Business Law - Winding Up of a Company
Winding up of a company is defined as the condition when the life of the company is brought to an end. The properties of the company are administered for the profit of its members and its creditors.
Steps of Winding Up
The following steps are followed in the case of a company winding up −
An administrator, usually denoted as a liquidator, is appointed in the context of liquefaction or winding up of a company.
The liquidator takes control over the company, assembles its assets, pays debts of the company and finally distributes any surplus amongst the members according to their rights and liabilities.
The company has no assets or liabilities at the end of liquefaction or winding up.
The dissolution of a company takes place when the assets and liabilities of a company are completely wound up.
On the context of winding up, the name of the company is stuck off from the list of companies and its identity as a separate legal person is lost.
If a company is unable to pay its debts or the debts taken by the company is worth more than the assets it owns and no agreements have been made with the creditors, then the company is considered insolvent and is subjected to compulsory liquidation or compulsory winding up.
If an insolvent owes money to a natural person, he may ask the court of law to make a compulsory winding up order against the company.
On the issuance of the order, the order is informed by the court to the official receiver, who eventually becomes the liquidator.
The official receiver informs the creditors and conducts interviews with the directors of the company on the context of the winding up.
If it is believed by the official receiver that the company has enough assets to pay its creditors, then the official receiver will seek for the appointment of an insolvency practitioner as the liquidator.
The appointment of the liquidator is done either by calling a creditors’ meeting for the creditors to elect a liquidator by vote or by requesting the Secretary of the State to appoint one.
If there are no assets left, then the official receiver will become the liquidator.
A person must be owed a minimum amount of INR 750 without dispute before he can ask for a winding up.
Other business corporations or individuals can request the order of winding up of a company.
Insolvency Service, an agent of the government, is an investigating agency, which investigates the winding up of a company.
The Insolvency Service investigates financial failure and misconduct of individuals and companies.
The official receiver works for the Insolvency Service.
The official receiver finds out when and why an individual became bankrupt and finds out the primary cause behind the liquidation of a company.
The procedure of winding up differs according to the registration status of the company, i.e., if the company is registered or if it is an unregistered company.
If the winding up of a company is processed in the court of law, the liquidator is termed as official liquidator.
The official liquidator acts through a recognized reporting system under the supervision of the court.
Powers of a Liquidator
An administrator, usually denoted as a liquidator, is appointed in the context of liquefaction or winding up of a company. The liquidator takes control over the company, assembles its assets, pays debts of the company and finally distributes any surplus amongst the members according to their rights and liabilities.
The following are the general powers of a liquidator −
Illustrating or defending any action, suit, prosecution or any legal proceedings on behalf of the company
Carrying out the business of the company as far as it is beneficial for the company
Paying the creditors
Making any compromise or arrangements with the creditors
Compromising all the calls, debts and liabilities, which may result in further debts on the company
Selling all the mobile and immobile assets of the company by conducting public auctions or by private contracts, with power to transfer the assets to a single person or to various persons in parcels
Performing all the acts and deeds needed for the winding up with receipts and documents using the company’s seal and name
Drawing, accepting, making and endorsing any bill of exchange or promissory note in the name and on behalf of the company
Raising the security of the properties and money of the company
Compulsory Winding Up
Compulsory winding up takes place when a creditor of an insolvent company asks the court for a wind up. If the company goes into liquidation, the court of law appoints a liquidator for the liquidation.
The primary objective of the liquidator is to raise as much funds as needed to pay the creditors.
The company will then be dissolved and its name will be struck off from the list of companies in the registrar’s office.
Any surplus money left will be distributed amongst the shareholders of the company.
This legal process ends with the company’s name struck off from the list of companies in the registrar’s office.
After the name is struck off, the company ceases to exist anymore.
Winding up involves the following −
Every contract of the company, including individual contracts are completed, transferred or ended. The company is no more able to do business.
Any outstanding legal disputes are settled.
