This article has been written by Aditi Ananya from Chanakya National Law University

Table of Contents

Introduction

The process of liquidating a business is called winding up. When winding up, a business stops operating normally. Its only goals are to settle debts, dispose off shares, and provide partners or shareholders the remaining assets. The process of turning assets into cash is known as liquidation, and the phrase refers to it.

The legal process of winding up a firm is governed by partnership or company articles of association as well as corporate statutes. Both publicly traded corporations and privately held ones may be subject to mandatory or voluntary winding up. (Kenton, 2023)

A company’s winding up is the process by which its existence is ended and its assets are handled for the benefit of its creditors and members. An administrator, known as a “liquidator,” is appointed to take control of the firm, collect its assets, pay its obligations, and then divide any excess among the members in line with their individual entitlements. The process by which a company’s assets are realised by a liquidator, its debts and liabilities are paid off with the proceeds of realisation, and any excess assets that remain are given back to the company’s members or shareholders is known as winding up, or liquidation, according to Pennington (Pennington, 1985). The winding up will conclude with the firm having no assets and no obligations; thus, it will just be a formal procedure to dissolve the company, ending its legal existence as a corporation. A company’s winding up differs from an individual’s insolvency in that a company cannot be made insolvent under insolvency law. Furthermore, even a solvent company may be liquidated.

Ways in which an individual can windup a Company

A company can be wound up in two different ways-

(i). Voluntary winding up of a Company

(ii). Compulsory winding up of a Company

(i). Voluntary Winding up of a Company

This occurs when the directors and shareholders decide to dissolve the business on their own will. If the business is solvent, this can be accomplished by a creditors’ voluntary liquidation (CVL) or, if it is not, through a members’ voluntary liquidation (MVL).

The directors of an MVL issue a statement of solvency, saying that the firm can pay off all of its obligations within 12 months of the winding up process beginning. The assets of the corporation are then sold, and the money are dispersed to the shareholders. Any outstanding obligations are settled, and the corporation is dissolved.

The directors of a CVL must convene a meeting of creditors to advise them of the company’s financial situation and to choose a liquidator. The liquidator then takes over the business of the firm, sells its assets, and distributes the money to the creditors. Any outstanding obligations are settled, and the corporation is dissolved. (Ltd., 2023)

Procedure for Voluntary winding up of a Company

1. Organize a board meeting with the directors and pass a resolution declaring that the directors have investigated the company’s affairs and that it has no debts or that it will pay off its debts from the proceeds of the assets sold in a voluntary wind-up of the company.

2. Written notice of the meeting should be sent out with a suitable explanation.

3. The resolution should be passed by an ordinary majority in the general meeting or by a special majority of the directors. The winding-up of the company will begin on the date the resolution is passed.

4. The day after the resolution for winding up is passed, or the next day, a meeting of creditors shall be held. The company may choose to wind up voluntarily if two thirds of its creditors believe that doing so is in everyone’s best interests.

5. A notification for the appointment of a liquidator must be submitted with the registrar within ten days of the company winding up resolution being passed.

6. Certified copies of the regular or special resolutions adopted at the general meeting for the winding up of the company must be received within 30 days after the meeting.

7. The company’s operations must be concluded, the liquidators account for the winding-up account prepared, and an audit performed.

8. Convene the company’s last general meeting.

9. When the company is going to dissolve and its business are fully concluded, a separate resolution shall be enacted for the disposition of the books and documents of the company.

10. Submit an application and a copy of the accounts to the tribunal for the purpose of obtaining an order for the company’s dissolution within two weeks of the company’s general meeting.

11. After receiving the application, the tribunal has sixty days to issue an order dissolving the corporation.

12. A copy of the order must be sent to the registrar by the company liquidator.

13. Following receipt of a copy of the Tribunal’s ruling, the registrar will announce the company’s dissolution in the official gazette. (Winding Up – Company, n.d.)

Compulsory winding up of a Private Limited Company

The National corporation Law Tribunal (NCLT) can dissolve a corporation by order through a procedure called “winding up by the Tribunal,” which is sometimes referred to as “compulsory winding up.” When the business is unable to pay its debts or when it is right and equitable to do so, this procedure is started. The Companies Act of 2013 contains measures pertaining to forcible winding up.

