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COMPANY LAW PROJECT

WINDING UP OF COMPANIES (COMPANIES ACT, 2013)

ATUL NARAYAN
Roll No. 845
SEMESTER V
NUALS

Introduction

According to Halsburry's Laws of England, Winding up is a proceeding by


means of which the dissolution of a company is brought about & in the
course of which its assets are collected and realised; and applied in payment
of its debts; and when these are satisfied, the remaining amount is applied
for returning to its members the sums which they have contributed to the
company in accordance with Articles of the Company.
In the words of Prof. L.C.B. Gower, Winding-up of a company is the process
whereby its life is ended and its property administered for the benefit of its
creditors and members. A liquidator is appointed and he takes control of the
company, collects its debts and finally distributes any surplus among the
members in accordance with their rights. Thus, winding-up of a company is a
process of putting an end to the life of a company. It is a proceeding by
means of which a company is dissolved and in the course of such dissolution
its assets are collected, its debts are paid off out of the assets of the
company or from contributions by its members, if necessary. If any surplus is
left, it is distributed among the members in accordance with their rights. At
the end of the winding up the company will have no assets or liabilities and it
will, therefore, be simply a formal step for it to be dissolved, that is, for its
legal personality as a corporation to be brought to an end.
Therefore, the main purpose of winding up of a company is to realize the
assets and pay the debts of the company expeditiously and fairly in
accordance with the law. The Companies Act, 2013 provides for effective
time bound winding up process. It also provides for aspects such as new
grounds of winding up by NCLT, appointment of company liquidator,
professional assistance, concurrence of creditors for voluntary winding up,
simplification of provisions, remedy for fraudulent preference and so on.

DISCUSSION

Now as we traverse into the topic it needs to be duly noted that there exists
a clear and straight distinction between winding up of a company and the
dissolution of a company. It is only when a company is dissolved that it can
be said to cease to exist, i.e., the company as such does not cease to exist
when it is being wound up. The administrative machinery of the company
gets changed as the administration is transferred in the hands of the
liquidator. Even after commencement of the winding-up, the property and
assets of the company belong to the company until dissolution takes place.
On dissolution the company ceases to exist as a separate entity and
becomes incapable of keeping property, suing or being sued. Thus in
between the winding up and dissolution, the legal status of the company
continues and it can be sued in the court of law.
Distinction in brief: The entire procedure for bringing about a lawful end to
the life of a company is divided into two stages winding up and
dissolution. Winding up is the first stage in the process whereby assets are
realised, liabilities are paid off and the surplus, if any, distributed among its
members. Dissolution is the final stage whereby the existence of the
company is withdrawn by the law. Winding up or liquidation order can be
made by a Court of Law, even when the Company is in a solvent state. Not
all the companies which are being subjected to liquidation proceedings are in
financial trouble. For instance, a solvent company may be wound up, if there

is a default in filing financial statements with the Registrar or when there is a


reduction in the number of membership etc.1
Winding up in all cases does not culminate in dissolution. Even after paying
all the creditors there may still be a surplus; company may earn profits
during the course of beneficial winding up.

Modes of winding up
Section 270 of the Companies Act, 2013 provides for two modes of winding
up a registered company:
1. By the Court i.e. compulsory winding up;
2. Voluntary winding up, which may be either:
(a) Members voluntary winding up; or
(b) Creditors voluntary winding up; (Distinction between the two has been
omitted in the Companies Act, 2013).
(Voluntary winding up of a company subject to the supervision of the court, a
valid mode of winding up as per Companies Act 1956,was again, omitted in
the new act.)
WINDING UP BY THE COURT
Winding up by the Court or compulsory winding up is initiated by an
application by way of petition to the appropriate Court for a winding up order.
A winding up petition has to be resorted to only when other means of healing

1 Companies Act, 2013, at Section 271(1) - Circumstances in which Company may


be wound up by Tribunal

an ailing company are of absolutely no avail. Thus the irretrievable step of


winding up must be resorted to only in very compelling circumstances.
In Bowes v. Hope Life Insurance and Guarantee Co. and in Re General
Company for Promotion of Land Credit it was stated that "a winding up order
is not a normal alternative in the case of a company to the ordinary
procedure for the realisation of the debts due to it"; but nonetheless it is a
form of equitable execution.
Grounds on which a Company may be wound up by the Court
The Act prescribes the following grounds for winding up of a company:
(a) The company has passed a special resolution of its being wound up by
the Court; or
(b) Default is made in delivering the statutory report to the Registrar or in
holding the statutory meeting; or
(c)It is unable to pay its debts; or
(d) The Court is of the opinion that it is just and equitable that it should be
wound up.
(e) The company has made a default in filing with the registrar its balance
sheet and profit and loss account or annual returns for any five consecutive
financial years.
(f) The company has acted against the interests of the sovereignty and
integrity of India, the security of the State, friendly relations with foreign
States, public order, decency or morality.
The reasons for compulsory winding up under the Companies Act, 1956 (Old
Act) and the New Act remain same, except that the following grounds which
were in the old act stand deleted as reasons for compulsory winding up
under the New Act:

