Module-II Corporate Collapse

Modes of Winding Up
Contributories Liquidators- Appointment, Powers and functions Winding up by the Tribunal Analysis of

grounds of non-commencement of business, inability to pay debts, and just equitable Clause. Voluntary Winding up- by members - by creditors Stepwise procedure of Winding up

 Winding up of a company is the process whereby its

life is ended and its property administered for the benefit of its creditors and members. An administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their respective rights.

 Winding up is a process by which a company registered

under the Companies Act ceases to be one after the conclusion of the proceedings and the Company is removed from the list of Companies kept by the Registrar of Companies. Till the passing of the Companies ( Second Amendment ) Act, 2002, the winding up of Companies was done by or under the supervision of the High courts. Now pursuant to the Second Amendment, 2002 winding up petitions shall be presented to the National Company Law Tribunal constituted under section 10 FB of the Companies Act, 1956.

MODES OF WINDING UP

[Section 425 ]
A Company may be wound up : a) voluntarily by the concerned company distinguished as members voluntary winding up and creditors voluntary winding up. ( Section 488) b) by the Tribunal under any of the circumstances as prescribed. ( section 433)

CONTRIBUTORY
Contributory - the term contributory is defined under

section 428 to mean every person liable to contribute to the assets of a company in the event of its being wound up. The expression includes the holder of any shares which are fully paid up. * Fully paid up Share means where no money is due from the shareholder,i.e. he has paid the entire share money. A past member shall however be not liable to contribute if he ceased to be a member for one year or more before the commencement of the winding up.

Liquidator

Liquidator is a person who helps the court to complete the liquidation proceedings. An official liquidator may be appointed from a panel of professional firms of CA, Advocates, Company Secretaries etc., which the Central Government shall constitute for the court; or may be a body corporate consisting of such professionals as may be approved by the central government from time to time; or may be a whole time or part time officer appointed by the central government.

WHO CAN BE APPOINTED AS OFFICIAL LIQUIDATOR?

A member from the panel of the professional firms of

chartered accountants, advocates, company secretaries, cost and work accountants which the central government may constitute. Body corporate approved by central government. Whole-time or part-time officer appointed by the central government.

Duties of Liquidator
Sections 448 to 463 of the Companies Act 1956 deals with the overall role of official liquidators in winding up proceedings.
SECTION: MATTERS DEALING UNDER THE SAID SECTIONS

448 449

450
451

452
453

APPOINTMENT OF OFFICIAL LIQUIDATOR OFFICIAL LIQUIDATOR TO BELIQUIDATOR APPOINTMENT AND POWERS OF PROVISIONAL LIQUIDATOR GENERAL PROVISIONS AS TOLIQUIDATORS STYLE ETC OF LIQUIDATOR RECEIVER NOT TO BE APPOINTED OF ASSETS WITH LIQUIDATOR

 454

STATEMENT OF AFFAIRS TO BE MADE TO OFFICIAL LIQUIDATOR 455 REPORT BY OFFICIAL LIQUIDATOR 456 CUSTODY OF COMPANYS PROPERTY 457 POWERS OF LIQUIDATOR 458 DISCRETION OF LIQUIDATOR 458A EXCLUSION OF CERTAIN TIME IN COMPUTING PERIODS OF LIMITATION

 459
460

461
462 463

PROVISION FOR LEGAL ASSISTANCE TO LIQUIDATOR EXERCISE AND CONTROL OF LIQUIDATORS POWERS BOOKS TO BE KEPT BY LIQUIDATOR AUDIT OF LIQUIDATORS ACCOUNTS CONTROL OF CENTRAL GOVERNMENT OVER LIQUIDATORS.

Official Liquidator
The Official Liquidator is appointed by the Central

Government under section 448 of the Companies Act, 1956 attached to High Court of the State for the purpose of conducting liquidation proceedings of those companies which are ordered to be wound up by the High Court. Functionally the Official Liquidator is under the supervision and control of the High Court but administratively is under the control of the Central Government through the Regional Director.

