WINDING
UP OF THE COMPANY
INTRODUCTION-
Winding Up is the process of liquidating
a Company. While Winding Up, a company ceases to do business as usual. Its sole
purpose is to sell-off stock, pay-off creditors & distribute any remaining
assets to partners or shareholders. The term is synonymous with liquidation,
which is the process of converting assets to cash.
Winding Up is usually done, when purpose of which the Company is made,
fulfilled or there is any type of Mismanagement or Oppression is in the
Company, that it is difficult now to run the Company.
There are differences between Winding Up and Dissolution. At the end of
winding up, the Company will have no assets or liabilities. When the affairs of
the Company are completely wound up, the dissolution of the Company takes
place. On Dissolution, the Company`s name is struck off from the register of
the companies & its legal personality as a corporation comes to an end.
MEANING OF WINDING UP-
·
Winding Up of a Company is a process
of putting on end to the life of a Company.
·
It is a proceeding in which Company
is dissolved, its assets are collected, its debts are paid off out of the
assets of the Company. If any surplus is left, it is distributed among the
members in accordance with their rights.
·
During the process of winding up, the
Company still exists & has corporate powers until dissolution.
·
Dissolution is the end result of
Winding Up process.
·
An Administrator called Liquidator
is appointed & takes over the control of the Company, collects its assets,
pay its debts & finally distributes any surplus to the members in
accordance with their rights.
·
Its sole purpose is to sell off
stock, pay off creditors & distribute any remaining assets to partners or
shareholders.
The petition for winding up to the tribunal may
be made by[sec.272]-
1.
The Company, in case of passing a
special resolution for winding up.
2.
A Creditor, in case of Company`s
inability to pay debts.
3.
The Registrar, on any ground provided
prior approval of the Central Government has been obtained.
4.
A Contributory or Contributories, in
case of a failure to hold a statutory meeting or to file a statutory report or
in case of reduction of members below the statutory minimum.
5.
A person authorized by the Central
Government, in case of investigation into the business of the Company where it
appears from the report of the inspector that affairs of the Company have been
conducted with intent to defraud its creditors, members or any other person.
6.
The Central or State government, if
the Company has acted against the Sovereignty, Integrity or security of India
or against public order, decency, morality etc.
MODES OF
WINDING UP-
According to sec.270(1)
of the Companies Act,2013, the following types are, by which the Company
may be wind up-
·
Compulsory Winding Up (By Tribunal`s
Order)
·
Voluntary Winding Up-It
is of two types,
1.
Members Voluntary Winding Up,
2.
Creditors Voluntary Winding Up.
Compulsory Winding Up (By a Tribunal)-
According to sec.271 of the Companies Act,2013, a
Tribunal may issue an order to wind up a Company in the following
circumstances, as detailed in sec.271(1) of the Act.
·
Sick Company- If
the firm is in a position where creditors have a dominating position, with debt
dues, the Committee of the Creditors shall appoint an administrator to hold up
the winding up of the company, in accordance with the Company is in a sick
state i.e. the firm is unable to pay its obligations & it is not feasible
to resuscitate and rehabilitate such opinion & order that the Company may
be wind up.
·
Special Resolution-
If the Company has agreed, by a special resolution that it will wind up by the
Tribunal then the said winding up is at the discretion of the Tribunal. This
exempts the Tribunal`s ability to wind up a corporation if it is contrary to
the public interest or the Company`s interest.
·
Act against the State-
If the Company commits an Act that is detrimental to India`s sovereignty &
integrity, the security of the state, cordial relations with other states,
public order, or morals, the Tribunal may ask company to wind up the Company.
·
Fraudulent conduct of business-
If the Tribunal believes that the Company`s affairs have taken place by way of
fraud or that the reason for forming the Company is for fraudulent or unlawful
purpose, the Tribunal has the ultimate discretion to wind up the Company only
after receiving an application from the Registrar of Companies or any other
person authorized by the Central Government.
·
Failed to file financial statements
with Registrar- If the Company has failed to file its financial
statement or annual reports with the Registrar for the last five consecutive
fiscal years, as required by sec.271(1) of the Act.
·
It is just and equitable to wind up-
sec.271(1)(g) of the Act states that if the Tribunal believes that it is just
& equitable that the Company be wind up, it must consider the interests of
the company, its employees, creditors, shareholders, & the general public
interest, as well as all other remedies to resolve the circumstances that led
to the Tribunal`s decision to wind up under this premise, winding up the firm
necessitates a strong ground to liquidate that Company.
Procedure for Winding Up of a Company by Tribunal-
A petition is used to make an application to the
Tribunal in the Winding Up of a Company under sec.2 of the Statute.
The following individuals are entitled to file this
petition-
·
The Company,
·
Any Creditor, including any
contingent or potential creditors,
·
Any Contributors to that Company,
·
The Registrar,
·
Any person authorized by the Central
Government to do so.
