The winding up of a company is the process of dissolving a company and distributing its assets to claimants. Also known as liquidation, winding up typically occurs when a company is insolvent and unable to pay its debts when they are due. However, a solvent company may also be wound up voluntarily by its shareholders and directors.
In India, the winding up of companies is governed by the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 (IBC). The IBC has significantly changed the winding up regime in India and introduced a time-bound insolvency resolution process.
Table of Contents
What is the Winding Up of a Company?
Winding up a company refers to the legal process of closing its operations permanently. It involves selling the company's assets, settling its debts and liabilities, and distributing any remaining surplus among shareholders according to their rights. Once the process is complete, the company is dissolved and ceases to exist as a legal entity. Winding up may be voluntary, initiated by members or creditors, or compulsory, ordered by a court.
The main reasons for winding up a company include:
- Ceasing the company's operations
- Collecting the company's assets
- Paying off the company's debts and liabilities
- Distributing any remaining assets to the members
The main reasons for winding up a company include:
- Inability to pay debts (insolvency)
- Completion of the purpose for which the company was formed
- Expiry of the period fixed for the duration of the company
- The passing of a special resolution by the members to wind up the company
Key Aspects of Winding Up of a Company
The winding up of a company involves several key aspects that need to be considered:
1. Appointment of Liquidator
A liquidator is a person or entity responsible for managing the winding-up process of a company, including selling assets, settling liabilities, and distributing remaining funds to stakeholders. A liquidator is appointed to manage the winding up process. He is appointed by members or creditors in voluntary winding up or by the court in compulsory winding up.
2. Realisation of Assets
The liquidator takes possession of all the company's assets and realises them into cash. This may involve selling the company's property, plant and equipment, collecting debts from debtors, and recovering any unpaid capital from the contributors.
3. Payment of Liabilities
The liquidator settles all the company's liabilities, including debts owed to creditors, outstanding taxes and employee dues. The order of priority for payment is fixed by law, with secured creditors being paid first, followed by unsecured creditors and members.
4. Distribution of Surplus
After settling all the liabilities, surplus assets are distributed among the members in proportion to their shareholding. Preference shareholders are paid first, including any arrears, as per their rights. Once their claims are fully settled, the remaining surplus is allocated to equity shareholders in proportion to their shareholding. This process adheres to the company’s articles and legal requirements, ensuring an equitable distribution.
5. Dissolution of Company
Once the winding up process is complete, the liquidator submits a final report to the Tribunal or the ROC. The Tribunal then orders the dissolution of the company, and its name is struck off from the register of companies.
Types of Winding Up
There are three main modes of winding up of a company under the Companies Act 2013:
- Compulsory Winding Up of a Company (By the Tribunal)
- Voluntary Winding Up of a Company
a) Members' Voluntary Winding Up
b) Creditors' Voluntary Winding Up
- Winding Up Subject to the Supervision of the Tribunal
Let us discuss each of these types in detail.
1. Compulsory Winding Up (By the Court)
Compulsory winding up of a company is when a company is wound up by an order of a court or tribunal. This is also known as "winding up by the court". The court may order a company to be wound up on various grounds specified in Section 433 of the Companies Act, 1956 (now governed by Chapter XX of the Companies Act, 2013).
Compulsory winding up of a company is initiated by a petition filed before the National Company Law Tribunal (NCLT) by:
- The company itself
- The company's creditors
- The company's contributors
- The Registrar of Companies
- Any person authorised by the Central Government
The grounds for compulsory winding up include:
- Inability to pay debts
- Acting against the sovereignty and integrity of India
- Conducting affairs in a fraudulent manner
- Failure to file financial statements or annual returns for five consecutive years
- The Tribunal is of the opinion that it is just and equitable to wind up the company
If the NCLT is satisfied that a prima facie case for winding up is made out, it admits the petition, appoints an official liquidator and makes an order for winding up.
2. Voluntary winding up of a company
Voluntary winding up is when a company is wound up by its members or creditors without the intervention of a court or tribunal. Voluntary winding up is initiated by the company itself by passing a special resolution in a general meeting. There are two types of voluntary winding up:
1. Members' Voluntary Winding Up
This occurs when the company is solvent and can pay its debts in full. A declaration of solvency is made by a majority of the directors, stating that they have made an inquiry into the company's affairs and believe that the company has no debts or will be able to pay its debts in full within three years from the commencement of the winding up.
2. Creditors' Voluntary Winding Up:
This occurs when the company is insolvent and unable to pay its debts in full. No declaration of solvency is made in this case. The creditors play a greater role in this type of winding up compared to a members' voluntary winding up.
In a voluntary winding up, the company appoints a liquidator in a general meeting to conduct the winding up proceedings.
3. Winding Up Subject to the Supervision of the Court
A voluntary winding up (whether members' or creditors') may be converted into a winding up by the Tribunal if the Tribunal is of the opinion that the company's affairs are being conducted in a manner prejudicial to the interests of the public or the company.