Powers of Official Liquidator

1. In voluntary winding up of company

Voluntary liquidator may exercise the following powers - with the sanction of special resolution in the case of members voluntary winding up; - with the sanction of court or committee of inspection in the case of creditors voluntary winding up; - with the sanction of creditors if there is no such committee:

 to institute and defend any suit, prosecution or other

legal proceeding, civil or criminal, in the name and on behalf of the company to carry on the business of the company; to sell the immovable and movable property and actionable claims of the company by public auction or private contract to raise on the security of assets of the company any money requisite.

PROCEDURE TO PUT A COMPANY INTO MEMBERS VOLUNTARY WINDING UP.

STEP 1: Convene a Board Meeting to transact the

following business: (a) Make sure that the company can pay its debts in full within a period of three years if put into liquidation. (b) Declaration in Form No. 149 under Rule 313 of the Companies (Court) Rules, 1959, and verified by an affidavit, by the Directors sworn before a Judicial Magistrate on non-judicial stamp paper of Rs. 20/-. (c) Declaration will be accompanied by: i) The audited

 Balance Sheet and Profit & Loss Account commencing

from the date of last audited balance sheet and profit and loss account and ending with the latest practicable date before the date of declaration. ii) A statement of the companys assets and liabilities as at that date; and iii) A copy of the report of the auditors of the company on the above two documents. (d) Approve at the meeting the draft resolution for Members Voluntary Winding up and for appointing Liquidator and fix remuneration and also fix the date, time, place of the general meeting.

 STEP 2: Copies of item (b) and (c) to be filed and

registered with the Registrar at least 5 weeks before the General Meeting. STEP 3: Issue notice for the general meeting proposing a Special Resolution, with suitable Explanatory Statement. STEP 4: Hold the General Meeting and pass the Special Resolution for winding up. The winding up commences from the time of passing the resolution.

 STEP 5: Within ten days of passing of the resolution,

file notice with the ROC for the appointment of the liquidator after paying the requisite fee. STEP 6: Submit to the liquidator a statement on the companys affairs in Form No.57 in duplicate, duly verified by affidavit in Form No. 58 within twenty-one days of the commencement of winding up. STEP 7: File the Special Resolution passed for winding up with Explanatory statement with the ROC within 30 days of its passing in Form No .23 with requisite fee.

 STEP 8: Within 14 days of passing the resolution for

voluntary winding up, give notice of the resolution by advertisement in the Official Gazette and also in some newspaper circulating both in English and in Tamil, in the district where the registered office of the company is situated. STEP 9: Simultaneously to Step 8, the Liquidator to publish in the Official Gazette the Notice of his appointment in Form No. 151 of Company Court Rules and file with Registrar the Notice of his Appointment in form 152 of Company Court Rules.

 STEP 10: Simultaneously to Step 8, Liquidator to give

notice of his appointment to the concerned Incometax Officer under Section 178 of IT Act, 1961. No prescribed format for this intimation. Letter would be sufficient. STEP 11: If the liquidator is of the opinion that the company will not be able to pay its debts in full within the period stated in the declaration of solvency, or if the period stated in the declaration of solvency has

 expired without the debts being paid in full, the

liquidator has to summon a meeting of the creditors, and table before the meeting a statement of the assets and liabilities of the company in Form No. 150 of the Companies (Court) Rules, 1959. STEP 12: Where the winding up process continues for more then a year, Liquidator should call a general meeting within 3 month from the end of every year from the date of commencement of winding up, and table before the meeting an account of his acts and dealings along with statement in form No 153 of the

Companies (Court) Rules, which should be duly verified in Form 154 of the Company Court Rules. STEP 13: If Step 11 is applicable, the Liquidator to call a meeting of creditors also within 3 months from the end of the year. STEP 14: The Liquidator to file statements in the prescribed manner together with the Audit Report in the prescribed format, with the concerned Registrar of Companies twice in every year, if the liquidation is NOT completed within one year from the commencement of the winding up.

STEP 15: Complete the winding up by realising all assets and paying off all liabilities and returning share capital and surplus, if any. The provisions of sections 426, to 432, 487, 491, 494, 511, 511A, 512, 517 to 520, 528 to 549 and 553 and those of rules from Nos. 124 to 134 and Nos: 312 to 361 of the Companies (Court) Rules 1959 should also be noted in this respect.

 STEP 16: As soon as the affairs of the company are fully

wound-up, liquidator to prepare his account of the winding up in Form No. 156 of the Companies (Court) Rules 1959 and get the same audited. The audit report should be in the format suggested by ICAI for this purpose.