All the assets of the company are sold.
Money owed to the company, if any, is collected.
Funds raised are distributed to the creditors.
Surplus funds left after all the transactions are distributed amongst shareholders.
Consequences of Winding Up
The most important consequences of the winding up of a company are as follows −
As Regards the Company Itself
- Winding up doesn’t take away the existence of the company completely.
- The company continues to exist as a corporate entity till its dissolution.
- All the ongoing business of the company is administered by the liquidator during the phase of liquidation.
As Regards the Shareholders
- Contributors − a new statutory liability comes into existence.
- Every transaction of share during the liquefaction done without the approval of the liquidator is termed void.
As Regards the Creditors
- The creditors cannot file a case against the company except with the consent of the court.
- If the creditors already have decrees, they cannot proceed with the execution.
- They must explain their claims and justify their claims to the liquidator.
As Regards the Management
With the appointment of the liquidator, all the powers of the directors, chief executives and other officers tend to cease.
Only the powers to give notice of resolution and the power of appointment of the liquidator upon winding up of the company are given to the members.
As Regards the Disposition of the Company’s Property
All the dispositions of the company’s properties are void if the dispositions are not approved by the court or the liquidator.
Circumstances in which a Company May Be Wound Up
A company may be wound up by a tribunal where the petition has been filed under the following circumstances −
- A special resolution is passed by the company that the company shall be wound up by the tribunal.
- Failure of the company in reporting a statutory report at the registrar’s office.
- Non-commencement of the company in business within one year of incorporation.
- Number of members has reduced below 7 for a public company or 2 for a private company respectively.
- The debts of the company are unpayable by the company.
- The tribunal is just equitable to wound up the company.
- The company is unable to file its balance sheet or annual return for five financial years consecutively.
- The company has acted against the sovereignty and integrity of the country.
Application of Winding Up
An application of winding up must be filed with the petition of winding up by the following entities −
- The company
- Any creditor or creditors of the company
- Any of the contributory company
- Any person authorized by the central government
- The state government or the central government
According to the procedures mentioned in section 439-481 of the Companies Act, the tribunal will move on upon the receipt of the petition.
Winding Up of the Company by Tribunal
When a resolution for the winding up of a company is passed inside the company, the court may make an order for the voluntary winding up to continue.
However, the court remains in supervision of the winding up.
The freedom and liberty of the creditors, contributors or others to apply to the court at such times is limited by the court.
A petition for the winding up must be filed at the court for the supervision of the court over the winding up.
The winding up of a company by the order of the court is also regarded as a compulsory wind up.
Section 305 of the ordinances justifies the following circumstances where the court may wind up the company based upon a petition submitted to a court.
If the company decides by a special resolution that the company should be wound up by the court.
If the company is found to be a defaulter in delivering statutory reports at the registrar’s office or holding statutory meetings or holding two annual general meetings for two consecutive years.
If the company does not start its business for one year of incorporation or its business in suspended for one year.
If the number of members is reduced below 2, 3 and 7 for private, public and listed company respectively.
If the company is found no more able to pay its debts.
If the company is −
Carrying out or complying unlawful and fraudulent activities
Carrying out business activities not authorized by its memorandum of association
Carrying out business in an oppressive manner towards its members concerned with the promotion of the company
Running and is managed by the hands of persons who are in a default in maintaining proper accounts or are involved in fraudulent and dishonest activities
Managed by persons who fail to work in sync with the memorandum of association of the company or fail to comply with the registrar and the court of law.
If the company, being a listed company, does not stand out to act like one.
If the court’s opinion is to wind up the company or
Complete deadlock in the management of the company
Failure of company’s main objective
Recurring losses
Oppressive or aggressive policies of the majority of shareholders
Incorporation of a company with intent to fraudulent or illegal purpose
Public interest
If the company ceases to have a member.