In accordance with section 271, the Tribunal may, upon a petition filed under section 272, order the winding up of a corporation for any of the following reasons:

1. If the company is in arrears;

2. If the company has decided by special resolution to be wound up by the Tribunal – In the event that a business has elected to be wound up by the Tribunal by passing a special resolution, the Tribunal may issue a winding up order. Any reason whatsoever may be used to pass the resolution. If the tribunal determines that the winding up would be against the public interest or the interests of the corporation overall, it may not order the winding up.

3. If the company’s activities jeopardise India’s integrity and sovereignty, national security, cordial ties with other countries, public order, decency, or morality;

4. In the event that the Tribunal has mandated the firm’s winding up in accordance with Chapter XIX (in the case of a sick company);

5. When the Tribunal determines, upon the Secretary’s or the Government’s request, that the company should be dissolved because it has been operating dishonestly, was established for illegal or fraudulent purposes, or that any individual involved in the establishment or administration of the company has engaged in fraud, misconduct, or other related wrongdoing;

6. If the business has failed to file its accounts or annual statements with the registrar for the last five consecutive fiscal years; or

7. If the Tribunal considers it to be correct and reasonable, the firm shall be wound up (Jain, 2023) – In this instance, the Tribunal has a great deal of discretionary power. The Tribunal has been granted this authority in order to protect the rights of the underrepresented and marginalized members. Prior to making such an order, the tribunal will consider the interests of the public, employees, creditors, and shareholders. If the tribunal determines that the petitioner has other options for resolving his complaints and that the demand for the company’s winding up is inappropriate, it may also decline to issue an order for the mandatory winding up of the business. Here are a few examples of ‘just and equitable’ grounds on which the Tribunal may order the corporation to be wound up:

(i) Minority repression – In circumstances when individuals in charge of the company misuse their position to such a degree that it substantially harms the interests of minority shareholders, the Tribunal may order the firm to be wound up.

(ii) Management deadlock – If the firm’s management is completely deadlocked, the company may be ordered to be wound up.

(iii) Substratum loss – When the purposes for which a business was formed fail or become basically impossible to carry out, the ‘substratum of the firm’ is lost.

(iv) Losses – When a company’s business cannot be carried on except at a loss, the company may be wound up by a Tribunal ruling on reasonable and equitable reasons. However, mere fear on the part of some shareholders that the firm would be unable to generate profits cannot be a reasonable and equitable basis for the winding up decision.

(v) Fraudulent object – If the company’s operations or objects are fraudulent or unlawful, or have become illegal as a result of legislative changes, the Tribunal may order the company to be wound up on reasonable and equitable grounds. However, the majority of shareholders may waive the fraud, therefore the mere existence of a marketing fraud or fraudulent misrepresentation in the prospectus will not be sufficient justification for a winding up order.

Section 271(2) states that a firm is judged unable to pay its debts if any of the following conditions exist:

a) Notice for payment – If a creditor to whom the company owes a sum in excess of one lakh rupees serves a demand for payment on the company and the company fails to pay the sum or otherwise satisfy the creditor within three weeks, it is deemed that the company has become unable to pay its debt. It is critical that the obligation be paid immediately. Negligence in paying a debt on demand is failing to pay without justification. A simple omission will not constitute carelessness. Furthermore, there is no failure to pay in cases when a debt is legitimately contested. Inability to pay debts is what happens when public deposits are not paid by the deadline. When a dividend is issued, it becomes a debt owed by the business, and if the business is unable to pay the dividend, the shareholder may also request that the business be liquidated.

b) Decree – If a decree or order issued by a Tribunal/court in favour of a firm creditor on execution remains unsatisfied.

c) Commercial Insolvency – It is proven to the Tribunal’s satisfaction that the firm is unable to pay its debts. This suggests that the firm is commercially insolvent (when its assets are insufficient to satisfy its current liabilities), as revealed by its balance sheet. The fact that the firm is losing money does not imply that it is unable to pay its debts, because its assets may exceed its liabilities. All contingent and potential obligations shall be considered liabilities for this purpose. If the applicant can demonstrate the business’s bankruptcy, the firm may be wound up even if the debt mentioned in the petition is legitimately contested. Non-payment of a legitimately contested claim, however, does not indicate insolvency. (Sharma)

Procedure for Winding Up of a Company by Tribunal in India

In India, closing a business through a tribunal follows a structured procedure that is described below:

1. Admission of Winding Up Petition: In India, a petition for a company’s winding up by a tribunal is accepted provided that it is supported with the required statement of affairs in the format stipulated by the tribunal.

