The following article has been submitted by Aaditya Kapoor, a law-aspiring student of Vivekananda Institute of Professional Studies. Through his research, Aaditya strived to shed light upon the process of Winding-Up of a Company, and the various types of said process.
In a world that quickly pokes itself further and further towards industrialization, the corporate world is maybe the most fundamental component of what holds together a country’s economy – and India is no special case. As indicated by the Indian Companies Act, 2013, a company can be characterized as an affiliation enrolled with the Registrar of Companies, where the affiliation itself is an artificially but legitimate individual having an autonomous, lawful substance and a typical capital containing transferable offers.
A company can be all the more distinctively depicted as a business element going about as a legitimate individual, shaped by a solitary or a gathering of lawful people to commence business. There is no prerequisite of need for there to be a gathering of people associated with the arrangement of a company, as it is conceivable for one individual to do likewise – as long as the previously mentioned legitimate individual is perceived by law as somebody with certain lawful rights and commitments.
The Companies Act, 2013 provides insight into what qualifies as a company, and the different classifications of the same; a detailed description of which can be referred to here. The act also prescribes provisions regarding the process of Winding Up of a company.
Winding up is a process through which a company dissolves itself, ceasing to exist as a legal entity thereby. The aforementioned process involves selling off stock, paying back creditors and after resolving all debts, the remaining monetary or non-monetary funds are paid back to the members, as per their contribution to the company’s capital. According to Section 2(94A) of the Companies Act, winding up also means “liquidation” in the Insolvency and Bankruptcy Code, 2016. Once the necessary prerequisites are met with, the company undergoing this process is dissolved; however, it doesn’t lose its legal identity until after the dissolution is achieved. Therefore, it can be ruled out that the winding up of a company is the final stage of that company’s existence.
WHY DOES A COMPANY LEAD TO WINDING UP?
A number of reasons can contribute to winding up of a company. These reasons may include failure to commence a proper business, bankruptcy, and even voluntary interests of members in dissolving the company. At certain instances, death of promoters can also cause the company into undertaking the winding-up process. The courts can order such process to be ensured on a particular company as well, depending upon circumstances that may contribute to breach of law on any grounds prescribed by the courts.
MODES OF WINDING UP
There are a number of ways by which a company can launch itself into the winding-up process, and said ways include both voluntary actions as well as a judicial sanction.
- Compulsory Winding Up of Company: The felicitation of the winding-up process by a tribunal constitutes compulsory winding up of the company; the guidelines for which are contained under Section 272 of Companies Act. A Court can commence winding up of company through the following scenarios
- Special Resolution: If the company itself has maintained for it to be dissolved by the court through a special resolution, such company is deemed to achieve dissolution through compulsory winding up.
- Company’s Default: If a default is made by the company in the delivery of the statutory report to Registrar of Companies, or if the same is made in holding the statutory meeting of the company, the court has the authority to initiate compulsory winding up of a company. This rule shall also apply if the company fails to file its financial statements or annual returns for five consecutively preceding financial years.
- Non-commencement or Suspending of business: In case the company, even after registering itself and following due process for its formation, fails to commence business within a year from its inception, a winding-up proceeding can be initiated by the court – wherein the same effect can be achieved if the company after commencing business suspends the same for over a year.
- Reduction of Members: One of the prerequisites that need to be followed in order to formulate a viable company is for it to contain a certain minimum number of members – which is set at seven for a public company and 2 for a private company. However, if the number of members of the company goes below that required figure, the court has the authority to commence the winding-up process.
- Failure in paying debts: If a company renders itself unable to pay off its debts, it becomes prone to compulsorily winding up by order of the court.
- Indulging Fraudulent Acts: The court can order winding up of a company if said company is found to be indulging or partaking in fraudulent acts or other unlawful business. The same effect, based on principles of public benefit, can be achieved in case a member of management connected with the formation of company is found guilty of any kind of misconduct.
- Just & Equitable Clause of Court: Lastly, a court can initiate a process of compulsory winding up of a company if it deems the same to be a just and equitable action and one that furthers the public interest.
A petition to initiate compulsory winding up of a company has to be filed in the Tribunal. Such a petition can be furthered by anyone of the following persons/entities:
- The Company itself: As conferred earlier, a company can be compulsorily wound-up by passing a Special Resolution to achieve the aforementioned result; wherein this resolution is brought about members of the company itself.
- The Contributories: A contributory of the company is also entitled to file a petition for winding up of a company by the court, regardless of whether or not such contributory has tangible interests in the shares or assets of the company.
- The Registrar: The registrar, in consonance with the sanction of Central Government, can file a petition for winding up of the company to the tribunal only in a few exceptional cases. They are: (i) in case the company defaults in filing its financial statements with the registrar; (ii) If the company happens to act against public interest or interests of the nation itself; and (iii) if, based on an application made by the Registrar, the tribunal is led to believe that the company was formed for fraudulent or unlawful behaviour.
- The Central or State Government: The governing bodies themselves can file a petition of winding up of a company if there’s proof of said company acting against interests of the nation and public welfare.
2. Voluntary Winding-Up of Company: Not much different from the passing of the special resolution, the members of the company also hold the authority to trigger winding up of company in certain scenarios. According to Section 484 of the Companies Act, a company can be wound-up voluntarily under the following circumstances:
- By an Ordinary Resolution: In case the duration of the company was fixed by its articles since its inception, and the same has expired, a company can be led into the process of winding itself up.
- By a special resolution: To recall once again, a company can move into the winding-up proceeding bypassing of a special resolution – one that must be notified to the public via an advertisement in the Official Gazette, as well as in a local newspaper.
A company can be voluntarily wound-up through three different processes.
- In case the company has not arrived at a status of insolvency at the time of winding up, such that upon dissolution it is able to pay off its debts and settle other payments, it is considered to be a Members’ Voluntary Wind-up. The director(s) of the company must make a declaration to that effect, and the same must be verified by means of an affidavit. This individual process involves the following steps in succession:
- Declaration of solvency;
- Legal declaration to Registrar of Companies;
- Passing or issuing of resolution in the company’s general meeting within five weeks of the declaration of solvency;
- Liquidator’s appointment;
- Paying off all liabilities of the company post collection of its assets.
- In hindsight, if there is no declaration of solvency, it is presumed that the company has arrived to a point of insolvency. This process is called Creditors’ Voluntary Winding-up. In most cases, a situation of initiating voluntary winding up arises when the creditors realize that the particular company has turned insolvent; in which case, the shareholders arbitrarily decide to commence the company’s winding up. By default, the company is required to hold a meeting with its creditors in order to pass the resolution for winding up. This process also involves a few steps that need to be followed in succession:
- Proposing resolution for winding up of company in its general meeting.
- On the same day as the aforementioned proposal, there is a requirement of a meeting amongst creditors, and there is a requirement of formulating a list of creditors by the company’s Director(s).
- Appointment of Liquidator by the meeting of members and creditors.
- Appointment of a committee of inspection to reassure the status of insolvency.
- Commencement of winding-up according to the statute.
- After passing of the resolution for winding up of company, a court order can subject the process to supervision by the Court itself. Such order is ruled for protection of creditors and contributories of the company, so as to prevent them from incurring any loss.
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