Winding up of Company - Why and How?

Winding up of Company

Winding up of a company is the stage , where by the company takes its last breath. It is a process by which business of the company is wound up, and the company ceases to exist anymore. All the assets of the company are sold, and the proceedings collected are used to discharge the liabilities on a priority basis.

Modes of winding up :

There are three ways, in which a company may be wound up. They are :

1. Winding up by the court.

2. Voluntary winding up,
• Members Voluntary winding up.
• Creditors Voluntary winding up.

     c.  Winding up subject to supervision of the court

Winding up by The Court:

A company may be wound up by the court in following situations. Here, the court means "High Court".

1. If the company itself, has passed a special resolution in the general meeting to wound up its affairs. Special resolution means, resolution passed by three-fourth (3/4") of the members present.
2. If there is a default, in holding the statutory meeting or in delivering the statutory report to the Registrar.

A company which is limited by shares, and a company limited by guarantee having share capital, is required to hold a " Statutory meeting" of its members, within six months, and after one month, from the date of commencement of it's business. A statutory report of the meeting so held shall also be forwarded to the registrar. [ sec 165 (1) & (5)]

3. If the company fails to commence it's business within one year from the date of it's incorporation, or suspends it's business for a whole year.

A company limited by shares, has to obtain a "certificate of commencement" of business from the registrar. Unless it obtains such certificate, it cannot carry on it's business operation.

4. If the number of members, in a public company is reduced to less than seven, and in case of private company less than two.

The statutory requirement of minimum number of members in a public company is seven, and in case of private company, it is two (sec 12)

5. If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets, it is still unable to extinguish it's liabilities, it means that company is unable to pay it's debts.
6. If the court, itself is of the opinion that the company should be wound up.

The court may form such an opinion, if it comes to the knowledge of court that, the company is mismanaged, or financially unsound, or carrying an illegal operations etc.

Relevant Points :

Who Can Apply to Court, For Winding up Petition ? ( Sec 439)

Following persons can apply to the court, for petition for winding up:

• The company itself
• The creditor
• Any Contributory
• Registrar
• Any person authorized by central government, in case of oppression or mismanagement (397)

What Orders, The Court May Pass? (Sec 443)

The court may pass any one of the following orders on hearing the winding up petition.

1. Dismiss it, with or without costs
2. Make any interim order, as it thinks fit, or
3. Pass an order for winding up of the company with or without costs.

Consequences of court passing an order for winding up :

If the court is satisfied, that sufficient reasons exist in the petition for winding up, then it will pass a winding up order. Once the winding up order is passed, following consequences follow

• Court will send notice to an official liquidator, to take change of the company. He shall carry out the process of winding up, ( sec. 444)
• The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the winding up petition or not.
• The official liquidator is appointed by central Government ( sec. 448)
• The company shall relevant particulars, relating to, assets, cash in hand, bank balance, liabilities, particulars of creditors etc, to the official liquidator. ( sec. 454)
• The official liquidator shall within six months, from the date of winding up order, submit a preliminary report to the court regarding:

1.    Particulars of Capital

2.    Cash and negotiable securities

3.    Liabilities

4.    Movable and immovable properties

5.    Unpaid calls, and

6.    An opinion, whether further inquiry is required or not ( 455)

The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. (463)

Stay Order :

Where, the court has passed a winding up order, it may stay the proceedings of winding up , on an application filed by official liquidator, or creditor or any contributory. (466)

Dissolution of company (481)

Finally the court will order for dissolution of the company, when :

• the affairs of the company are completely wound up, or
• the official liquidator is unable to carry on the winding up procedure for want of funds.

Appeal : 483

An appeal from the decision of court, will lie before that court, before whom, appeals lie from any order or decision of the former court in cases within it's ordinary jurisdiction.

Voluntary Winding up

A company may , voluntary wind up it's affairs, if it is unable to carry on it's business, or if it was formed only for a limited purpose, or if it is unable to meet it's financial obligation, and etc. A company may voluntary wind up itself, under any of the two modes:

1. Members voluntarily winding up
2. Creditors voluntarily winding up

A company may voluntarily wind up itself, either by passing :

An ordinary resolution, where the purpose for which the company was formed has completed, or the time limit for which the company was formed, has expired.