2. Authorization of Creditors: Before filing a winding-up petition, creditors need to get the tribunal’s approval. Only in the event that the company’s liquidation is clearly required, would the tribunal take the petition under consideration.

3. Registrar’s Submission: In addition, a copy of the winding-up petition must be filed with the registrar, who must provide the tribunal with their evaluation within 60 days, in order for a business to be wound up by a tribunal in India.

4. Form and Attachments: Forms NCLT 1, NCLT 2, and NCLT 6 are used in the petition submission process.

5. Tribunal’s Order and Provisional Liquidator: The tribunal will issue an order for winding up under Section 273 no later than ninety days after receiving the petition. Additionally, it has the authority to issue a temporary order designating a liquidator. All pertinent parties get notice on the appointment of the interim liquidator.

6. Objections and Director’s Responsibilities: In India, a tribunal may order the winding up of a corporation under Section 274 if it has a reasonable suspicion to do so. It is possible to file an objection within 30 days following the order. Additionally, within 30 days of the order, the directors must provide the books of accounts to the liquidator.

7. Declaration of any Conflict of Interest: In accordance with Section 275, the official liquidator has seven days to disclose any conflicts of interest pertaining to their appointment. Under Section 276, the same liquidator may be dismissed for misconduct, fraud, mismanagement, or incompetence in their professional capacity.

8. Notice and Winding-up Committee: In accordance with Section 277, the registrar publishes notice of an Indian tribunal-ordered winding-up of a corporation in the official gazette. Within three weeks, the official liquidator submits an application to the tribunal to form the Winding-up Committee, which will produce a final report following the company’s dissolution as well as monthly updates.

9. Jurisdiction and Legal Proceedings: Section 279 states that no lawsuits or other legal actions may be brought against a corporation that has been wound up by an Indian tribunal. Under Section 280, the tribunal is still able to decide the company’s ongoing cases.

10. Final Report and Timely Completion: In accordance with Section 281, the liquidator must deliver the final report to the tribunal within 60 days of winding up the business. According to Section 282, the full dissolution procedure must be finished in a certain amount of time.

11. Asset Distribution and Fraud Proceedings: The corporation is responsible for liquidating all of its assets and prioritising the satisfaction of its creditors’ debts. If the corporation is not implicated in fraudulent conduct, any residual cash are distributed among the shareholders. (Agrawal, 2023)

CASES

IBA Health v. Info-Drive Systems (CA No. 8230/2010) – Kapadia C.J. begins his analysis by noting that the Company Court is not required in a winding-up proceeding to examine complex issues of law and fact, or resolve serious disputes between parties. The Supreme Court ruled that in the event if the respondent raises a “substantial” or “bona fide” argument over the debt’s existence, the Company Court is not permitted to move on with the winding-up petition.
In Vijay Industries v. NATL Technologies Ltd, (2009) 3 SCC 527, it was laid down that if the debt is bona fide disputed, there cannot be “neglect to pay” within the meaning of Section 433(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated and non-payment of the amount of such a bona fide disputed debt cannot be termed as “neglect to pay” so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. The Central Government will monitor the official liquidator’s performance and has the authority to ask him to respond to any questions. It goes without saying that the official liquidator, who is often a public accountant, must be completely impartial, unaffected by the firm, and unrelated to its operations in any kind. A liquidator typically confers with the company’s creditors and shareholders during the winding-up process in an effort to facilitate his work or suggest a mutually agreeable settlement. The liquidator is required to present the court with a comprehensive report detailing the company’s activities and property disposition, following the payment of all creditors or the depletion of the company’s capital, if any. Following the presentation of the aforementioned account, the Court declares the company’s dissolution. (Malhotra, n.d.)