COMPANY LAW UNT 5 LESSON 2 : WINDING UP

 

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

COMPANY  LAW 

N.O.T.E.S 

UNIT - 5  

 LESSON 2 : WINDING UP

INTRODUCTION

- Dissolution is the legal process through which a company ceases to exist, similar to how incorporation brings a company into existence.

- Winding up is a method of achieving the dissolution of a company, and until all winding up formalities are completed, the company's existence continues.

- The process of winding up begins with the appointment of a liquidator by the Tribunal.

- The liquidator is an insolvency professional chosen from a pool of registered professionals under the Insolvency and Bankruptcy Code, 2016.

MEANING OF WINDING UP

- Winding up is the process that brings an end to the life of a company.

- According to Professor Gower, it involves administering the company's assets for the benefit of its members and creditors. A liquidator is appointed to take control of the company, liquidate its assets, pay its debts, and distribute any surplus among the members.

- Section 2(94A) of the Companies Act 2013 defines winding up as either winding up under the Act itself or liquidation under the Insolvency and Bankruptcy Code, 2016, depending on the applicable law.

DISTINCTION BETWEEN WINDING UP AND DISSOLUTION

Winding up and dissolution are two distinct stages in the process of ending a company's existence. The main differences between the two are:

A. Winding up is the prior stage, while dissolution is the final stage.

B. During winding up, the legal existence of the company continues until the process is complete. However, in the case of dissolution, the existence of the company comes to an end, and its name is struck off from the register of companies.

CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL

Section 271 of the Companies Act, 2013 provides provisions for the winding up of a company by the Tribunal. The following are the circumstances in which a company may be wound up:

A. Special Resolution: If the company has passed a special resolution to be wound up by the Tribunal.

B. Acts against National Interests: If the company has acted against the interests of India's sovereignty and integrity, state security, friendly relations with foreign states, public order, decency, or morality.

C. Fraudulent Conduct: If, upon application by the Registrar or an authorized person, the Tribunal determines that the company's affairs have been conducted fraudulently, or the company was formed for fraudulent and unlawful purposes, or the individuals involved in its formation or management have been guilty of fraud, misfeasance, or misconduct.

D. Default in Filing: If the company has defaulted in filing its financial statements or annual returns with the Registrar for five consecutive financial years.

E. Just and Equitable: If the Tribunal deems it just and equitable that the company should be wound up.

WINDING UP OF COMPANY UNDER JUST AND EQUITABLE

Under the "just and equitable" grounds, a company may be ordered to be wound up by the Tribunal in the following circumstances:

1. Loss of Substratum: When the company fails to fulfill its objective(s) or loses a substantial part of its capital, rendering its substratum ineffective.

2. Deadlock in Management: When disagreements and groups among directors lead to a situation where timely and suitable decisions cannot be made, resulting in management ignoring shareholder interests and the company's growth.

3. Fraudulent Object: If the company was incorporated with the intention of carrying out fraudulent or illegal activities, or if its objectives have become illegal due to changes in the law.

4. Financial Losses: When the company sustains heavy losses and becomes incapable of continuing its business activities.

5. Oppression of Minority: When majority shareholders make decisions that unfairly prejudice the interests of minority shareholders.

6. Bubble Company: When the company exists only on paper without engaging in any business activities or possessing any assets.

In summary, the "just and equitable" grounds for winding up a company include the loss of substratum, management deadlock, fraudulent object, financial losses, oppression of minority shareholders, and the existence of a mere bubble company. In such cases, the Tribunal may order the winding up of the company.

PETITION FOR WINDING UP

According to Section 272 of the Companies Act, 2013, the following provisions govern the presentation of a petition for the winding up of a company:

1. Petitioners for Winding Up: The petition can be presented by the company itself, any contributory or contributories (shareholders), persons specified in clauses (a) and (b), the Registrar, a person authorized by the Central Government, or in cases specified in Section 271(b), by the Central Government or a State Government.

2. Rights of Contributory: A contributory, regardless of holding fully paid-up shares or the company having no assets or surplus assets for distribution, can still present a winding up petition. The shares in question must have been originally allotted to the contributory, held for at least six months during the eighteen months preceding the commencement of winding up, or acquired through the death of a former holder.