a. Suspension of the business for one year from the date of incorporation or
suspension of business for a whole year; or
b. Reduction in number of members of a company below two (in case of a
private company) and seven (in case of a public company).
On the flipside, a new ground has been added for compulsory winding up
under the New Act. On the application by the Registrar or any other person
authorised by the Central Government by way of notification under the New
Act, if the Tribunal is of the opinion that the affairs of the company have been
carried out in a fraudulent manner or unlawful purpose or any person
concerned or involved in the management or affairs of the company has
acted in a fraudulent manner or misfeasance or misconduct, that it is better
to wind up the company.
No statutory definition for the term insolvency can be found under the
Companies Act, 2013 or in any other Indian insolvency legislations. However,
Section 271(1)(a) of the Companies Act provides that a Company may be
wound up by the Tribunal if it is "unable to pay its debts".
Section 271 of the Companies Act, 2013 which deals with the circumstances
in which a Company may be wound up by the Tribunal uses the words
"unable to pay its debts" to describe the situation of commercial insolvency
of a company. In this regard, the test to determine the commercial
insolvency was laid down by the English Courts in the case of In Re European
Life Assurance Society Ltd. In this case, the Court held that a company is
said to be commercially insolvent, if the existing and probable assets of the
Company would be insufficient to meet its existing liabilities. 2This test has
been accepted and followed by the Indian Courts.
Winding Up Process
Chapter XX, Part-I of the New Act deals with the compulsory winding up
2 The Legal Regime of Liquidation in India, S Mohamed Azaad, Legal Bloc Journal,
ISSN: 2395-0277

process. The petition for compulsory winding up can be presented to the


appropriate authority by:
1. The Company, in case of passing a special resolution for winding up.
2. A creditor, in case of a company's inability to pay debts.
3. 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.
4. The Registrar, on any ground provided prior approval of the Central
Government has been obtained.
5. A person authorised by the Central Government, in case of investigation
into the business of the company where it appears from the report of the
inspector that the 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.
Filing of Winding up Petition
The draft rules provide that a winding up petition (Petition) is to be filed
under section 272 of the New Act in the prescribed form no 1, 2 or 3,
whichever is applicable and is to be submitted in three sets.
Statement of Affairs of the Company
If the company files the Petition, it shall be accompanied with the statement
of affairs (Statement) in Form No. 4 read with section 272(5) of the New Act.
The Petition shall state the facts up to a specific date, which shall not be the
date more than fifteen days prior to the date of making of the Statement. A
Chartered Accountant in practice shall duly certify this Statement. The fee for

filing the Petition shall be submitted as prescribed in Annexure-B of the draft


rules.
Advertisement of the Petition
Subject to the directions of the Tribunal, the petition shall be advertised in
not less than fourteen days before the date fixed for hearing in one daily
newspaper in English language and one daily newspaper in the principal
regional language circulating in the State or union territory where the
registered office of company is situated. The advertisement needs to be
carried out in Form No 6. The previous requirement of publication in the
official gazette of the State or union territory mentioned in Company Court
Rules (1959), has been done away with under the New Act.
Final Order and its Content
Thus the Tribunal, after hearing the Petition has the power to dismiss it, with
or without cost, or to make an interim order, as it thinks fit, or can appoint
the provisional liquidator of the company till the passing of the winding up
order. An order for winding up of a company will be in Form 11 and contains
the footnote prescribing the following duties:
a. To submit the complete and audited book of accounts up to the date of
order;
b. To attend the company liquidator at the required time and place with all
information;
c. To surrender the assets of the company and documents related to it,
including those