Procedure for Winding Up of a Company
A special resolution must be passed in the company in the context of winding up and the consent of 3/4th of its members is required for the winding up to be carried out by the court.
A list of the total assets must be prepared in order to confirm that the company is no more able to pay its debts.
A list of the creditors must be prepared.
In the context of any defaults in payments, the creditors of a company are required to make a decision for filing a petition in the court of law.
Advocates must be engaged to prepare and file the petition.
Voluntary Winding Up
A company may be wound up voluntarily under the following circumstances −
An ordinary resolution is passed in the general meeting of the company on the context of winding up −
If the period pre-fixed by the articles of association of the company has been expired.
In case of an event according to the articles of association of the company, under which the company needs to be dissolved.
If a special resolution is passed by the members of the company for the voluntary liquidation of the company.
A minimum notice of 21 clear days must be given in order to convene a general meeting.
However, with the consent of the members, a general meeting can be convened with a shorter notice.
A voluntary winding up is commenced just after the above mentioned resolution has been passed.
The notice for the beginning of the winding up of a company must be made in an official gazette, i.e., by applying to the registrar of companies within 14 days of commencement of the liquidation.
Again, the notice of the winding up of the company must be published in a newspaper in the place where the registered office of the company is situated.
The company becomes unable to conduct any commercial business activities after the commencement of the winding up.
However, business can be conducted for the benefit of the company’s winding up process, i.e., paying debts to the company’s creditors, etc.
The corporate state and its corporate power continue to remain in existence until the company is finally dissolved.
Further, there two kinds of voluntary winding up −
- Members voluntary winding up
- Creditors voluntary winding up
- The rules for both kinds of winding up are the same.
- The Companies Act however provides some specific criteria for these two types of winding up.
Members’ Voluntary Winding Up
This type of winding up is carried out when the company is solvent and is able to pay its liabilities totally. The important aspects of members’ voluntary winding up are as follows −
Declaration of Solvency
For the winding up of a company, it is needed for the directors to conduct a meeting, where the majority of the directors make a declaration approved by an affidavit that they have made a full assessment of the company and the company is able to pay all its debts within three years of the winding up of the company.
It is necessary for such a declaration to be made at least 5 weeks before the resolution to become effective.
It should be necessarily delivered to the registrar’s office.
Appointment and Remuneration of Liquidators
The company, in a general meeting, must exercise the following things &minsu;
Appointment of liquidators for the purpose of winding up of the company as and when the company is about to be wound up and for the distribution of the assets of the company
Fixing an adequate remuneration to be paid to the liquidators. This fixed remuneration cannot be changed in any circumstances. The liquidator does not take charge of his office unless the remuneration is fixed.
Board’s Power to Cease
During the course of liquidation, all the powers of the directors and managers are ceased.
However, the power to give notices and the power to make appointments to the registrar is not ceased.
However, the powers of the directors may continue to exist upon the sanction of their powers by the shareholders or the liquidator.
Notice of Appointment of the Liquidator Is Given to the Registrar
Power of Liquidator to Accept Shares as Consideration as Sale of Property of the Company −
The liquidator can accept shares, policies or take interests to consider the sale of the company’s belongings to another company.
He may do so with an aim to distribute the same amount of members of the transferor company, provided −
Duty of Liquidator to Call Creditors’ Meeting in Case of Insolvency
If the liquidator, for any reason, realizes that the company is on the verge of insolvency, i.e., thinks that the company will be unable to pay its debts and liabilities within the limited time as specified by the declaration of insolvency, he must summon a meeting of the creditors where the statement of all the assets and liabilities is laid before them.
Duty of the Liquidator to Inform the Income Tax Officer
Upon the appointment of a liquidator, the income tax office must be informed of the appointment of the liquidator.
This must be done within 30 days of the appointment of the liquidator.
The tax assessment of the company is to be carried out.
Duty of the Liquidator to Call General Meeting at the End of Each Year
In case the process of winding up takes more than one year, the liquidator must call for general meetings at the end of each year.