3. Registrar's Entitlement: The Registrar can present a winding up petition under Section 271, except on grounds specified in Section 271(a). However, prior sanction from the Central Government is required, and the company must be given an opportunity to make representations.

4. Statement of Affairs: When a petition is presented by the company, it must be accompanied by a statement of affairs in the prescribed form and manner.

5. Submission of Views by the Registrar: A copy of the petition should be filed with the Registrar, who must submit their views to the Tribunal within sixty days of receiving the petition.

In summary, Section 272 outlines the different parties eligible to present a petition for winding up a company, the rights of contributories, the Registrar's entitlement and requirements for presenting a petition, and the obligation of the Registrar to submit their views to the Tribunal.

POWERS OF TRIBUNAL

Section 272 of the Companies Act, 2013 provides the following orders that the Tribunal can pass upon receiving a winding-up petition:

1. Dismissal: The Tribunal can dismiss the petition, with or without costs.

2. Interim Order: The Tribunal has the power to issue any interim order it deems appropriate.

3. Appointment of Provisional Liquidator: The Tribunal can appoint a provisional liquidator for the company until a winding up order is made.

4. Winding Up Order: The Tribunal can make an order for the winding up of the company, with or without costs.

5. Other Orders: The Tribunal has the discretion to pass any other order it considers suitable.

The Tribunal is required to make the order within ninety days from the date of petition presentation. Before appointing a provisional liquidator, the Tribunal must provide notice to the company and grant it a reasonable opportunity to make representations.

Section 273 states that the Tribunal cannot refuse to make a winding up order solely based on the grounds that the company's assets have been mortgaged or that the company has no assets.

Furthermore, under Section 273(2), if a petition for winding up is presented on the just and equitable ground, the Tribunal may refuse to make a winding up order if it believes that there is another remedy available to the petitioners and that seeking winding up instead of pursuing the other remedy would be unreasonable.

DIRECTION FOR FILING STATEMENTS OF AFFAIRS

Section 274 of the Companies Act, 2013 outlines the provisions related to the filing of objections, statements of affairs, and submission of books of account in a winding up petition:

1. Filing Objections and Statement of Affairs: When a petition for winding up is filed by a person other than the company, the Tribunal, if satisfied with a prima facie case, orders the company to file its objections and a statement of its affairs within 30 days. The Tribunal may grant an additional 30 days in special circumstances.

2. Security for Costs: The Tribunal has the authority to direct the petitioner to deposit reasonable security for costs before issuing directions to the company.

3. Consequences of Failure to File Statement of Affairs: If the company fails to file the statement of affairs, it forfeits the right to oppose the petition. Directors and officers responsible for the failure can be punished.

4. Submission of Books of Account: Directors and officers of the company must submit the completed and audited books of account to the appointed liquidator within 30 days of the winding up order.

5. Penalties: If any director or officer contravenes the provisions of this section, they can be punished with imprisonment for up to six months, a fine ranging from Rs. 25,000 to Rs. 5 lakh, or both. The complaint can be filed by the Registrar, provisional liquidator, Company Liquidator, or any person authorized by the Tribunal before the Special Court.

In summary, Section 274 establishes the obligations for the company and its directors/officers in a winding up petition, including the filing of objections, statement of affairs, and submission of books of account. Failure to comply with these provisions can result in penalties and liabilities for the responsible individuals.

PROVISIONS FOR WINDING UP UNDER INSOLVENCY ANDBANKRUPTCY CODE, 2016

The Insolvency and Bankruptcy Code (IBC) of 2016 provides provisions for the insolvency resolution and liquidation of companies, partnership firms, and individuals. The IBC applies to cases involving a minimum default amount of ₹1 lakh. Under the IBC, a company can be voluntarily wound up by following the following procedure:

I. Convene a Board Meeting:

- The majority of directors must pass a resolution proposing voluntary liquidation.

- A declaration by the majority of directors stating that the company has no debt or will be able to pay its debts in full from the proceeds of asset sales.

- The declaration must be accompanied by audited financial statements, record of business operations, and a valuation report of the company's assets.

II. Convene a General Meeting:

- Within four weeks of the declaration, a special resolution of the members or a resolution of the members can be passed in a general meeting, appointing an insolvency professional as the liquidator.

- The resolution can be based on voluntary liquidation or the expiry of the company's duration or the occurrence of an event specified in the company's articles of association.