documents from which the benefit from the assets

accrues.
Liquidators and their appointment

Section 275 lays down that, f or the purposes of winding up of a company by


the Tribunal, the Tribunal at the time of the passing of the order of winding
up, shall appoint an Official Liquidator or a liquidator as the Company
Liquidator. The provisional liquidator or the Company Liquidator, as the case
may be, shall be appointed from a panel maintained by the Central
Government consisting of the names of chartered accountants, advocates,
company secretaries, cost accountants or firms or bodies corporate having
such chartered accountants, advocates, company secretaries, cost
accountants and such other professionals as may be notified by the Central
Government or from a firm or a body corporate of persons having a
combination of such professionals as may be prescribed and having at least
ten years experience in company matters.
Jurisdiction of the Tribunal
As per section 280 of the Act, the Tribunal has been vested with jurisdiction
to entertain or dispose of the following:
a Any suit or proceeding by or against the company
b Any claim made by or against the company including claims by or
against any of its branches in India
c Any application made under section 233 for merger and amalgamation
of certain companies.
d Any scheme submitted under section 262 for sanction for revival and
rehabilitation
e Any question of priorities or any other question whatsoever of law or
fact
VOLUNTARY WINDING UP
The companies are usually wound up voluntarily as it is an easier process of
winding up. It is altogether different from a compulsory winding up. In
voluntary winding up the company and its creditors are left to settle their
affairs without going to a Court, although they may apply to the Court for

directions or orders, as and when necessary. One or more liquidators are to


be appointed by the company in general meeting for the purpose of winding
up the affairs and distributing the assets of the company.
When a company is wound up by the members or the creditors without the
intervention of Tribunal, it is called as voluntary winding up. As per section
304 of the Act, a company may be wound up voluntarily at any time by
passing a special resolution but where the articles provide for a period on the
expiry of which the company is to be wound up and that period has expired
or for a contingency on the happening of which the company is to be
dissolved and that contingency has happened, winding up may be
commenced with an ordinary resolution.
Declaration of Solvency (Section 305):
In case of a proposed voluntary winding up, majority of its directors but not
less than two directors, shall at a Board meeting make a declaration verified
by an affidavit that they have made full inquiry into the affairs of the
company and they have formed an opinion that the company has no debt or
whether it will be able to pay its debts in full from the proceeds of assets sold
in voluntary winding up.
Section 488(5) of the Old Act had divided voluntary winding up into two
kinds:
(i)
(ii)

Members voluntary winding up; and


Creditors voluntary winding up.

When the company was solvent and able to pay its liabilities in full, it did not
need to consult the creditors or call their meeting. Its directors or where they
are more than two, the majority of its directors could, at a meeting of the
Board, make a declaration of solvency verified by an affidavit. But in case of
non-filing of solvency, the creditors could approach
Meeting of Creditors (Section 306)

The Act of 2013 has abolished the above mentioned distinction between
members voluntary winding up and the creditors voluntary meeting up. The
requirement now is that after members meeting for voluntary winding up a
meeting of creditors must also be called. Such meetings of its creditors shall
either be on same day or on the next day. The company shall cause a notice
of the meeting to be sent by registered post to the creditors with the notice
of the meeting of the company.
The Board of Directors of the company shall

Cause to be presented a full statement of the position of the affairs of


the company together with a list of creditors of the company, if any,
copy of declaration under section 305 and the estimated amount of the

claims before such meeting; and


Appoint one of the directors to preside at the meeting.

Where two-thirds in value of creditors of the company are of the opinion that:
(a) it is in the interest of all parties that the company be wound up
voluntarily, the company shall be wound up voluntarily; or
(b) the company may not be able to pay for its debts in full from the
proceeds of assets sold in voluntary winding up and pass a resolution that it
shall be in the interest of all parties if the company is wound up by the
Tribunal, the company shall within fourteen days thereafter file an application
before the Tribunal.
The notice of any resolution passed at the meeting of creditors shall be given
by the company to the Registrar within 10 days of the passing thereof. Within
14 days of passing of resolution for winding up of company, the company
must give a notice of the resolution in the Official Gazette and also advertise
in a newspaper with circulation in the district where the registered office is
present.

Within 30 days of General Meeting for winding up of company, the company


is supposed to file certified copies of the ordinary or special resolution
passed in the General Meeting for winding up of the company. The next step
would be to wind up affairs of the company and prepare the liquidators
account of the winding up of the company and get the same audited and call
for a final General Meeting of the Company and pass a special resolution for
disposal of the books and papers of the company when the affairs of the
company are completely wound up and is about to be dissolved.
Within two weeks of final General Meeting of the Company, the Company
must file a copy of the accounts and file an application to the Tribunal for
passing an order for dissolution of the company. If the Tribunal is satisfied,
the Tribunal shall pass an order dissolving the company within 60 days of
receiving the application. The company liquidator would then file a copy of
the order with the Registrar. The Registrar, on receiving the copy of the order
passed by the Tribunal then publishes a notice in the Official Gazette that the
company is dissolved.
Liquidator and his appointment:
The Tribunal at the time of passing a winding up order has to appoint an
Official liquidator from the panel maintained under Section 275(2).The
tribunal also has the power to limit the power of the liquidator either at the
time of appointment or at any subsequent point. Section 276 of the Act
empowers the Central Government also has the power to strip the official
from its ranking on grounds of misconduct, fraud, misfeasance or breach of
duties also The tribunal may assign the work on death, resignation or
removal of the liquidator to another company liquidator. According to section
287 of the Act the Tribunal may constitute an advisory committee to advise
the company liquidator and to report to the Tribunal on matters which it may
direct.