 STEP 17: Liquidator to call the final General Meeting

by giving notice stating the time, place and object of the meeting, in Form No. 155 of the Companies (Court) Rules, 1959 by advertisement in the official Gazette. The Notice in the Gazette to be given not less than one month before the meeting. In addition, the notice should also be published in some newspaper circulating in the district where the registered office of the company is situated.

 STEP 18: At the meeting, place the accounts prepared

under Step 16. STEP 19: At the meeting also pass a special resolution for disposal of the books and papers of the company when the affairs of the company are completely wound up and it is about to be dissolved. STEP 20: Within a week of the final meeting held under Step 17, file the copy of the account with the ROC as well as with the Official Liquidator (OL) and also file a return with both in Form No. 157 of the Companies (Court) Rules 1959. If a quorum is not

 present at the meeting, file the return in form no. 158

of the Companies (Court) Rules, 1959. STEP 21: File the Special Resolution with the ROC, within 30 days of passing in Form No. 23 after paying the requisite fee.

SUBSEQUENT COURSE OF ACTION FROM THE ROC AND OL

1. The Registrar of Companies, on receiving the

account and the return shall forthwith register them. 2. The OL on receiving the account and the return would make a scrutiny of the books and papers of the Company to ascertain as to whether the affairs of the Company has not been carried on in a manner prejudicial to the interest of its members or public, and makes a report to the concerned High Court. From the date of the submission of the report to the concerned High Court the company is deemed to be dissolved

Duties of Companies Secretary in WU

Arrange the Board Meeting, within 5 weeks immediately

preceding the date of passing the resolution for MVWU. Arranging & Preparing P&L Account, B/S & Audited Report and ending with the latest practicable date before the date of declaration Prepare declaration of Solvency, get it verified by affidavit before the Magistrate & file with the Registrar with all reports. Prepare & Issue of notice of the meeting to members & to check special resolution passed, appointment & remuneration fixed in the meeting. Check the Official Gazette and newspapers within 14 days after passing resolution

When cant a company commence a Members Voluntary Winding Up

Not every company can be wound up in a members voluntary

winding up. The first exception is insolvent companies. The company must be solvent at the time and the directors must have executed a Declaration of Solvency stating so and setting out the assets and liabilities. The Act sets out 3 more exceptions: a) if an application has been filed for the winding up of the company on the basis that the company is insolvent (whether it is or not); and b) the company has already been wound up by the Court. Once the Court has made that order, the directors and members lose the power to make any other appointment. c) A third exception is where the company is the corporate trustee of a number of trusts, and one or more of these trusts are continuing.

CREDITORS VOLUNTARY WINDING UP

A winding up petition is a perfectly proper remedy for

enforcing payment of a just debt. It is the mode of execution which the Court gives to a creditor against a company unable to pay its debts. In Palmers Company Precedents, Part 11, 1960 Edn., at p. 25

 The scope of the meaning to be given to the phrase

unable to pay its debts appearing in section 218(1)(e) of the Companies Act 1965 is explained by McPherson in his book The Law of Company Liquidation (3rd Editon) at page 54 as follows: The phrase unable to pay its debts is susceptible of two interpretations. One meaning which may properly be attached to it is that a company is unable to pay its debts if it is shown to be financially insolvent in the sense that its liabilities exceed its assets. But to require proof of this in every case would impose upon an

 applicant

the often near-impossible task of establishing the true financial position of the company. primary meaning to the phrase is insolvency in the commercial sense that is inability to meet current demands irrespective of whether the company is possessed of assets which, if realised, would enable it to discharge its liabilities in full.

Procedure Of CVWU
Where the resolution for winding up has been passed,

but the Board of Directors are not in a position to give a declaration on the liability of company, they may call a meeting of creditors, for the purpose of winding up. (500) It is the duty of Board of Directors, to present a full statement of companys affairs, and list of creditors alongwith their dues, before the meeting of creditors. [500 (3)] Whatever resolution, the company passes in creditor's meeting, shall be given to the Registrar within ten days of its passing. (501)

 Company in the general meeting [ in which resolution for

winding up is passed] , and the creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act. Any director, member or creditor may approach the court, for direction that; Liquidator appointed in general meeting shall act, or He shall act jointly with liquidator appointed by creditor, or Appointing official liquidator, or Some other person to be appointed as liquidator. [502 (2)]

 The remuneration of liquidator shall be fixed by the

creditors, or by the court. (504) On appointment of liquidator, all the power of Board of Directors shall cease. (505) In case, the winding up procedure, takes more than one year, then he will have to call a general meeting, and meeting of creditors, at the end of each year, and he shall present, a complete account of the procedure, and the status / position of liquidation (505).