III. Approval of Creditors:

- If the company owes debts to any person, creditors representing two-thirds in value of the company's debt must approve the resolution within seven days.

 Notification to Registrar of Companies and the Board:

- The company must notify the Registrar of Companies and the Board about the resolution within seven days.

IV. Public Announcement by Liquidator:

- The appointed liquidator must make a public announcement within five days of their appointment.

- The announcement should call upon stakeholders to submit their claims as of the liquidation commencement date.

- The announcement must be published in the Official Gazette, English and regional language newspapers, and on the corporate person's website and designated website by the Board.

V. Proceedings by the Liquidator:

i. Preliminary Report:

- The liquidator must submit a Preliminary Report within forty-five days from the liquidation commencement date.

- The report includes details on the company's capital structure, estimates for assets and liabilities, plans for further inquiry into the company's conduct, proposed liquidation plan, timeline, and estimated costs.

ii. Maintenance of Registers and Books of Account:

- The liquidator is responsible for maintaining the company's registers and books of account.

- These records must be preserved for eight years after the company's dissolution.

- Incomplete books of account should be completed and brought up to date.

- The liquidator must keep receipts for all payments made and costs incurred.

iii. Duties and Responsibilities of the Liquidator:

- Substantiation of Claims: The liquidator may request evidence or clarifications from claimants to substantiate their claims.

- Verification of Claims: The liquidator must verify claims within thirty days and may admit or reject them in whole or in part. Creditors can appeal to the Adjudicating Authority against the liquidator's decision.

- List of Stakeholders: The liquidator prepares a list of stakeholders within forty-five days, including admitted claims, secured or unsecured debts, stakeholder details, and the status of accepted or rejected claims.

- Pay Money into Bank Accounts: The liquidator opens a bank account in the name of the corporate person in voluntary liquidation for receiving all due money. Payments above five thousand rupees are made through cheques or online banking transactions.

- Distribution: The liquidator must distribute the proceeds from realization within six months, deducting liquidation costs before making the distribution to stakeholders.

VI. Completion of Liquidation:

- The liquidator aims to wind up the affairs of the corporate person within one year from the voluntary liquidation commencement date.

- If the voluntary liquidation continues for more than one year, the liquidator has specific obligations:

   a) Call a meeting of the contributories (those liable to contribute to the assets) within fifteen days from the end of each year.

   b) Present a Status Report at each meeting, which includes:

      i. Settlement of the list of stakeholders.

      ii. Details of any remaining property to be sold and realized.

      iii. Distribution made to the stakeholders.

      iv. Distribution of unsold property to the stakeholders.

      v. Updates on material litigation involving or against the corporate person.

      vi. Filing and progress of applications for the avoidance of transactions according to Chapter III of Part II of the Code.

- The Status Report must include an audited account of the voluntary liquidation, demonstrating the receipts and payments related to the liquidation since the liquidation commencement date.

VII. Preparation of Final Report:

- The liquidator, upon fully winding up the affairs of the corporate person, prepares a Final Report.

- The Final Report consists of:

   a) An audited account of the voluntary liquidation, showing the receipts and payments since the liquidation commencement date.

   b) A statement demonstrating:

      i. Disposal of the corporate person's assets.

      ii. Satisfaction of the corporate person's debt to the creditors.

      iii. No pending litigation against the corporate person.

   c) A sale statement for all assets, including details such as realized value, cost of realization, mode of sale, comparison with registered valuer's valuation, buyer information, and other relevant details.

VIII. Submission of Final Report:

- The liquidator sends the Final Report to:

   a) The contributories of the corporate person.

   b) The Registrar of Companies.

   c) The Board.

- The Final Report is sent via registered post to the registered addresses and through electronic means.

When the affairs of the company are completely wound up:

IX. Dissolution of the Company:

- The liquidator applies to the National Company Law Tribunal (NCLT) by submitting Form NCLT-1 for the dissolution of the company.

- The NCLT fixes a date for hearing the petition and, if satisfied, passes an order for the company's dissolution from the date of that order.

- The company must comply with the order and be dissolved accordingly.

Filing of the Order with the Registrar:

- The company is required to file the order of the NCLT with the Registrar of Companies within fourteen days of receiving the order or within a time specified by the NCLT.