Section 291 says that the company liquidator with the sanction of the
Tribunal may appoint one or more charted accountants or company
secretaries or cost accountants or legal practitioners as may be necessary to
assist him in performance of his duties and functions.
As per section 310 of the Act the company in its general meeting, where a
resolution of voluntary winding up is passed, shall appoint a Company
Liquidator from the panel prepared by the Central Government for the
purpose of winding up its affairs and distributing the assets of the company
and recommend the fee to be paid to the Company Liquidator. Section 311
gives the power to remove and fill vacancy of company liquidators.
Where the creditors have passed a resolution for winding up the company
under sub-section (3) of section 306, the appointment of the Company
Liquidator shall be effective only after it is approved by the majority of
creditors in value of the company. Where creditors do not approve the
appointment of a Company Liquidator by members, creditors shall appoint
another Company Liquidator.
Cost of Voluntary Winding up (Section 323):
All costs, charges and expenses properly incurred in the winding up,
including the fee of the Company Liquidator, shall, subject to the rights of
secured creditors, if any, be payable out of the assets of the company in
priority to all other claims.
WINDING UP OF UNREGISTERED COMPANY:
The term unregistered company includes any partnership, association or
company consisting of more than seven members at the time of the petition,
but does not include the follows:
a A railway company incorporated by an Act of the Parliament or other
Indian law or Act of the British Parliament.
b A company registered under the Companies Act.

c A company registered under any previous company law, excepting


those having registered office in Burma, Aden or Pakistan before their
separation from India.
Section 375 of the act says that any unregistered company may be wound
up under this Act, in such manner as prescribed, and all the provisions of the
Act with respect to winding up shall apply to an unregistered company
subject to section 375(2)-(4).
It is therefore clear that the provisions that are dealt with the winding up of a
registered company is applicable to an unregistered company under the
section 375 of the said Act. According to the said section, no unregistered
company can be wound up voluntarily as it can be done by the Tribunal only.
The section goes on to give scenarios in which an unregistered company can
be wound up and they are as follows:
1 If the company has been dissolved or has ceased to carry on business
or is carrying on business for the purpose of winding up.
2 If the company is unable to pay its debts.
3 If the tribunal is of the opinion thats it is just and equitable to wind up
the company.
Under this provision a company is said to be unable to pay its debt in the
following cases:
1 Where a creditor to whom the company is indebted for more than
Rs.1,00,000/- has served a notice but the company has not settled with
him for three weeks.
2 If any case has been filed against a member for a debt due from the
company or from the member in his character as member and the
company has not within 10 days settled the demands or procured the
case to be stayed or has not indemnified the member against the sum
due and the expenses.
3 If any execution or other process has been returned unsatisfied in
whole or part.

4 If it is otherwise proved to the satisfaction of the Tribunal that the


company is unable to pay its debts.
Section 376 of the Act says, where a body corporate incorporated outside
India which has been carrying on business in India, ceases to carry on
business in India, it may be wound up as an unregistered company under this
Part. Notwithstanding that the body corporate has been dissolved or
otherwise ceased to exist as such under or by virtue of the laws of the
country under which it was incorporated.
Section 377 says that these provisions are additional to the rest of the
provisions of the Act relating to winding up all of which are applicable as well.
The Tribunal or the Official liquidator has the power do any act in the case of
an unregistered company which can be exercised in the situation of winding
up of a registered company. It goes on to say that an unregistered company
shall not be treated as a company under this act except the situation of it
being wound up.

BIBLIOGRAPHY

Books Referred:
1) Companies Act, 2013 and Rules & Forms: With Concise Commentary
and Referencer, Second Edition, Corporate Professionals, 2015.
2) Business Law, Avtar Singh, 9th Edition, Eastern Book Company, 2011.

3) The Legal Regime of Liquidation and Corporate Insolvency Laws in India


under The Companies Act, 2013, S. Mohammed Azaad, Legal Bloc Journal.

Websites Referred:
1) http://www.legalservicesindia.com/article/article/winding-up-of-acompany-1319-1.html
2) http://www.diplomatist.com/dipom05y2014/article021.html
3) https://legalbloc.com/wp-content/uploads/2015/05/The-Legal-Regimeof-Liquidation-and-Corporate-Insolvency-Laws-in-India-An-InquisitiveAnalysis-under-The-Companies-Act-2013.pdf