This article is written by Sambavi Marwah, a fourth-year law student, from Delhi Metropolitan Education, GGISPU.
This article explains the ‘Role of the Courts in winding up of a company’. It states the requirements and the grounds of the winding up of the company when the decision of Courts is involved.
What is a Company?
The Companies Act 2013 of India defines a company as-
“A registered association which is an artificial legal person, having an independent legal, entity with perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.”
A company can be a public company (or Public Limited Company), a private company (Private Limited Company) or a One Person Company.
Characteristics of a company are as follows:
•Separate legal entity
Winding of a Company
Winding up of a company is the process by which the life of a company comes to an end and the assets are distributed and divided accordingly among its members and creditors.
A liquidator is appointed and he takes the charge over the assets of the company, pays the debt, and pays the remaining amount to the members of the company.
As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.
Winding up of a company can take place due to several reasons like- bankruptcy, mutual agreement among the stakeholders, losses, order by the court, etc.
As per section 270, a company would wind up in two ways:
•Voluntary winding up
•Compulsory winding up
Voluntary Winding Up
Voluntary winding up takes place when the company becomes insolvent and is unable to pay its liabilities. The members decide voluntarily to wind up before the National Company Law Tribunal intervenes.
To voluntarily wind the company, a meeting is called upon, where a resolution is passed to carry out the process of winding up. There are two ways by which a company declares winding up:
•By Special Resolution: After getting 75% majority of votes from its shareholders and board of directors, a company may wind up voluntarily but only when the special resolution has been passed. Then after the resolution has passed, the same has to be published in the Official Gazette and in leading newspapers of that district/city within 14 days.
•By Ordinary Resolution: A company may wound up voluntarily if the life or duration of the company comes to an end. The duration of the company’s existence is mentioned in the articles of the company.
Meeting of the Creditors
If during the meeting of the creditors, the majority of them are of the view that a company should wind up voluntarily, the process of winding up takes place.
But, if they think that the company should be wound up by the Tribunal as it may not be able to set off the debt, then the process of winding up will opt. The process begins by applying to the Tribunal within 2 weeks. Also, the Registrar of the company has to be informed of the same within 10days.
The next step is the appointment of a liquidator. The company appoints a liquidator who is evaluating the asset & liabilities of the company and present a final report to National Company Law Tribunal.
Compulsory Winding Up- Role of the Courts
Compulsory winding up takes place when the Court gives an order to the creditors or the members of the company to wind up. It is primarily the National Company Law Tribunal (NCLT) which has the jurisdiction to wind up companies under the Companies Act, 2013. There must be strong reasons to order winding up as it the last resort to be adopted.
Constitution of NCLT
It consists of mainly:
With the introduction of the new Companies Act, 2013, a tribunal can wind up the company of the following grounds:
•When the company becomes insolvent and is unable to pay the debt.
•If a special resolution has been passed in the favor of winding up the company by the tribunal.
•If the company has acted against the Constitution of India, damaging the integrity or the morality of India, or security of the state.
•If it has been found out that the financial statements or annual returns have not been filled by the company for preceding 5 consecutive financial years.
•If it is found by the Tribunal that it is reasonable, fair, and equitable for the company to wind up.
•If it has been found out that the company has been engaged in some criminal act or any unlawful activities.
Who may File a Petition to the Tribunal?
Section 272 of the Companies Act 2013 says, that a winding-up petition is to be filed in the prescribed form no 1, 2, or 3 whichever is applicable and it is to be submitted in 3 sets. The petition for the process of winding up can be filed by the following entities:
•A company can file a petition to the Tribunal for the process winding up when a Special Resolution to wind up the affairs of the company has been passed by the members of the company.
•A contributory shall be entitled to present a petition for the winding-up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding-up or have devolved on him through the death of a former holder.
•A Registrar may make petition to the Tribunal for the winding up the company only in the following cases:
- If the company’s activities are unlawful and fraudulent.
- If the company failed to file the annual financial statements within a stipulated time.
- If the company acted against the morality or integrity of the state.
The Registrar may do so with the previous sanction of the Central Government.
•The Central government or the State government can file a petition on the ground that the company acted against the nation’s security or against the interests of the sovereignty or integrity of India.
•Last but not the least; a petition can be filed by any person authorized by the respected government.
The process of winding up the company under the Companies Act 2013 is as lengthy as setting and forming the company. The process of winding up has its own grounds and complexities, which aid the company to make a decision. It can be further concluded that National Companies Law Tribunal plays an important role in the winding-up of a company as it takes an important decision while keeping all the grounds and measures of winding up.
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