunal on the following grounds:

• Misconduct;
• Fraud or misfeasance;
• Professional incompetence or failure to exercise due care and diligence;
• Inability to act as a liquidator;
• Conflict of interest or lack of independence during the term of appointment [17]

      Liquidator’s Duties:

• The liquidator collects and realizes the assets of the company.
• Pays off the debts in the order of priority established by law.
• Any surplus is distributed among the shareholders.

     Liquidator’s Reports:

• The liquidator submits periodic reports to the tribunal on the progress of the winding-up process.

h)   Final Meeting and Dissolution (Section 318 and 302 of the Act)

Final Accounts:

• Once the liquidation process is complete, the liquidator prepares a final account of the winding-up process.
• A final meeting of creditors and contributories is convened to present these accounts.

Dissolution Order:

• The liquidator files an application for dissolution with the tribunal along with the final report.
• The tribunal, upon satisfaction, passes an order for the dissolution of the company.
• The company is dissolved, and its name is struck off the register of companies.

Forms:

Form WIN 11: Dissolution application by liquidator.

Form WIN 12: Order of dissolution.

Form WIN 13: Advertisement of dissolution.

i)   Priority of Payments (Sections 326-327 of the Act)

Order of Priority:

• Insolvency resolution process costs and liquidation costs.
• Secured creditors.
• Workmen’s dues.
• Other debts and liabilities.
• Preference shareholders.
• Equity shareholders.

j)   Legal and Procedural Safeguards

• Protection of Interests: The tribunal ensures that the interests of creditors, employees, and other stakeholders are protected throughout the winding-up process.
• Transparency and Accountability: The liquidator’s actions are closely monitored by the tribunal to ensure transparency and accountability.
• Compliance: Strict compliance with the procedural requirements laid down in the Companies Act, 2013, and the Companies (Winding Up) Rules, 2020, is mandatory.

k)  Consequences of Compulsory Winding Up

According to Section 278 of the Act, the order of winding up will operate in favour of all creditors and contributories as if it has been made on their joint petition.[18] Section 279 further provides that no suit or any other legal proceeding can be initiated against a company against whom an order of winding up has been passed without any permission from the tribunal, against whom the order of winding up has been passed. An application in this regard will be decided within 60 days.[19] 

2. Voluntary winding up

Corporate Insolvency Resolution Process (CIRP) is a process to resolve the corporate insolvency of a corporate debtor. It can be initiated by filing an application to the Adjudicating Authority under Chapter II of Part II of the Code. If this process fails, the company initiates the process of liquidation. The process of voluntary winding up under IBC may be started by a corporate debtor, financial creditor, or operational creditor. 

When a company decides to wind up its affairs and proceed further with the required proceedings on its own, this Act is called the voluntary winding up of a company. Part II of Chapter XX of the Act deals with the voluntary winding up of the companies.

In this scenario, the firm and the shareholders work out their differences in a formal meeting rather than taking the case to court. The company appoints an official liquidator to oversee its business. The date of the general meeting resolution to dissolve the company voluntarily is the starting point for the dissolution process. As per Article 304[20]:

• If a company’s general meeting approves a resolution mandating the business be wound up voluntarily after its term, if any, set forth in its articles expires or upon the occurrence of any circumstance for which the company’s articles provide for dissolution;
• If the corporation adopts a specific resolution, it may choose to voluntarily dissolve.[21]

Procedure for Voluntary Winding Up

Further, Section 59 of the Insolvency and Bankruptcy Code, 2016 deals with the voluntary liquidation of corporate persons. It provides that a corporate person who wants to liquidate itself voluntarily and has not committed any default may initiate the liquidation proceedings under the Act.[22] However, the proceedings of a registered corporate person must satisfy the following conditions:

a) There must be a declaration from the majority of the directors of the company which must be verified by an affidavit and must state that:

