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LAW GOVERNING THE PROCEDURE OF WINDING UP IN INDIA

Winding up of a company is a process when a company comes to an end. The expression “winding up” simply means to end up or fetch up in a specified date, situation, or place. The winding-up of a company is the last process to bring a company to an end. It is the last stage of companies’ existence. Winding up of a company can be due to many reasons like loss, bankruptcy, mutual agreement among stakeholders, or death of persons who are the promoters of the company.
As it is clear from the above discussion that winding up is a process when the company is put to an end and its corporate existence is ended.
There are two ways for a company to come to an end as per Section 270 of the Companies Act, 2013. The procedure for winding up of a company can be initiated either by a tribunal or by way of voluntary winding up.

1. Winding up by the Tribunal

In the process of winding up a company by the tribunal, the administrator is appointed (usually denoted as liquidator) for winding up of a company. He takes control over the company, assembles its assets, pays debts of the company, and lastly distributes any surplus amongst the members according to their rights and liabilities. He also conducts a public auction for selling all the mobile and immobile assets of the company. The liquidator also draws, make, endorse any bill of exchange or promissory note in the name and on behalf of the company.
Now there are some circumstances under which a company is made to wind up, by the tribunal like-

  • When the company is at a loss and inadequate to pay its debts.
  • If the company has passed the special resolution that the company is wound by the tribunal.
  • If the company has acted against the integrity and morality of India, the security of the state, or ruin any kind of friendly relations with foreign or neighboring countries.
  • If the company has not filed its financial statements or annual returns for the preceding 5 consecutive financial years.
  • If the wound up of the company feels necessary by the tribunal.
  • If the company is involved in any unlawful business or any fraudulent activities or any person of that company found guilty of fraud and any kind of misconduct.

Under section 272 of the companies act, 2013 the petition for winding up of a company can be filed by any of the following parties such as-

  1. The creditors
  2. The company itself
  3. Any contributors of the company
  4. Central or state government
  5. Registrar of companies
  6. Any person authorized by the central government for that purpose.

The above persons stated can file the petition for winding up of a company by filing form number 1, 2, or 3 whichever is required along with the statement of affairs in form number 4.

After hearing the petition, the tribunal has the power to dismiss it or make an interim order as it thinks fit or appoint an appropriate liquidator for the company till the passing of the winding-up order.

2. Procedure for voluntary winding up

Voluntary wind-up is initiated when the members of the company mutually decide to shut down the company and make an end of its existence. When the members are unable to maintain it, or unable to make the desired profit, or any kind of disputes among the partners, etc. then the shareholders or members mutually decide not to continue the business operation. All the shareholder distributes its assets and pays all the remaining debts and after that, they discontinue their business operation.

Steps for voluntary wind up-

  1. The directors of the company have to make a declaration that the company is solvent and will pay all the remaining debt in full, also the company has not committed any default of repayment of the debt, and lastly, the company is not being liquidated or winding up for defrauding any person.
  2. The board will appoint an insolvency professional who will act as a liquidator for conducting the liquidation process.
  3. Assemble the board of directors for approving the voluntary liquidation of the company, appointment of a liquidator, and fixing day date and time for the general meeting of the company and issue notice containing the proposed resolution along with the explanatory statement.
  4. Assemble the general meeting of the shareholder within 4 weeks of the declaration of solvency.
  5. The liquidator will conduct the liquidation process. He takes control over the company, assembles its assets, settles all the dues of the company, pays all the remaining debts, and distribute the assets to the shareholder.
  6. The liquidator shall make a public announcement within 5 days from his appointment calling stakeholders to submit their claims within 30 days from the liquidation commencement date.
  7. The liquidator shall submit a preliminary report stating the capital structure of the corporate person, estimates the assets and liabilities based on the book of the corporate person, and the proposed plan of action for carrying out the liquidation.
  8. The liquidator opens a bank account in a scheduled bank in the company’s name followed by the words “involuntary liquidation” for receiving all the money dues and realized to meet liquidation cost.
  9. The liquidator has to obtain a no-objection tax from the tax authorities where the registered office of a company is situated.
  10. The liquidator shall recover the assets of the company in a time-bound manner.
  11. The money recovers from the proceeds shall be distributed to the stakeholders within 6 months from the receipt of the amount after deducting the liquidation cost.
  12. The liquidator has to complete the process of its liquidation 12 months from the date of the commencement.
  13. After the completion of the liquidation process, the liquidator has to make a final report which contains:
  • Audited accounts of liquidation.
  • A statement showing the assets are disposed of, debts are paid, and no litigation is pending.
  • A sale statement of assets to whom it is sold, mode and manner, etc.

14. The liquidator shall then file the final report to the registrar and the IBBI.

15. After receiving the order passed by the tribunal, the registrar then publishes a notice in the official gazette declaring that the company is dissolved.

Conclusion

The process of winding-up of a company is not very simple, it includes within it many complexities and technicalities. Earlier there was just the Companies Act, 2013, which governed this area, however with the enactment of the Insolvency and Bankruptcy Code, 2016, it has become more difficult to apply these provisions simultaneously and to decide precedence. However, the process of a compulsory winding up under the Company Act, 2013 a favorable framework for companies for winding up.


AUTHOR:

Devishaa Patni
B.A.LL.B.
Banasthali University