In such cases, the Tribunal may order that the voluntary winding up shall continue but subject to the supervision of the Tribunal. The Tribunal may appoint an additional liquidator to conduct the winding up along with the liquidator appointed by the company.
Winding Up a Company Process
The procedure for winding up of a company in India depends on the mode of winding up. Here is a step-by-step procedure for compulsory winding up of a company in India and voluntary winding up:
The process of winding up of a company in India is complex and involves several legal formalities. It is advisable to seek the assistance of a professional (such as a company secretary or a lawyer) to ensure compliance with all the requirements.
Example of Winding up of a Company
One notable example of the winding up of a company in India is the case of Kingfisher Airlines Limited. Kingfisher Airlines was a prominent Indian airline that ceased operations in 2012 due to financial difficulties and mounting debts.
In 2016, the Karnataka High Court ordered the winding up of the company on a petition filed by the Airports Authority of India, which was one of the company's creditors. The court appointed an Official Liquidator to take charge of the company's assets and manage the winding up process.
The liquidator faced several challenges in the winding up process, including the recovery of dues from the company's debtors and the sale of its assets. The company had a fleet of aircraft and other assets, which had to be valued and sold to pay off the creditors.
One of the major issues in the winding up of Kingfisher Airlines was the recovery of dues from its promoter, Vijay Mallya. Mallya had given personal guarantees for some of the loans taken by the company, and the creditors sought to recover these dues from him. However, Mallya fled to the UK, and the Indian authorities have been trying to extradite him to face charges of fraud and money laundering.
The winding up process of Kingfisher Airlines is still ongoing, and the liquidator is working to realise the company's assets and settle its liabilities. The case highlights the challenges involved in the winding up of a large and complex company with multiple stakeholders and legal issues.
The Kingfisher Airlines case also underscores the importance of timely action by creditors in the event of default by a company. Many of the company's creditors, including banks and airports, had allowed the debts to accumulate for several years before initiating legal action. This delay made it more difficult to recover the dues and increased the losses for the creditors.
In conclusion, the winding up of Kingfisher Airlines is a cautionary tale for companies and creditors alike. It highlights the need for effective risk management, timely action in case of default, and the importance of following due process in the winding-up of a company.
Conclusion
In conclusion, the winding up is a legal process of liquidating a company's assets, settling of liabilities and distributing surplus to its members. It is a complex process that requires careful planning and execution, and the guidance of professional advisors.
There are three modes in winding up under companies act 2013: compulsory winding up by the Tribunal, voluntary winding up by the members or creditors and winding up under the Tribunal's supervision.
These modes of winding up have specific requirements and procedures. Proper planning and professional guidance can help minimise the impact on stakeholders like creditors, employees and members, ensuring a smoother and compliant winding-up process.
Frequently Asked Questions
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Private Limited Company
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One Person Company
(OPC)
- Freelancers, Small-scale businesses
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- Businesses looking for single-ownership
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(Pvt. Ltd.)
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- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
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- Firms sharing resources with limited liability
Frequently Asked Questions
What does winding up mean?
Meaning of winding up of a company: It is the process of dissolving a company and distributing its assets to claimants. It involves closing down the company's operations, realising its assets, paying off its debts and liabilities and distributing the surplus (if any) to the members.
What is Creditors' Voluntary Winding Up?
Creditors' Voluntary Winding Up is a type of voluntary winding up of a company that occurs when the company is insolvent and unable to pay its debts in full. In this type of winding up, the creditors have a greater say in the appointment of the liquidator and the conduct of the winding up proceedings.
Who can be appointed as a liquidator?
A liquidator can be an individual or a corporate body. They must be independent and should not have any conflict of interest with the company being wound up. Usually, professionals such as chartered accountants, company secretaries, cost accountants or advocates are appointed as liquidators.
What is a Statement of Affairs?
A Statement of Affairs is a document submitted by the directors of a company to the liquidator in a winding up. It shows the particulars of the company's assets, debts and liabilities, the names and addresses of the creditors, the securities they hold and other relevant details.
What is the process of dissolution of a company?
The process of dissolution of a company involves the following steps:
a. Passing a special resolution to wind up the company
b. Appointment of a liquidator to manage the winding-up process
c. Realisation of the company's assets and settlement of its liabilities
d. Distribution of any surplus assets to the members
e. Submission of the final report by the liquidator to the Tribunal or ROC
f. The passing of an order by the Tribunal dissolving the company
g. Striking off the company's name from the register of companies by the ROC
What are the effects of winding up a company?
The main effects of winding up of a company are:
- The company ceases to carry on its business except for the beneficial winding up of its business.
- The powers of the board of directors cease, and the liquidator takes over the management of the company.
- Legal proceedings against the company are stayed.
- The company’s assets are realised and distributed to the creditors and members.
- The company is eventually dissolved and ceases to exist as a legal entity.
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