Or

By way of special resolution

Both types of resolution shall e passed in the general meeting of the company. (484)

Once the resolution of voluntarily winding up is passed, then the company may be wound up, eitherthrough :

• Members voluntarily winding up, or
• Creditors voluntarily winding up

The only difference between the abate two, is that in case of members voluntarily winding up, Board of Directors have to make a declaration to the effect, that company has no debts. (488)

Members Voluntarily Winding up

Directors of the company shall call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an Affidavit, stating that;

1. The company has no debts to pay, or
2. The company will repay it's debts; if any, within 3 years from the commencement of winding up, as specified in declaration (488)

Who shall carry out the winding up procedure? and What shall be the procedure?

• The company shall appoint one or more liquidators, in a general meeting, who shall look after the affair of winding up procedure, and distribution of assets. [ 490 (1)]
• The liquidator so appointed, shall be paid remuneration for his services, which shall also be fixed in general meeting [490 (2)]
• The company shall also give notice of appointment of liquidator to the registrar within ten days of appointment (493)
• Once the company has appointed liquidator, the powers of Board of Directors, Managing Director, and Manager, shall cease to exists. (491)
• The liquidator is generally given a free hand, to carry out the winding up procedure, in such a manner, as he thinks best in the interest of creditors, and company.
• In case, the winding up procedure, takes more than one year, then liquidator will have to call a general meeting, at the end of each year, and he shall present, a complete account of the procedure, and position of liquidator (496)

Members Voluntarily Winding up

Directors of the company shall call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an Affidavit, stating that;

1. The company has no debts to pay, or
2. The company will repay it's debts; if any, within 3 years from the commencement of winding up, as specified in declaration (488)

Who shall carry out the winding up procedure? and What shall be the procedure?

• The company shall appoint one or more liquidators, in a general meeting, who shall look after the affair of winding up procedure, and distribution of assets. [ 490 (1)]
• The liquidator so appointed, shall be paid remuneration for his services, which shall also be fixed in general meeting [490 (2)]
• The company shall also give notice of appointment of liquidator to the registrar within ten days of appointment (493)
• Once the company has appointed liquidator, the powers of Board of Directors, Managing Director, and Manager, shall cease to exists. (491)
• The liquidator is generally given a free hand, to carry out the winding up procedure, in such a manner, as he thinks best in the interest of creditors, and company.
• In case, the winding up procedure, takes more than one year, then liquidator will have to call a general meeting, at the end of each year, and he shall present, a complete account of the procedure, and position of liquidator (496)

Distribution of property of company on voluntarily winding up [ both members and creditors voluntarily winding up]

Once the company is fully wound up, and assets of the company sold or distributed, the proceedings collected are utilized to pay off the liabilities. The proceedings so collected shall be utilized to pay off the creditors in equal proportion . Thereafter any money or property left, may be distributed among members according to their rights and interests in the company.

Winding Up Subject to Supervision of Court

Winding up subject to supervision of court, is different from "Winding up by court."

Here the court only supervise the winding up procedure. Resolution for winding up, is passed by members in the general meeting. It is only for some specific reasons, that court may supervise the winding up proceedings. The court may put up some special terms and conditions also.

However, liberty is granted to creditors, contributories or other to apply to court for some relief. (522)

• The court may also appoint liquidators, in addition to already appointed, or remove any such liquidator. The court may also appoint the official liquidator, as a liquidator to fill up the vacancy.
• Liquidator is entitled to do all such things and acts, as he thinks best in the interest of company. He shall enjoy the same powers, as if the company is being wound-up voluntarily.
• The court also may exercise powers to enforce calls made by the liquidators, and such other powers, as if an order has been made for winding up the company altogether by court. ( 526)

Priority Indisposing Liabilities [529 A & 530]

• When the company is wound up, by any mode, the liabilities shall be discharged in following priority.

1.    Workman's dues.

2.    Debts due to secured creditors, in case of insolvency.

3.    All ---------, taxes, cesses and rates due from the company to the central government or a state govt.

4.    All wages and salary of any employee due within four months.

5.    All -------- holiday remuneration becoming payable to any employee.

• All such debts shall be paid in full. If assets are insufficient to meet them, they shall abate in equal proportions.

Money Received By Liquidator : (553)

Apart from an official liquidator, every liquidator appointed by company or court to carry on the winding up procedure, shall deposit the money is received by him in a scheduled bank, to the credit of a special banking account opened by him.