WHEN AFFAIRS OF THE COMPANY ARE FULLY WOUND UP ( 509)

The liquidator shall take the following steps, when affair

of the company are fully wound up: Step-1 Call a general meeting, and meeting of creditors, and lay before it, complete picture of accounts, winding up procedure and how the properties of company are disposed of. Step-2 The meeting shall be called by advertisement, specifying the time, place and object of the meeting. Step-3 The liquidator shall send to the Registrar and official liquidator copy of account, within one week after the meeting.

 Step-4 If from the report, official liquidator comes to the

conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of its members or public, then the company shall be deemed to be dissolved, from the date of report to the court. Step-5 However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public, and then court may direct the liquidator to investigate further.

MVWU
Members voluntary winding-up can be resorted to by solvent companies and thus requires the filing of Declaration of Solvency by the Directors of the company with the Registrar there is no need to have creditors meeting Liquidator, in the case of members winding-up, is appointed by the members.

CVWU
Creditors winding-up, on the other hand, is resorted to by insolvent companies

a meeting of the creditors must be called immediately after the meeting of the members creditors voluntary winding-up, if the members and creditors nominate two different persons as liquidators, creditors nominee shall become the liquidator

Members voluntary winding-up, there of Creditors voluntary winding-up, if is no provision for any such Committee. the creditors so wish, a Committee of

The remuneration of liquidator/(s) is fixed by the members in case of Members voluntary winding-up (Section 490)

be fixed by the Committee of Inspection, if any, or by the creditors in case of Creditors voluntary winding-up (Section 504).

PRIORITY IN DISPOSING LIABILITIES [529 A & 530]

When the company is wound up, by any mode, the liabilities shall be discharged in following priority. 1. Workman's dues. 2.Debts due to secured creditors, in case of insolvency. 3.All ---------, taxes, cesses and rates due from the company to the central government or a state govt. 4. All wages and salary of any employee due within four months. 5.All -------- holiday remuneration becoming payable to any employee. All such debts shall be paid in full. If assets are insufficient to meet them, they shall abate in equal proportions.

Winding Up
Winding Up of a company is the process whereby its life is ended

and its property administered for the benefit of its creditors and members.
An administrator, called liquidator, is appointed and he takes

control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights Professor. Gower

Modes of Winding Up
Winding up by the Court (Compulsory Winding Up) Voluntary Winding Up

a) Members Voluntary Winding Up b) Creditors Voluntary Winding Up

Winding Up subject to the supervision of the Court.

Winding Up by the Court

Special Resolution of the Company Default in holding statutory meeting Failure to commence business Reduction in Membership Inability to pay its debts
Demand for payment neglected Decreed debt unsatisfied Commercial Insolvency

Just and Equitable

Substratum of the Company is gone Majority of the shareholders using the powers unfairly Deadlock in the management to achieve the objectives

Petition for Winding Up

By the Company By the Creditors

Debentures Holders Central or state Government whom any tax charge is due. Person who has monetary claim against the company

By any Contributory or Contributors

Membership is reduced below the statutory minimum Original Allottee of shares Held the company shares for at least 6 months during the 18

months immediately before the commencement of winding up. Shares have transferred through the death of a former holder.

By the Registrar By any person authorized by the Central Government

Content of the Petition

Name of the Company with the date of its Incorporation Address of the Registered Office Amount of Paid Up Capital Statement of facts to justify a winding Up order. Request to the Court to issue an order of winding up Statement in the form of an affidavit that the facts stated in the

petition are correct and true.