Procedure-
§
Petition in Tribunal,
§
Appointment of liquidator [to examine
the debts and credits]
§
Hearing of petition by the Tribunal,
§
Winding Up order by the
Tribunal[sec.302]
Voluntary Winding Up of a Company-
A
Voluntary Winding Up is a self-imposed wind up & dissolution of a Company
that has been approved by its shareholders. Such a decision will happen once a
Company`s operations, wrap-up its financial affairs, & dismantle its
corporate structure in an orderly fashion, while paying back creditors
according to their assigned priority.
Procedure for a Voluntary Winding Up-
1.
Resolution passed by the Company-
The
first step in the voluntary winding up process is to pass a resolution for
winding up the Company. This resolution must be passed by the Shareholders or
members of the company by way of Special Resolution. A special resolution is a
resolution that requires the approval of at least 75 percent of the
shareholders or members of the company. The resolution must be passed at a
General Meeting of the Company.
2.
Declaration of Solvency-
§
In case of Indian Directors, the
declaration should be un Rs.100 stamp paper.
§
In case of Foreign Directors, the
declaration should be notarized & apostilled.
§
Affidavit to be accompanied by,
Ø
Audited financial statement (past 2
years),
Ø
Records of business operation (past 2
yrs),
Ø
Report of valuation of assets of the
company,
Ø
Latest financial position of the
company.
3.
Notice to Registrar-
Once the declaration
of Solvency is done, the Registrar should be given a notice about the winding
up within 7 days of resolution.
4.
Appointment of Liquidator-Once
the resolution for voluntary winding up of a Company is passed, appointing a
liquidator is next. A liquidator is a person who is appointed to wind up the
affairs of the Company.
The liquidator can be any person or a firm of chartered accountants or
company secretory.
The shareholders or
members must approve the appointment of the company`s liquidator at a general
meeting. The liquidator must be appointed within 30 days of the passing of the
resolution for voluntary winding up.
Ø
After these steps the Final Meeting
will be conducted.
5.
Realization of assets & payment
of liabilities-
The
next step is to realize the Company`s assets & liabilities. The liquidator
must take possession of the Company`s assets & sell them off to realize the
maximum value. The liabilities of the company must be paid off in the following
order of priority-
Ø
Secured Creditors,
Ø
Workmen`s dues,
Ø
Other debts & liabilities.
6.
Distribution of remaining assets-
After all the liabilities of the Company are paid off,
the remaining assets must be distributed among the shareholders or members of
the Company. If there are any assets that can`t be distributed, then they must
be transferred to the appropriate authority.
7.
There will be conducted a Final
Meeting.
8.
Publication
in official Gazette.
Types of Voluntary Winding Up-
This is of two types-
1.
Member`s Voluntary Winding Up,
2.
Creditor`s Voluntary Winding Up.
Difference b/w Members & Creditors Voluntary
Winding Up-
1.
Members Voluntary Winding Up takes
place only when the Company is in a position to pay its debt, while latter
takes place in cases, when the Company is in a position to pay its debt.
2.
In 1st type, Declaration
of Solvency is made by the Directors, while in latter, no such declaration is
made.
3.
Only meeting of members is called in
former, while meeting of members as well as creditors is called in latter.
4.
The liquidator is appointed &
remuneration is fixed by the Company itself, while in latter, the remuneration
is fixed by the Committee of Inspection & liquidator is appointed by the
Creditors.
5.
In former, no Committee of inspection is
appointed, while in latter, Committee of Inspection is appointed.
6.
The liquidator can exercise some
powers with the sanction of a special resolution of the Company in former type,
while in latter, sanction of the tribunal is required, not of Court.
7.
In former case, Meeting of members is
called on completion of proceedings of winding up, while in latter, members as
well as creditors are called in meeting on the completion of the proceeding.
Case Laws-
German Date Coffee Company`s Case- A
Company was found for the purpose of manufacturing coffee from dates under a
patent which was to be granted by the government of the Germany. The German
patent was never granted. On a petition of shareholders, it was held that the
Substratum of the company had failed & it was important to carry on the objects
for which it was formed. So it was an equitable step that the company be wound
up.
Yenjidije Tobacco Co. Ltd. Case-
A &
B, who traded separately as cigarette manufacturers agreed to amalgamate their
business & formed a private ltd. Co., of which they were the shareholders
& the only directors. They had equal voting rights. A dispute arose which
was submitted to arbitration, but one of them refused to accept the award. Both
parties became so hostile, that neither of them was agreed to speak to the
other party except through their secretary. There was a complete deadlock &
as such the Tribunal ordered for the winding up of the company, although its
business was flourishing.
CONCLUSION-
When the business of a company winds up, its
operations are stopped & its assets are liquidated or sold. There are two
different ways to wind up, it can either be done voluntarily by the
stockholders or compulsory by the Tribunal. Winding up is an important term for
business owners to understand. There are a number of legal procedures that need
to be followed in order to properly wind up a business, so making sure you follow
these rules is vital.
The types of winding up of a company help business
decide if they should stop operations. The voluntary decision can be due to
internal reasons. The management must do due diligence before this decision.
The Court`s decision will require the company to follow the winding up process.
The company should understand the rules to ensure a legal winding up.
END