The meetings should be held within three months from the end of each year or as specified by the central government of India.
The liquidator must present a brief account of his actions and the matters he is dealing with and the progress of the winding up at the general meeting before all the other members of the company.
Final Meeting and Dissolution
When the affairs of the company are fully finished, the liquidator must do the following things −
Make a report on how the process of winding up progressed, ensuring all the property of the company has been disposed.
Conduct a general meeting of the company for laying the report before the company and provide justification of the steps he has taken for the successful winding up of the company.
Send a copy of the report to the registrar’s office and meet the registrar to return the report within one week and make a report to the tribunal about the conduct of the winding up to ensure that that the liquidation went as per the members of the company’s interest.
Dissolution of the Company
Bringing an end to the life of a company is termed as dissolution.
No property can be held by a dissolved company.
The company cannot be sued by the court after liquidation.
If any property of the company still remains after the dissolution of the company, the property will be taken over by the government immediately.
Creditors’ Voluntary Winding Up
Creditors’ voluntary liquidation is a procedure in which the company's directors choose to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed insolvency practitioner) to liquidate all its assets. The important provisions of the creditors’ voluntary winding up are as follows −
Meeting of the Creditors
A creditors’ meeting must be called up within two days of the day when the resolution for winding up of the company, as proposed by the creditors, is passed.
A notice of the creditors’ meeting along with the notice of the general meeting of the company must be delivered to all the creditors of the company.
A full-fledged report on the company’s affairs, the list of the creditors of the company and the estimated amount of claims made by the creditors should be presented by the directors before the creditors of the company.
Notice of Resolution to Be Given to the Registrar −
When a resolution of winding up of a company, as proposed by the creditors, is passed, a notice of the resolution must be delivered at the registrar’s office within 10 days from the day when the resolution is passed.
Appointment of the Liquidator
A liquidator for the purpose of the winding up of the company may be nominated by the creditors of a company at the creditors’ meeting.
However, if there are different persons nominated at the general meetings of the company and the creditors meeting of the company, then the person nominated by the creditors is appointed as the liquidator of the company.
Appointment of the Inspection Committee
If the creditors wish, they may appoint an inspection committee for watching over the entire process of winding up of the company.
Remuneration of the Liquidator
The creditors fix the remuneration of the liquidator.
If the creditors fail to fix the remuneration of the liquidator, the remuneration shall be fixed by the tribunal.
No liquidator shall join unless a respectable remuneration is fixed.
Once fixed, the remuneration cannot be changed.
Power of the Liquidator
The liquidator enjoys all the powers as vested on a director.
Further the liquidator enjoys all the powers as vested on a liquidator in case of members’ voluntary winding up according to section 494 of the Companies Act, 1956.
Duty of the Liquidator to Call General Meeting at the End of Each Year
In case the process of winding up takes more than a year, the liquidator must call for general meetings and creditors’ meetings at the end of each year.
The meetings should be held within three months from the end of each year or as specified by the Central Government of India.
The liquidator must present a brief account of his actions and the matters he is dealing with and the progress of the winding up at the general meeting before all the other members of the company.
Final Meeting and Dissolution
When the affairs of the company are fully finished, the liquidator must do the following things −
Make a report on how the process of winding up went, ensuring all the property of the company has been disposed.
Conduct a general meeting of the company for laying the report before the company and give certain explanation about the justification of the steps he has taken for the successful winding up of the company.
Send a copy of the report to the registrar’s office and meet the registrar to make a return of the report within one week and make a report to the tribunal about the conduct of the winding up to ensure that the liquidation went as per the members of the company’s interest.
Dissolution of the Company
Bringing an end to the life of a company is termed as dissolution.
No property can be held by a dissolved company.
The company cannot be sued by the court after liquidation.
If any property of the company still remains after the dissolution of the company, the property will be taken over by the government immediately.