Procedures for Winding Up

Commencement of Winding Up Advertisement of Petition Power of Court to stay or restrain proceedings against company Intimation to Liquidator or Registrar Copy of Winding up order to be filled with the Registrar

Consequences of Winding Up

Order for winding up deemed to be notice of discharge Suits Stayed Powers of the Court Effect of Winding Up Official Liquidator to be liquidator

 A company may, voluntary wind up its affairs, if it is

unable to carry on its business, or if it was formed only for a limited purpose, or if it is unable to meet its financial obligation, and etc. A company may voluntary wind up itself, under any of the two modes: A company may voluntarily wind up itself, either by passing: An ordinary resolution, where the purpose for which the company was formed has completed, or the time limit for which the company was formed, has expired.

 By way of special resolution

Both types of resolution shall e passed in the general meeting of the company. (484) Once the resolution of voluntarily winding up is passed, and then the company may be wound up, either through: - Members Voluntary Winding Up - Creditors Voluntary Winding Up

 The only difference between the abate two, is that in

case of members voluntarily winding up, Board of Directors have to make a declaration to the effect, that company has no debts. (488)

MVWU
Directors of the company shall call for a Board of

Directors Meeting, and make a declaration of winding up, accompanied by an Affidavit, stating that; a. The company has no debts to pay, or b. The company will repay it's debts; if any, within 3 years from the commencement of winding up, as specified in declaration (488)

WHO SHALL CARRY OUT THE WINDING UP PROCEDURE? & WHAT SHALL BE THE PROCEDURE?

The Company shall appoint one or more liquidators, in

a general meeting, who shall look after the affair of winding up procedure, and distribution of assets. [490 (1)] The liquidator so appointed, shall be paid remuneration for his services, which shall also be fixed in general meeting [490 (2)] The Company shall also give notice of appointment of liquidator to the registrar within ten days of appointment (493)

 Once the company has appointed liquidator, the

powers of Board of Directors, Managing Director, and Manager, shall cease to exist. (491) The liquidator is generally given a free hand, to carry out the winding up procedure, in such a manner, as he thinks best in the interest of creditors, and company. In case, the winding up procedure, takes more than one year, then liquidator will have to call a general meeting, at the end of each year, and he shall present, a complete account of the procedure, and position of liquidator (496)

WHEN AFFAIRS OF THE COMPANY ARE FULLY WOUND UP

The liquidator shall take the following steps, when

affairs of the company are fully wound up : (497) Call a general meeting of the members of the company, a lay before it, complete picture of accounts, wining up procedure and how the properties of company are disposed of. The meeting shall be called by advertisement, specifying the time, place and object of the meeting. The liquidator shall send to, the Registrar and official Liquidator copy of account, within one week of the meeting.

 If from the report, official liquidator comes to the

conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it's members, or public, then the company shall be deemed to be dissolved from the date of report to the court. However, if official liquidator comes to a finding, that affair have been carried in a manner prejudicial to interest of member or public, then court may direct the liquidator to investigate furthers.

Continued..
Notice of appointment of liquidator is filed with

registrar with 10 days of passing resolution. Check the special resolution for winding up is filed with the Registrar within 30 days of the meeting. Check every invoice, order and business letter issued by the company during the period contains a statement that company is being wound up Check all the Books, Documents, Movables & Immovable properties of the company are delivered to the liquidator, for public examination and give evidence as required.

Creditors Voluntarily Winding Up (CVWU)

Meeting of Creditors 2 Newspapers Resolution Notice given to Registrar 10 Days & Rs. 500 Appointment of Liquidator Committee Appointment Inspection Not more than 5 Persons Liquidator Remuneration Boards Powers to cease an appointment of Liquidator Powers to fill vacancy in office of liquidator Duty of Liquidator to call meeting of company & Creditors at the end of each year Final Meeting & Dissolution

WU- Subject to Supervision of Court

WU of a company subject to the supervision of the court

presupposes a voluntary winding up of the Company At any time after a company passed a winding up, the Court may make an order that voluntary winding up shall continue, but subject to the supervision of the Court. The court may give such liberty to creditors, contributors or others to apply to as it thinks. Petition for the continuance of a voluntary winding up subject to the supervision of the Court is deemed to be a petition for winding up by the Court.

Consequences of Winding Up
Consequence as to shareholders Consequence as to Creditors

Consequence as to Servants & Officers

Consequence as to Proceedings against the Company Consequence as to Costs