The act of “winding up” or “liquidating” a company entails ending its operations, gathering its assets, and distributing those assets to shareholders and creditors in accordance with the Act. This process ends the company’s legal existence. It is also described as a process by which a company’s existence is terminated and its assets are managed for the benefit of its shareholders and creditors. The phrase “winding up a firm” refers to various business closure methods and is used in a variety of insolvency contexts.
According to Professor Gower, the process of ending a company’s existence and administering its assets for the benefit of its members and creditors is known as winding up. One is winding down one of the processes that results in a company’s dissolution. There are three ways to dissolve a company:
- Mandatory liquidation by the Tribunal.
- voluntary winding up initiated by the creditors or by the members themselves.
- Under the Tribunal’s supervision, voluntary winding up
In the business world, closing, dissolving, or shutting down a corporation is referred to as “winding up.” When a company is instructed to be wound up by a tribunal order, compulsory winding up occurs.
A company may be dissolved in any of the following ways:
- By giving a company’s undertaking to another as part of a plan for reconstruction or fusion. In this situation, the Tribunal will issue an order dissolving the transfer or company without winding it up.
- Through the company’s dissolution, in which the company’s assets are realized and used to settle its debts. If there is any surplus, it is allocated among the company’s members in accordance with their rights.
MODES OF WINDING UP
- Tribunal/Compulsory Winding Up
- Voluntary Winding Up
We’ll go over each method of winding down briefly now.
- Tribunal/Compulsory winding up
Dissolution wrapping up an order from the Tribunal may be used to dissolve a firm. This method of liquidation is frequently referred to as a company’s mandatory liquidation. According to Section 271 (1), the Tribunal may decide to dissolve a corporation if a petition is brought before it on one of the following grounds:
- Passage of a Special Resolution Authorizing the Winding Up
The Tribunal may issue a winding up order if a corporation passes a Special Resolution authorizing it to be wound up by the Tribunal. The decision can be passed for any reason at all. If the tribunal determines that the winding up would be against the interests of the corporation as a whole or the public, it may not order it.
- Acting against the National Interest
The corporation may be ordered to be wound up if it has violated any of the following: I the sovereignty and integrity of India; (ii) the security of the State; (iii) friendly relations with other states; (iv) public order; (decency); or (v) morality.
- A Company may be wound up if the Tribunal orders it to be so in accordance with Chapter XIX, which addresses the revival and rehabilitation of sick companies.
- The Company’s Business is Being Operated in a Fraudulent Manner
The Tribunal may issue a winding-up order if, upon the Registrar’s or any other person’s request, the Tribunal determines that:
- The state of the (ii) the company was formed for fraudulent and unlawful purpose; or (iii) 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.
- Default in Filing Financial Statements
A company may be wound up by the Tribunal if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years.
- Inability to Pay Debts
If a company is unable to pay its debts or meet its financial obligations, it may be ordered to be wound up. A company is deemed unable to pay its debts in the following three situations, according to Section 271 (2):
- Failure to Pay on Demand: When a company fails to pay or otherwise satisfy a creditor to whom it owes more than Rs. 1 lakh within 21 days of the creditor’s or his agent’s or legal adviser’s demand for payment.
- Unsatisfied Decreed Debt: When a company fails to satisfy a decree issued by any court or tribunal in favour of a creditor, in whole or in part. Please keep in mind that there is no in this case, any amount is a condition. Unsatisfied execution of a decree, no matter how small, will constitute inability to pay.
- Proving Inability to Pay Debts or Commercial Insolvency: A company is also deemed to be unable to pay its debts if the Tribunal is satisfied that the company is unable to pay its debts. When determining whether a company is unable to pay its debts, the Tribunal must consider the company’s contingent and prospective liabilities. If a company cannot demonstrate that its assets are sufficient to meet its liabilities in a reasonable time, it may be considered commercially insolvent
- Just and Equitable Reason for Winding Up
The Tribunal may ISO order the winding up of a company if the Tribunal believes that it is just and equitable to do so.
