Winding Up Of a Company And The Ways It Can Be Done In

Author: Abhay Rawat, University of Petroleum and Energy Studies

INTRODUCTION

Winding up of the company in the simplest terms is the process of liquidation of the company. Professor Gower expressed the winding-up of the company as the cessation of the company’s life and the subsequent disposition of the company’s properties for the benefit of the members and creditors of the company[1]. He points out that a company brings in a person as an administrator known as a liquidator, who is primarily responsible for taking control of the company, collecting the different assets of the company, paying off all the debts of the company it may have and finally distribute any remainder among the members of the company in accordance with their rights in the company.

Difference between Winding up and Dissolution[2]

The primary difference between the two processes lies in the fact that winding up serves as a prelude to dissolution. Therefore, the two concepts belong to the different spheres of the company’s closure. After the winding-up process is over the company is left without liabilities and assets. After the closure of the company’s operations when the procedure of liquidation of assets is completed, the dissolution process will start. As a result, the company ceases to be recognized as a legal entity, and the name of the company is deleted from the corporation register by the Registrar of Companies.

Ways of Winding Up of a company[3]

The Company Act, 2013 provides for two ways in which a company can get wound up, namely:

Voluntary Winding Up

Voluntary winding up of the company is of two types and they are:

Voluntary Winding Up by the Members
Voluntary Winding Up by the Creditors

Initially, the Companies Act, of 2013 provided for this method of winding up but later, after the Insolvency and Bankruptcy Code passed in 2016, this concept was removed only for a way of a company winding up that is left in the Company Act which is:

Compulsory Winding Up due to an order by the Tribunal (NCLT)

According to Section 271 of the 2013 Companies Act[4], Tribunals have the discretion and the powers to wind up a company in the following cases and on these grounds:

If the company has resolved by a Special Resolution that the company may be wound up by the Tribunal.
If the company acts/or has acted against the sovereignty or integrity of India, the security of the Country, the friendly relations of India with foreign countries, the public order, the decency or morality.
Should a person be authorized to apply for it by the Registrar or another desiring person on behalf of the Central Government under the Act, the Tribunal is going to be satisfied that the illegal angle was the conduct of the company, and the company was cunningly or not so cunningly really aiming for the goal of fraud, illegal or unlawful. Otherwise, all the individuals associated with the origin or the direction of its actions might be blamed for fraud, abuse of duty or unlawful acts related to it due to which the company has to be wound up.
Where a company has defaulted in filing annual returns or financial statements of the company for the past five years with the registrar.
If the Tribunal believes that this would be fair and reasonable and decided that a company should be wound up.

The grounds of the tribunal of company winding up under the Companies Act of 2013 were two more ways i.e., Inability to pay debts and winding up under Chapter XIX of the Companies Act of 2013, however, they were removed by the passing of the Insolvency and Bankruptcy Code of 2016.

We can understand the above-mentioned 5 grounds of winding up by a Tribunal in further detail.

Special Resolution

A company may, by special resolution, resolve to wind up the company by the Tribunal. Nevertheless, the Tribunal’s power in such a case is discretionary, and they are not under the obligation to order the winding up of the company just because the company wants to do it. The Tribunal is required to ascertain that such winding up is not the result of any adverse effect on the company, or the public, this was laid down in the case of B. Viswanathan v. Seshasayee Paper and Boards, 1991.

If the company has passed a resolution for special winding up due to the company incurring losses, then the court needs to think of whether a financial revival of the company might be a possibility in its decision.

Acts against Sovereignty

In case a company is not aligned with national sovereignty, and integrity of India, public order decency, morality, the principles of sovereignty, the State’s security, friendly relations with foreign countries, and the public’s interest could all be potentially affected. The Tribunal, however, only allows petitions under this clause from the Central Government or a State Government and the order for the winding up of the company will be passed after the petition was received.

Fraudulent or Unlawful conduct of affairs

The procedure introduced in the new 2013 Companies Act for the winding up of a company in India may involve an application to the Tribunal for the same, made either by the Registrar of Company or by a person appointed by the Govt. of India, under section 224(2)(a) the Central Government may make a petition to the Tribunal for winding up of the company. Then, the Tribunal has the option to close the company for one, two, or three causes given as the reason. If the Tribunal after looking at the facts and evidence forms an opinion i.e.,

The affairs of the company are taking place in a fraudulent manner; or
The formation of the company was for a fraudulent or unlawful purpose. or
The person who formed the company or the management of the company’s affairs has been found guilty of fraud, misfeasance, or any misconduct in connection therewith.

If any of the above three points are found to be true, then it is within the power of the Tribunal to order the winding up of the company.

Default in Filing Financial Statements

According to the Companies Act, 2013 in reference to Tribunals, if a company is not able to file financial returns with the Registrar of Companies appointed by the Central Government for the immediate five consecutive financial years, the Tribunal can order for the companies winding up.

Just and Equitable

If the court believes that there is a legal and ethical reason for the company to be liquidated, it can exercise that power. By interpreting the text in a strict manner, the court must make sure that it takes into account the interests of the company, the employees, the shareholders, and the creditors, while also looking after the interest of the public. These Just and Equitable Grounds are possible such as:

Losses

The decision to liquidate a company is made just and fair when the company cannot make profits but instead faces a constant loss. A company’s goal is to make money by creating new activities, and if it is unsuccessful, the best business move is to wind up the company.

Oppression of Minorities

It will be considered just and equitable to wind up a company in which the principal shareholders are carrying on oppressive or aggressive policy towards the minority shareholders,

Fraudulent Purposes

If a company is found to have been incorporated or set up for fraudulent or illicit purposes, the most appropriate and fair thing to be done is that the company would have to be ordered to pay its debts and would cease to exist.

Loss of Substratum

Under the circumstances such as the main purpose of the company was supposed to be the selling of goods and services, but instead, the main purpose failed to materialize and the company was left with not enough substratums to continue, the solution is to shut down the company.

Who can apply for a petition for Winding up?[5]

Section 272 of the Companies Act, 2013 provides as to who can file a petition for winding up of the company in front of the Tribunal:

Company
Creditors
Contributory
Registrar of Companies
Central Government
State Government

Tribunal’s Power[6]

After hearing the petition for winding the Tribunal under Section 273 has the following powers which it can exercise:

Dismiss it with or without cost
Making interim orders as it may deem to be necessary
Appoint a provisional liquidator of the company till a winding up order
Make an order for winding up with or without costs; or
Any other order it may think is necessary.

Conclusion

In summary, the process of liquidating a company, generally speaking, involves a schedule of actions, including stopping the company’s activities, paying off all of its debts, and passing the remaining assets among the participants. This brings about an exact ending to the operations of the company, providing a favorable position for both the creditors and the shareholders. Based on the company’s still existing and/or emerging financial or legal problems, the process can be given up or compelled by the Tribunals. A liquidator’s designation is major to working on the company’s remaining assets and debts.

Once the winding-up process is complete, the company undergoes dissolution, ceasing to exist as a legal entity and being removed from the register of companies. This final step ensures that the company no longer has any legal obligations or rights. Understanding these procedures helps stakeholders navigate the complexities of closing a business responsibly and efficiently.