• A full inquiry into the affairs of the company has been made and an opinion has been formed that the company has no debt or will be able to pay its debts in full from selling its assets in the voluntary liquidation. 
• The company is not liquidated in order to defraud any person.

b) The declaration must be accompanied by the following documents:

• Financial statements and record of the company’s operations for the preceding two years or since its incorporation.
• Valuation report of the assets of the company which is prepared by a registered valuer. 

c)  A special resolution regarding the voluntary winding up of the company must be passed within four weeks of declaration or a general resolution must be passed in a general meeting regarding voluntary winding up due to the expiry of its duration fixed by its articles or due to occurrence of any event for which articles provide that the company should be dissolved.

Further, the Section provides that the company must notify the Registrar and Board about the resolution being passed for the liquidation of the company within seven days from the date such resolution is approved by the creditors. With the approval of creditors, the liquidation proceedings of the company will be deemed to have commenced from the date such resolution is passed. When the affairs of a company have wound up completely and its assets have been liquidated completely, an application will be made by the liquidator to the Adjudicating Authority for the dissolution of such a company. The Authority will pass an order regarding dissolution of the company and it will be dissolved accordingly and the copy of said order must be given to the required authority with which the company is registered within fourteen days.  

Powers and duties of company liquidator under the code

According to Section 35 of the IBC, a liquidator will perform the following functions and duties:

• Verify the claims of creditors of the company.
• Take into custody all the assets, properties and actionable claims belonging to the company.
• Evaluate the assets and property of the company and prepare a report in this regard.
• Take measures to protect and preserve the assets and properties of the company. 
• Carry on the business for beneficial liquidation. 
• He can also sell the immovable or movable property of the company.
• Draw, accept, make, and endorse any negotiable instrument including the bill of exchange, hundi, or promissory note on behalf of the company. 
• He can also obtain any professional assistance in order to discharge his duties. 
• Institute or defend the suits by or against the company. 
• Investigate the financial affairs of a company.[23] 

Duties related to dissolution of a company under the Companies Act, 2013 prior to 2016

Before 2016, the Companies Act, 2013, under Section 318 provided that once the affairs of a company are wound up completely, the company liquidator is required to prepare a report of the same showing that the assets of the company have been disposed of and the debts have been discharged and then call a general meeting of the company in order to finally wind up the accounts. If in case, the majority of the members decide to wind up the company after considering the report of the company liquidator, they may pass a resolution for its dissolution.[24] 

Within two weeks of this meeting, the company liquidator must send the following documents to the registrar and file an application along with a report related to the winding up of the company before the tribunal in order for it to pass an order for dissolution of the company:

• Copy of final accounts related to winding up of the company and make a return with respect to each meeting.
• Copy of resolutions passed in such meetings. 

Power to accept shares

Under Section 319, if a company is to be wound up voluntarily and the whole or part of its business is to be sold or transferred to any other company, the company liquidator of the transfer or company may with the sanction of a special resolution which conferred on him a general authority:

• Receive shares, policies, or other interest in the transferee company by way of compensation.
• Enter into any other arrangement wherein the members of the transferor company participate in the profits or receive any other benefit from the transferee company with respect to cash, shares, policies or any other like interest received.[25] 

However, these arrangements must be entered into with the due consent of the secured creditors. The Section further provided that any transfer, sale, or arrangement will be binding on the members of the transferor company. If any member of the transferor company expressed his dissent in writing and addressed the same to the company liquidator within seven days after such resolution is passed and also did not vote in favour of the special resolution, may require the liquidator to:

• Abstain from carrying such resolution into effect or
• Purchase his interest at a price which will be determined by the agreement or registered valuer. 

Further, if the liquidator decides to buy a member’s interest, such money raised by him will be determined by a special resolution and paid before the company is dissolved. However, the provision has been omitted in 2016. 