The Tribunal has broad discretionary powers under this clause. When it appears to be just and equitable, the Tribunal may order the dissolution of a company. What is just and equitable is a question of fact, determined by the facts of each case. However, when making an order under this clause, the Tribunal generally considers the interests of the company, its employees, creditors, shareholders, and society.
- Voluntary winding up
It is referred to as voluntary winding UP’ when a company is wound up by its members and creditors without the intervention of the Tribunal.
In a voluntary winding up, the company and its creditors are free to settle their differences without having to go to the Tribunal. Although the Company, their Liquidator, or any contributory or creditor may apply to the Tribunal for directions or orders, as and when necessary, for the resolution of any question arising during the winding up process.
It should be noted that there were two types of voluntary winding up under the previous Companies Act of 1956. (l) Voluntary Winding Up of Members; and (2) Voluntary Winding Up of Creditors. ‘Members’ Voluntary Winding Up’ was a reason to buy solvent companies when they were insolvent.
The directors submitted a “declaration of solvency” to the Registrar. Insolvent companies, on the other hand, used Creditors’ Voluntary Winding Up when directors failed to make a ‘declaration of solvency.’ The above distinction was abolished by the Companies Act of 2013. There can be no voluntary winding up under the 2013 Act if a ‘declaration of Solvency’ is not made.
- Grounds for Voluntary Winding Up
Section 304 states that a company may be wound up voluntarily in one of two situations:
(l) Through the adoption of an Ordinary Resolution: A company may decide to dissolve voluntarily by ordinary resolution:
(a) When the period specified in the articles of incorporation for the duration of the company has expired
(b) When the event for which the articles provide that the company shall be dissolved has occurred
(2) By Passing a Special Resolution: A company may, at any time and for any reason, pass a special resolution to be voluntarily wound up.
When a resolution for voluntary dissolution is passed, it must be advertised within 14 days passing of the resolution in the Official Gazette as well as in some important newspaper circulating in the district of the company’s registered office (Section 3071).
ROLE OF LIQUIDATOR
Because the entire process of liquidation/voluntary liquidation is dependent on the liquidator, the liquidator has been given significant powers. Because powers and responsibilities coexist, the liquidator bears both legal and moral responsibilities. The liquidator’s major powers and duties, in addition to complying with the Act, Rules, and Regulations, include the following:
- Inviting, verifying, and settling all creditors’ claims.
- Taking custody / control of all assets, including actionable claims.
- Measuring the assets and preparing reports.
- Protecting and preserving assets.
- Carrying on the CD’s business for its beneficial liquidation.
- Selling assets, realizing actionable claims.
Parties of winding up a company
- The business
- Creditors of the company holding debentures may or may not have appointed a trustee.
- Shareholders or contributors to the company who own fully paid-up shares
- Unpaid debts of contingent or prospective creditors
- The person authorized by the state or federal government
The liquidator may apply to the Court for the release of duties once the following conditions are met:
- All the company’s assets have been realized (that is, all assets have been sold and converted to cash)
- The investigations into the winding-up proceedings have been completed; and
- A final dividend (if any) has been paid to creditors to settle debts
The liquidator will notify the company’s creditors and contributors, along with a summary of the relevant receipts and payments in the liquidation, of his intention to apply to the Court for release from his duties as liquidator. Any creditor or contributory has 21 days from the date of the notice to object to the proposed release the liquidator’s
Following receipt of the court’s order for release, the liquidator will file a “Certificate of Release of Liquidator” with the Registrar of Companies. The company will be dissolved two years after the “Certificate of Release of Liquidator” is filed.
DIFFERENCE BETWEEN WINDING UP AND DISSOLUTION
Procedure Of Company Dissolution
- Petition Filing for Company Dissolution
First, interested parties should file a petition for the company’s dissolution. The following individuals may file the petition on the company’s behalf:
- The Company’s Trade Creditors
- The Business Itself
- All types of company contributors
- Any of the three previously mentioned categories
- Central or state government authorities
- Corporate Registrar
The petition must be in Form WIN 1 or Form WIN 2. Such a petition must be submitted in three copies. The petition in Form WIN 3 must be accompanied by an affidavit.
