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Kinds, Consequences and Reasons for Winding up of a Company under the Companies Act, 2013

Kinds, Consequences and Reasons for Winding up of a Company under the Companies Act, 2013


This research paper is on Indian firm winding up laws. Winding up is defined as winding up under this act or liquidation of a firm under the IBC Code, 2016 i.e., a procedure through which a company’s legal position is terminated. This paper discusses the legislation relating to the Companies Act and the many repercussions and grounds for a firm’s winding up. A firm’s dissolution might be required for a variety of reasons, including the end of a business, misfortune, insolvency, the endless succession of promoters, and so on. A firm’s winding up procedure can be launched purposefully by the various Tribunal or creditors, or by stakeholders. Liquidation is another term for winding up. Because it is the NCLT that deals with company cases in India, the tribunal’s powers and jurisdiction are extremely important. The corporation is only wound up after a tribunal order. There are 2 types of winding up, as per Section 425. They are as follows: Compulsory Winding Up on the Court’s Order: A firm may be forced to wind up on the Court’s order. Compulsory Winding Up is another name for this. Section 433 lists the circumstances in which a corporation may be wound up, and the second is Voluntary Winding Up, which has two types: Creditors and Members Voluntary Winding Up. It will be Members Voluntary Winding Up if a Solvency Declaration is made incompliance with the Act’s provisions; if it is not made, it will be a Creditors’ Voluntary WindingUp. The declaration must be made by a majority of the directors at the board meeting and mustbe backed up by an affidavit. There may be general and legal consequences and consequences with regard to the company itself, shareholders, creditors, management, and the disposition of the business’s property following the winding up of the firm.

1. Introduction

A company’s death can be compared to a man’s death. When a person dies, he completes all of his affairs and departs from his life. In corporate law, winding up a company entails gathering all assets and liquidating them in order for the company to cease operations. “A winding up is a procedure for bringing about the dissolution of a company and in the course of which its assets are collected and realized; & applied in payment of its debts; & when these are satisfied, the remaining amount is applied for returning to its members the sums that they have contributed to the company in accordance with the Articles of Association.” A firm can wind up in 2 ways: voluntarily or involuntarily. Members or creditors may petition the company tribunal for winding up voluntarily, but the court may wind up the firm involuntarily. Reasons for which a firm may be wind up are:

i. When a corporation is not able to pay off its debts, it is forced to wind up. The High Court in Reliance Infocomm Ltd v. Sheetal Refineries Private Ltd, defined “inability to pay debts” as a condition in which a corporation is commercially bankrupt, meaning that the debts and liabilities of the firm outnumber its assets.

ii. The corporation proceed with a special resolution requesting the tribunal to wind up the corporation.

iii. If India’s sovereignty and integrity has been violated, as well as the security of state’s, ties with foreign countries, public morality, order, and decency.

iv. The Tribunal has ruled that the company should wind up.

v. If the registrar or any other person who is authorized by the Central Government’s believes that there have been some fraud in affairs of business, the corporation is formed for some illegal objectives, or the people involved have been guilty of misconduct, misfeasance, or fraud.

vi. The annual returns or financial statements of 5 successive financial years have not been submitted to the registrar, vii. Winding up the company is just and equitable in the opinion of the tribunal.

1.1 Literature Review

As per the Halsburry’s Laws of England, winding up is a legal process. “Winding up is a procedure for bringing about the dissolution of a company & in the case of a corporation, it is a procedure for bringing about the dissolution of a company & in the case of a corporation, it is a procedure for bringing about the dissolution of when its assets are gathered and realized; when they are used to pay its debts; and when they are used to pay its debts. After requirements are met, the residual funds are used to refund the funds to the members. According to AOA, which they have provided to Co.”

The following is Professor Gower’s definition of winding up: “A tangle of a tangle of a tangle of a tangle The process by which a company’s life is ended and its property is administered for the benefit of others is known as a company.”
“A petition for winding up is an entirely appropriate means of enforcing the payment of a just obligation. It is the method of execution that a creditor can use against a firm that is unable to pay its debts.” Palmer also included incapacity to pay debts in his book, which is also referenced in the Companies Act,2013, it states that the inability to pay back the debts fundamentally arises under 3 situations: The following are some of the circumstances in which courts have previously broken-down organizations on this basis:

1. Deadlock: When a company’s administration is at a standstill, it is just and fair. It is reasonable to arrange for a winding down.