Winding Up of Unregistered Companies

Part II of Chapter XXI deals with the winding up of unregistered companies. Section 375 of the Act provides that an unregistered company cannot be wound up voluntarily under the Act. It provides that such a company will be wound up under the following circumstances:

• The company is dissolved or ceases to carry on the business or is continuing to carry on the business only for the purpose of winding up.
• The company is not able to pay its debts.
• It is just and equitable in the opinion of the tribunal to wind up the company.[26]

The Section further provides that an unregistered company will include any partnership firm, limited liability partnership, society or cooperative society, association etc but will not include:

• A railway company incorporated under any Act of Parliament or any other Indian law.
• Any company registered under the Act.
• Any company registered under the previous company law but not a company whose office was in Burma, Aden, or Pakistan.

According to Section 376, a foreign company incorporated outside India but carrying business in India can be wound up as an unregistered company if it ceases to carry business in India.[27]

Summary Procedure for Winding up of a Company

Section 361 provides that if a company which is to be wound up has assets of a book value not exceeding one crore rupees and belongs to prescribed classes of companies, the central government may order for winding up of such company. After the order is made, the central government will appoint an official liquidator in this regard. He will further take into his custody all the assets, effects and actionable claims belonging to the company. He will also submit a report to the central government in this regard and whether any fraud is committed in the company within thirty days of his appointment.[28]

On receiving the report, the central government can order an investigation into the affairs of the company in case any fraud has been committed. After taking into consideration the investigation report, the government can finally order for winding up of the company according to part I of Chapter XX.

Winding Up variations since the Insolvency and Bankruptcy Code, 2016

The term “winding up” now has a slightly different meaning under the Companies Act of 2013 and the Insolvency and Bankruptcy Code of 2016, respectively. The winding up by Tribunal procedure has taken the place of the winding-up methods covered in section 270 of the 2013 Companies Act. If a corporation has breached India’s sovereignty, integrity, security, friendly relations with foreign governments, public order, decency, or morality, or if the tribunal is mentally ill, it may be wound up by the tribunal in response to a petition filed under Section 272. Replaced is Section 271, which discusses the conditions under which a business may be dissolved by Tribunal.[29]

Following is the winding-up procedure under the new court:

The proper company registrar must receive a declaration confirming the company’s legitimacy and ability to pay its debts. After the voluntary liquidation is approved and the liquidator is appointed, a special resolution must be passed within 4 weeks. Additionally, a newspaper announcement must be published within 5 days, the ROC must be notified within 7 days, estimates of the company’s assets and liabilities must be provided to a corporate person within 45 days, uncalled capital must be realized, the amount realized must be distributed to shareholders within 6 months, and a final report must be submitted within 4 weeks.[30]

[1] Pennington’s Company Law, 5th Edition, Page 839

[2] The Companies Act, 2013, s. 271(1).

[3] Ibid.

[4] The Companies Act, 2013, s. 274.

[5] Supra note 2.

[6] Ltd [1916] 2 Ch 426.

[7] Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. D. 169.

[8] (1882) 20 Ch D 169.

[9] German Date Coffee Co., In Re (1882) 20 Ch. D. 169.

[10] 1968 AIR 772.

[11] Seth Mohan Lal v. Grain Chambers Ltd., AIR 1968 SC 772.

[12] The Companies Act, 2013, s. 272.

[13] Id., s. 273(1)(a).

[14] Id., s. 273(1)(c).

[15] Id., s. 275.

[16] Ibid.

[17] The Companies Act, 2013, s. 276.

[18] Id., s. 278.

[19] Id., s. 279.

[20] Id., s. 304(1).

[21] Ibid.

[22] Insolvency and Bankruptcy Code, 2016, s. 59.

[23] Insolvency and Bankruptcy Code, 2016, s. 35.

[24] The companies act, 2013, s. 318.

[25] Id, s. 319.

[26] Id., s. 375.

[27] Id., s. 376.

[28] Id., s. 361.

[29] Supra note 2.

[30] Ibid.