Winding up ( Contd.)

Apart from a normal company, registered under the companies Act, 1956 there are other companies as well winding up procedure for these companies are bit different from a company registered under companies Act.

Unregistered Companies : (583)

In simple words, an unregistered company, is a company which is not registered or covered under provisions of companies Act. 1956 ( 582)

• An unregistered company, cannot be wound up voluntarily, or, subject to super vision of court.
• However, the circumstances, in which unregistered company may be wound up, are as follows :
1. If the company, is dissolved, or has ceased to carry on business, or is carrying on business only for the purposes of winding up, it's affairs,
2. If the company is unable to pay it's debt
3. If the court is of opinion, that it is just and equitable, that the company, should be wound up.

A creditor, contributory, or company itself by filing a petition, or any person authorized by central government may institute winding up proceedings.

In respect to other aspects, the same provisions and procedure shall follow, as in winding up of registered company.

A foreign company, carrying on business in India, which has been dissolved , may be wound up, as unregistered company.

Foreign Company ( 584)

A foreign company, is a company which is incorporated outside India, and having a place of business in India.

Winding up of such companies is only limited to the extent of it's assets in India. In respect of assets and business carried outside India, Indian courts has no jurisdiction.

• Winding up of a foreign company can only be made through court.
• Even if the company had been dissolved or ceased to exist in the country of it's incorporation, winding up order in this country can be made.
• Even if a foreign company has been wound up according to foreign law, the courts in India still protect the Indian Creditors. The surplus assets, after paying the creditors, should be distributed among the share holders equally in the same proportion, as the assets ---- to the total issued and paid up capital.
• Tendency of a foreign liquidation does not affect the jurisdiction to make winding up order. The Assets can be of any nature and do not take to be in the ownership of the company and can come from any Source [(1944) 2 All.E.R. 556]
• As, for persons claiming to be creditors, their presence, itself is sufficient. It is not required to be shown, that company carried on business operations from any place of business in India.

Government Company

A Govt. company, means a company, in which 51% or more of, shares are held by a govt. company

Winding up procedure for a government company registered under the companies Act, 1956, is nearly similar to normal winding up procedure.

However, courts, take interest of public into consideration, and priority is given to them, as a govt. company is main function is to provide services to public.

Creditors Voluntarily Winding up

1.    Where the resolution for winding up has been passed, but the Board of Directors are not in a position to give a declaration on the liability of company, they may call a meeting of creditors, for the purpose of winding up. (500)

2.    It is the duty of Board of Directors, to present a full statement of company 's affairs, and list of creditors along with their dues, before the meeting of creditors. [500 (3)]

3.     Whatever resolution, the company passes in creditor's meeting, shall be given to the Registrar within ten days of it's passing. (501)

4.     Who shall carry out the winding up procedure and at shall be the procedure ?

5.    Company in the general meeting [ in which resolution for winding up is passed] , and the creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act. ( 502)

6.    Any director, member or creditor may approach the court, for direction that ;

·         Liquidator appointed in general meeting shall act, or

·         He shall act jointly with liquidator appointed by creditor, or

·         Appointing official liquidator, or

·         Some other person to be appointed as liquidator. [502 (2)]

7.    The remuneration of liquidator shall be fixed by the creditors, or by the court. (504)

8.    On appointment of liquidator, all the power of Board of Directors shall cease. (505)

9.    In case, the winding up procedure, takes more than one year, then he will have to call a general meeting, and meeting of creditors, at the end of each year, and he shall present, a complete account of the procedure, and the status / position of liquidation (505).

When affairs of the company are fully wound up

The liquidator shall take the following steps, when affairs of the company are fully wound up : (497)

1. Call a general meeting of the members of the company, a lay before it, complete picture of accounts, wining up procedure and how the properties of company are disposed of.
2. The meeting shall be called by advertisement, specifying the time, place and object of the meeting.
3. The liquidator shall send to, the Registrar and official Liquidator copy of account, within one week of the meeting.
4. If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it's members, or public, then the company shall be deemed to be dissolved from the date of report to the court.
5. However, if official liquidator comes to a finding, that affair have been carried in a manner prejudicial to interest of member or public, then court may direct the liquidator to investigate furthers.