2. Oppression of Minority: It is ethical and equitable to close a company where the principle is oppressed. Shareholders have been subjected to a coercive, harsh, or squeezing strategy aimed at the minority. A request for the Tribunal to wind up can be rescinded on the same grounds additionally.

1.2 Statement of Problem

A company is dissolved through the process of winding up. The assets are sold, the liabilities are discharged, and any surplus is dispersed to the shareholders/members in proportion to their ownership stake in the firm. The laws of this Act as well as the IBC, 2016 govern the winding up procedure.

In this paper, we will focus on the Companies Act 2013 and delve into the types, reasons, and consequences of a company’s winding up in order to simplify the process, promote better understanding, and also guide through the process of a company’s winding up in a step-by-step and easier-to-understand manner.

1.3 Research Questions

1. What are the various means by which a corporation can wind up?

2. What are the reasons for winding up of a corporation?

3. What are the consequences of winding up of a corporation?

4. What is the process for winding up of a corporation?

1.4 Aim and Objectives of Study

1. Examine the interpretation of winding up of a firm or corporation.

2. Examine the reasons for winding up of a firm or corporation.\

3. Study about the various means of winding up of a firm or corporation.

4. Examine the consequences of winding up of a firm or corporation.

5. Study about the circumstances in which a company can be winded up.

6. Examine the procedure by which a company is wound up.

1.5 Research Methodology

1.5.1 Method of Study

The methodology adopted in this research paper is Descriptive and Analytical. The first i.e. Descriptive method comprises of enquiries, findings and surveys. The second i.e. Analytical method is a method, where the researcher uses facts or information or data already accessible and analyse them to create an essential evaluation of the information.

This paper also contains some research questions which are answered by analysing and compiling the already accessible information and presented it in a much more simpler way.

1.5.2 Sources

Secondary data has been used for the purpose of this research i.e. the information was already collected by other researchers. It includes various publication’s, research surveys, Journals, and other relevant information.

1.5.3 Citation Style

The citation used in this research paper is ILI citation.

1.6 Scope and Limitations of Study

The scope of the paper is limited to understanding all the basics of winding of a company i.e. need, consequences, modes, procedure of winding up of a company etc. And since secondary sources of data was used to seek the answers to 1 or 2 questions or legal propositions or various doctrines, its scope is quite restricted. Moreover, there was not any need to do field work as a result of which data may not be robust enough to answer complicated issues.

2. Kinds, Consequences and Reasons to wind up a company

2.1 Modes to wind up

A Company can wind up in 2 modes, as given under Act. They are, a. Compulsory wind up b. Voluntary wind up.

A. Compulsory winding up by Tribunal

The Tribunal has the power to pass a decree for winding up a firm under the following cases:

i. Sick Company

If the firm is unable to pay its debts and creditors have a commanding position with respect to the dues to be collected, the Committee of creditors will choose a person as administrator for Company, in accordance with the Tribunal’s order for winding up process. This occurs when a corporation is in a sick state, i.e., it is not able to pay off its debts and cannot be revived or rehabilitated. In such a circumstance, the court may order the firm to wind up.

ii. Special Resolution

If the Corporation has agreed to go for wind up by the Tribunal through a special resolution, the Tribunal’s decision on the winding up is final. This exempts the Tribunal’s power to wind up a corporation if it is contrary to the general public interest or the interest of the corporation.

iii. Acts Against State

If a firm violates the integrity and sovereignty of territory of India, the security of the state, relations with overseas countries, morality, public order, or decency, then the Tribunal may pass an order for the company to be wound up.

iv. Fraudulent Conduct of Affairs

If the Tribunal has reasons to believe that the working of the company has been carried out fraudulently or that the purpose for which the company was started is fraudulent or for any illegal purpose, then the tribunal has been granted the authority to pass an order to wind up the corporation after receipt of an application from the Registrar or any other person who is authorised by the Central Government.

v. Default in filing Financial Statements If the corporation has not filed its annual returns or finance statements with the Registrar for the previous five 5 years.

vi. Just and Equitable to wound up If the Tribunal determines that winding up the company is just and equitable after looking into the interests of the company, its various shareholders & stakeholders, and the interest of the public, as well as all other remedies available to resolve the situation, the Tribunal will wind up the company. Winding up a firm on this ground necessitates a solid foundation to liquidate the firm.

