Introduction:
‘Winding up’ of a company is the process of closing or finishing up of a company. Under this process, the company ceases to carry on its business. The management of its affairs is taken out of its director’s hands. Instead, an administrator called liquidator is appointed, who takes control of the company in his hands. He realizes its assets and pays its debts from the money so realized. And finally distributes the surplus, if any, among the members in accordance with their rights. Thus, at the end of the winding-up process, the company will have no assets or liabilities and therefore it will take simply a formal step for its dissolution i.e., for bringing an end to its legal personality. In this way, winding-up may be defined as a process of closing down a company after the realization of its assets, payment of its liabilities and distribution of any remaining surplus among its members. The winding-up is also called ‘liquidation’ in common parlance.
Winding up of company differs from the insolvency of an individual or a partner in as much as a company cannot be made insolvent under the law of insolvency. Moreover, even a solvent company may be wound-up.
Winding up of a company is different from its dissolution. Winding-up is the process of closing or finishing a company. During this process, the company legally exists. It means that after winding-up and before dissolution the legal entity or existence of the company remains as it is and therefore it can be sued in a court of law. ‘Dissolution’ of a company means the termination of the legal existence or personality of the company.
After the dissolution of a company, it cannot be sued because at that time it does not remain in legal existence. On dissolution, the name of the company is struck off the Register of companies by the Registrar and this fact is published in Official Gazette. Thus, a company is created by law and terminated by law through dissolution. In fact, winding-up of company precedes its dissolution. As soon as the affairs of the company are fully wound-up, the liquidator calls the final general meeting of the company and thereafter follows the dissolution.
Chapter XX of the Companies Act, 2013 regulates the winding-up of companies in India.
Voluntary Winding up:
When members and creditors of a company decide to wind-up the company without the intervention of the Tribunal, it is known as voluntary winding-up of a company. Voluntary winding-up is very common because there are not so many restrictions in this type of winding-up as are found in case of winding-up by Tribunal.
Section 304 lays down that a company may be wound up voluntarily in either of the following two ways:
If the company in general meeting passes a resolution requiring the company to be wound up voluntarily as a result of the expiry of the period for its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company should be dissolved; or
If the company passes a special resolution that the company is wound up voluntarily.
Section 305 obligates on the director or directors of the company to make a declaration, stating that they have made a full inquiry into the affairs of the company and they have formed an opinion that the company has no debt or whether it will be able to pay its debts in full from the proceeds of assets sold in voluntary winding up or not. Any director of a company making a declaration under this section without having reasonable grounds for such opinion, shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to five years or with fine which shall not be less than 50,000 Rupees, but which may extend to three lakh rupees, or with both.
Section 306 mandates a company to call up a meeting of creditors, either on the same day or on next day. The Board of Directors have to present a full statement of the position of the affairs of the company, with a copy of the declaration made under section 305, and the estimated amount of the claims, with a list of creditors of the company, before such meeting. If two-thirds in value of creditors of the company are of the opinion that it is in the interest of all parties that the company is wound up voluntarily, then only the company shall be wound up voluntarily. But, if the creditors decide that Company is wound by the Tribunal in accordance with the provisions of Part I of Chapter XX of Companies Act, 2013, the company shall have to make an application before the Tribunal within fourteen days. The provision also provides penalty both for the company and for defaulting director.
Where a company has passed a resolution for voluntary winding up and a resolution under sub-section (3) of section 306 is passed, the company has to publish a notice of the resolution by advertisement in the Official Gazette and also in a newspaper in the district where the registered office of the company is situated. (S. 307)
In the case of a voluntary winding up, the company shall from the commencement of the winding up cease to carry on its business except as far as required for the beneficial winding up of its business.
The Central Government notified section 59 of the Insolvency and Bankruptcy Code, 2016, on 30th Match 2017. This provision of the code provides for the procedure to be followed in a voluntary winding up process. Subsequently, the Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2016, by exercising its powers accorded by Section 59, 106 and 208, read with Section 240 of the code, on 31st March 2017.
The recently notified section 59 stipulates that any corporate person can voluntarily liquidate itself if it has not committed any default, may initiate voluntary liquidation proceedings under the provisions of the Code.
The Board can make specific provisions regulating voluntary liquidation proceedings, but these proceedings must include according to s. 59(3) of the act, a declaration from majority of the directors of the company verified by an affidavit stating that, they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and the company is not being liquidated to defraud any person. The declaration has to be accompanied with, audited financial statements and records of business operations of the company for the previous two years or for the period since its incorporation, whichever is later; a report of the valuation of the assets of the company, if any prepared by a registered valuer.
Within four weeks of a declaration, there shall be a special resolution of the members of the company in general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or a resolution of the members of the company requiring the company to be liquidated voluntarily as a result of expiry of period of its duration and appointing an insolvency professional to act as the liquidator. This resolution has to be passed and approved by creditors representing two-thirds in value of the debt of the company. The company has to then notify the Registrar of Companies and the Board within seven days of such resolution.
Under the Code, only an insolvency Professional can be appointed as a liquidator, and other requirements under regulation include, that both the insolvency professional and entity to which he belongs, has to be independent of the corporate person. Independence shall be there in the following circumstances:
If he is eligible to be appointed as an independent director on the board of the corporate person (company) under section 149 of the Companies Act, in the last three financial years.
Is not related to the company in the last 3 financial years.
Was neither an employee, partner, proprietor in any of the company’s auditors, cost auditors or companies secretaries firms, nor of a legal or consulting firm, which had any transaction with the corporate person which led the corporate person contributing 10% or more of the gross turnover of such firm in the last three financial years.
The liquidator’s rights and duties are provided in the code, under s. 35-53.
Where the affairs of the corporate person/company have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the Adjudicating Authority (NCLT) for the dissolution of such corporate person.
Conclusion:
The process of winding-up of a company is not very simple, it includes within it many complexities and technicalities. Earlier there was only one act, which generally governed this area, but now with the enactment of the Insolvency and Bankruptcy Code, 2016, it has become more difficult to apply these provisions simultaneously and to decide precedence. Hence, nowadays, The area of company law has become a specialized field, because of its technicalities, but it perpetrates other drawbacks too because the person running the company, their linkage with the legal functioning of the company gets broken up. Hence, simple and easier laws are needed, so that even non-legal person can know how to run company, efficiently and legally, without totally depending on lawyers.