- Company’s Financial Statement
The statement of affairs of the company must be provided with the petition, according to Rule 4 of the Companies (Winding Up) Rules, 2020. According to Section 272(4) or Section 274(1), the company’s statement of affairs must be submitted in the form of Form WIN 4. Such information must be current and no older than 30 days. The company’s statement of affairs must be made in duplicate and accompanied by an affidavit. Form WIN 5 must be used for the affidavit of concurrence.
The petition must be advertised for 14 days before the hearing date. Such advertisements must be written in both English and a vernacular language. The paper must be distributed in the state or Union territory where the company’s registered office is located. Form WIN 6 should be used for advertisements.
- Provisional Liquidator Appointment
The tribunal will appoint a provisional liquidator after receiving the petition and official proof of the affidavit. The provisional liquidator’s appointment would be announced to the company in accordance with Section 273(1)(c). This must be completed on Form WIN 7. The responsibilities that the provisional liquidator must fulfil would be specified in accordance with to the company’s specifications This would be specified in Form WIN 8.
- Notice of termination to the Provisional Liquidator
Section 277 (1) requires the registrar of companies to forward a copy of the notice to the official liquidator. This would be sent in Form WIN 9 formats, via courier, registered speed post, or any other electronic method. This must be sent within 7 days of the order being placed.
- Order of Closure
The company liquidator would receive the winding-up order in the form of Form WIN 11. Such an order must include variations in the signed and sealed form. The registrar must send this to the company within seven days. When the registrar sends it to the company, it must be in Form WIN 12 and 13.
- Property Custody
The company liquidator would seize all assets and documents. The liquidator has the authority to seize all the company’s documents, actionable claims, and books. The company liquidator must submit a report to the tribunal within 60 days of the order.
- The company’s affairs
If the company’s affairs are wound up, the company liquidator would apply to the tribunal for the company’s dissolution. This decision would be made only if the company liquidator believes it is just and reasonable to wind up a company. When an order to wind up a company is issued, a copy of the order is sent to the registrar. This must be done.
- Company Dissolution
If the tribunal determines that the accounts are correct, it will issue an order for dissolution or dissolve the company. This must happen within 60 days of receiving the application. Company Dissolution. If the tribunal determines that the accounts are correct, it will issue an order for dissolution or dissolve the company. This must happen within 60 days of receiving the application.
Winding up a Business Through Voluntary Winding Up
- Resolution and Special Resolution Adoption
To begin, the company must hold a general meeting to pass the resolution. However, the company must check the memorandum of association and articles of association to see if such a provision for dissolution exists. Following completion of this task, the company must call a general meeting. The members of the general meeting must vote on a special resolution. A special resolution would require 75%, or three-fourths of the members. After such resolutions are passed, the company must appoint a liquidator to carry them out.
- Solvency Declaration
The following step is for the company to declare its solvency status. This would display information about the company’s finances. This solvency status must also be demonstrated to trade creditors.
- Preparation of the Closing Report
The liquidator would prepare a report on the company’s winding up. Such a report would include information on the company’s assets, liabilities, and other types of trade liabilities. This report must be presented to the company’s general meeting. Once this is approved, the liquidator will provide the ROC with a copy of the final accounts.
- Tribunal Application
The company liquidator would also apply to the tribunal for the company’s dissolution. If the tribunal determines that the accounts are correct, it will issue an order for dissolution or dissolve the company. This must happen within 60 days of receiving the application. Such information must be submitted to the ROC.
Winding up a company necessitates the following documents
- The company’s Certificate of Incorporation
- The company’s Memorandum of Association and Articles of Association
- Certificate relating to the closure of the company’s bank account
- Board Resolution Copies
- A copy of the creditors’ resolution stating that three-fourths of the members have accepted
- Company’s Financial Statement
- WIN 1 or WIN 2 Winding Up Petition Form
- Statement of the Company’s Affairs in the Format of Form WIN 4
- Affidavit of Concurrence in the Form WIN 5 Format
- Form WIN 6: Advertisement in a Vernacular Newspaper
- Appointment of a Provisional Liquidator in the WIN 7 and 8 Format
- STK-2 (Procedure for) Form winding up a dormant or defunct company (This would only be used for the fast-track procedure which is carried out by the courts)