Procedure involved in Compulsory winding up by Tribunal

An application has to be submitted to the Tribunal to wind up a firm, which has to be made by a petition. The people who are eligible to make this petition are:

a. Company

b. Creditor’s

c. Contributories

d. Registrar

e. Any person who is authorised by the Central Government

i. Appointment of a Liquidator to examine the firm’s debts and creditors in order to determine if the Company is eligible for compulsory winding up by the Tribunal.

ii. Liquidators have a duty to make a report and submit it to the Tribunal following the above appointment.

iii. The Tribunal issues directives to the liquidators in dissolving the company, according to which the property of the firm is taken into custody in order to first satisfy the creditors and contributories.

iv. Finally, following careful evaluation of audits and reports filed by the liquidator to the Court, the Court issues an order for dissolution in order to settle the debts owed to the firm’s creditors and other contributors.

B. Voluntary winding up

There are 2 situations where a corporation can wind up voluntarily. They are:

i. If the corporation decided to pass a resolution to wind up voluntarily in its general meeting which maybe because of cessation of the period for its duration, if any, anchored by its articles or on the happening of any such event in respect of which the articles of the company provide the company to wind up or,

ii. If the corporation has decided to pass a special resolution for voluntary winding up.

Procedure involved in Voluntary winding up

1. A declaration has to be passed by the members of the company including the directors, to be delivered to registrar within 5 weeks of date of passing of resolution for winding up.

2. The director, directors or in case there are more than 2 directors, the majority of directors have to make a declaration verified by an affidavit in a board meeting to the effect that a full inquiry into the company affairs has been made and the company has no debt or whether it has the capacity to pay off the debts from proceeds of sale of assets if they decide to voluntarily wind up the company.

3. A company meeting will be called where the resolution for voluntary winding up will be proposed and another meeting of the creditors of the company shall also be called on the same or the next day and a notice of such meetings has to be sent to the creditors via a registered post.

4. The resolution which has been passed has to published in the Official Gazette or the local vernacular newspaper which is prevalent in that district within 14 days of such declaration.

5. The company will appoint a Company Liquidator in its general meeting where the resolution of such winding up is passed. The Liquidator appointed must be from the panel prepared by the Central government and will take care of the winding up affairs.

6. A notice has to be given to the Registrar about the appointment of the Liquidator, with the name and other required details of the liquidator, of any opening which has occurred in his office, and of the name of the such Liquidator which has been hired to fill such vacancies within 10 days of this hiring or the arising of vacancy.

7. A quarterly progress report has to be sent by the Company Liquidator in a prescribed manner to all the members and creditors. Also, at least 1 meeting per quarter of each creditors and members has to be called to update them about the progress of winding up process. If the Liquidator fails to perform such duty then he may be punished with a fine which may extend to Rs.10,00,000.

8. Finally, a last meeting will be called by the Liquidator, where he shall present the report about the winding up showing the disposition of assets and the amount of debts discharged and a general meeting will be called for the information regarding the final winding up of accounts and offer any explanation thereof.

9. Within 2 weeks of such meeting, the Liquidator has to, send a copy of the final wound up accounts to the registrar, along with copies of resolutions passed in these meetings. It also has to file an application relating to winding up of the firm, which has to be presented before the tribunal.

2.2 Consequences of winding up

The major repercussions after the firm is wound up are as follows:

With respect to the Company

• Wind up of the company does not lead to end of a firm completely.

• The firm will continue to exist as a separate legal entity until it is completely dissolved.

• While the company is going through the phase of liquidation, all the business activities are administered by the liquidator.

With respect to the Shareholders

• Contributors ? a new statutory liability comes into existence.

• Every transaction of share during the liquefaction done without the approval of the liquidator is considered void.

With respect to the Creditors

• Creditors are not allowed to file a suit against the firm without court’s consent

• If the creditors already have some pending decrees, they are not allowed to go ahead with its implementation.

• Creditors have to explain and account for their claims to the liquidator.

With respect to the Management

• When a liquidator is appointed, all the authority of the chief executives, directors, and other officers cease to exist.

• The members only have the power to send notice of resolution and the power to appoint a liquidator during the firm’s winding up.

With respect to the Disposition of Property

• The disposition of the companies property must be approved by the court or the liquidator otherwise it will be considered void.

2.3 Circumstances in which a company can wind up

A company can wind up by a tribunal if a petition is submitted under the given situations:

• The corporation passed a special resolution directing the tribunal to pass an order to wind up the firm.

• The company failed to file a statutory report with the registrar.

• Non-commencement of business activity by the firm within 12 months after its incorporation.

• The number of members in a public corporation has decreased below 7 and in a private firm has decreased below 2.

• The company’s debts are beyond its ability to pay.

• The tribunal’s decision to wind up the corporation is just and equitable.

• For the past five financial years, the company has not been filed its balance sheet or annual return.

• The company has violated the integrity and sovereignty of the territory of India.

Application to wind up

The following entities must file an application for winding up with the petition for winding up:

• Company

• Creditors

• Contributory company

• Any person who is authorized by the central government

• Central government or State government Upon receipt of the petition, the tribunal will proceed according to the processes outlined in section 439-481 of Act.

The circumstances in which a court may wind up a firm based on a petition presented to a court are justified by Section 305 of the Act.

• If the company decides that it should wind up through a special resolution by the court.

• If the company is deemed to have missed two consecutive years of delivering required reports to the registrar, hold statutory meetings, or hold 2 annual general meetings.

• If the corporation does not begin operations within one year of its establishment or if its operations are suspended for one year.

• If the members of the private, public, or listed firm is reduced to less than 2, 3, or 7, the company will be considered private, public, or listed.

• If it is discovered that the corporation is no longer able to pay off its dues.

• If the corporation is –

o Engaging in or abiding with fraudulent and unlawful activities;

o Engaging in such activities which are not permitted by its MOA.

o Engaging in business in an oppressive manner towards its members concerned with the company’s promotion.

o Managed and run by people who are not able to maintain proper accounts or are involved in fraud or any other corrupt activities.

o Managed by individuals who do not work in accordance with the company’s MOA or with registrar and the law.

• If the company, even though it’s a listed company, it cease to act like one.

• If the court is of the opinion the company should wind or

o Complete deadlock in the management

o Failure of firm to meet its main objectives

o Recurring losses

o Oppressive policies of the major stakeholders

o Incorporation of a company for unlawful, fraudulent or any other illegal purpose

o Protection of interest of public

• If the corporation ceases to have even a single member.

3. Conclusion

The Act has taken a wonderful initiative in establishing a prudent corporate governance structure in India. The Act clearly prescribes the modes by which a firm can wind up. A company can wind up by compulsory mode or voluntary mode. Then, we talked about the procedure by which a company maybe wound up compulsorily, the parties which can file a petition for such winding up on occurrence of certain circumstances. We also talked about the procedure for voluntary winding up of a company. Then, we dealt with the consequences of such winding of various parties comprising of creditors, shareholders, company and management. Finally we talked about the circumstances in which a corporation can be wound up by a tribunal in case a petition has been filed. Thereby, we have talked in brief about the kinds, consequences and reasons for winding up of a company under Act in detail and in a summarized form.

4. Suggestions

Shutting down the company is not as simple as letting go off employees and repaying investors. Regulations prescribe the manner in which payments need to be made and procedure to be followed. As a result of which company which may have already been shut down may be be forced to continue to operate as a zombie until finally it is dissolved. Though the provisions of the Act are clear about the processes for winding up of a company yet the processes are so time consuming that it may take anywhere from6 months to infinity to fully dissolve a company. “Ease of exit is as important as ease of setting up a business”. Though the time for minimum time required for winding up a company has been significantly brought down from2 years to 6 months further improvements in the act is needed to bring out the mountain of formalities and simplify the procedures of winding up. Which in turn will help in attracting more companies to set up operations in India and contribute towards the nation’s economy.

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