Winding up of a company

Abstract:

The winding up of a company is the last stage of a companies’ existence. There may
be several reasons for winding up of the company including mutual agreement among
stakeholders, loss, bankruptcy, death of promoters etc. Winding up is the process by
which the company is put to an end that is the process through which its corporate
existence is ended and it is thereafter finally dissolved. As per section 270 of the
Companies Act, 2013 a company can be wound up either by a tribunal or by way of
voluntary winding up. The provisions of the act lay down proper procedures for the
winding up of a company.

Meaning of Winding-Up

Winding-up is a process whereby the life of a company is ended & property is

administered for the benefit of shareholders & creditors.

Structure of Winding-Up

● By court (NCLT)/ Compulsory Winding-up

● Voluntary Winding-up (provisions related to voluntary winding-up have been

repealed and has now been shifted to Insolvency & Bankruptcy code).

● Voluntary Winding-Up

it is a process where the company becomes insolvent and so it decides to wind-up the
company before the NCLT does and declares itself to be insolvent. There are two ways
by which the company declares voluntary winding-up:

1. By Ordinary Resolution: A company may wound up voluntarily if the given

period or duration of the company has expired. Such period should be
mentioned in the articles of the company or if there is any mentioning in the
articles, that company shall dissolve on the occurrence of a particular event
and if such event occurs then the company, by passing an ordinary resolution
can start the process of winding-up.

2. By Special Resolution: A company may wound up voluntarily after getting

75% majority from its shareholders and board of directors. The process will
only start when the special resolution has been passed. After the resolution
has passed the same has to be published in the Official Gazette and in
leading newspapers of that district/city within 14 days.

Mode of Winding Up

As per Companies Act 2013, section 270 sub-section clause 1 provides for the modes
of the winding up of the company that can be done either by –
Tribunal

The circumstance under which a company may be wound up by a Tribunal is provided

under section 271 of the Companies Act 2013. They are as follows –

a. If the company is unable to pay its debts;

It shall be pertinent to note that if an execution or other process issued on a decree or

order of any court or Tribunal in favour of a creditor of the company is returned in the
favour of a creditor of the company is returned unsatisfied in whole or in part; or if it is
proved to the satisfaction of the Tribunal that a company is unable to pay its debt, and in
determining whether a company is unable to pay its debts, the Tribunal shall take into
account the contingent and prospective liabilities of the company.

(b) if the company has, by special resolution, resolved that the company be wound up
by the Tribunal;

(c) if the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order,
decency or morality;

(d) if the Tribunal has ordered the winding up of the company under Chapter XIX;

(e) if on an application made by the Registrar or any other person authorized by the
Central Government by notification under this Act, the Tribunal is of the opinion that the
affairs of the company have been conducted in a fraudulent manner or the company
was formed for fraudulent and unlawful purpose or the persons concerned in the
formation or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and that it is proper that the company be wound up;

(f) if the company has made a default in filing with the Registrar its financial statements
or annual returns for immediately preceding five consecutive financial years; or

(g) if the Tribunal is of the opinion that it is just and equitable that the company should
be wound up.

The Petition of Winding Up by The Tribunal Can Be Made by The Following: -

According to section 272 clause 1 of the Companies Act, 2013, a petition of winding up
of the company can be made by the following:

(a) the company;

– It occurs in cases where a company passes a special resolution to wind up the

company.

(b) any contributory or contributories;

– The section 2 clause 26 of the Companies Act, 2013 defines the term contributors
which includes holders of any shares which are fully paid-up and who are shareholders
of the company at the time of commencement of winding up.

(c) all or any of the persons specified in clauses (a), (b) and (c) together;

(d) the Registrar;

– According to 272 clauses 4 of the Companies Act, 2013 that the Registrar may with a
prior sanction of the central government, file an application petition for winding up of
company only based on the following grounds: -

1.) When a company default in submitting a statutory report is a statutory meeting

2.) When a company has not commenced its meeting within one year from the date of
its incorporation

3.) When the financial statements are disclosed by the Registrar or the report by the
special auditor or on the inspection made under section 210 or 213 it appears that the
financial conditions of the company are unable to pay debts.

4.) When the Central government authorizes the Registrar of the company to wind up.

5.) In case the member of the company is fallen below the statutory requirements

6.) Where it was just and equitable by the Registrar of the Company to wind up.

(f) any person authorized by the Central Government in that behalf; or

– If any report submitted by the inspector appointed to investigate the affairs of the
company that either the business of the company is conducted in an unlawful manner or
the person concerned for management of the company are guilty of fraud or any kind of
misconduct

(g) in a case falling under clause (c) of sub-section (1) of section 271, by the Central
Government or a State Government.

Powers of Tribunal

According to section 273, The Tribunal may, on receipt of a petition for winding up
under section 272 pass any of the following orders, namely: —

(a) dismiss it, with or without costs;

(b) make any interim order as it thinks fit;

(c) appoint a provisional liquidator of the company till the making of a winding-up order;

(d) make an order for the winding-up of the company with or without costs; or

(e) any other order as it thinks fit: Provided that an order under this subsection shall be
made within ninety days from the date of presentation of the petition:
Provided further that before appointing a provisional liquidator under clause (c), the
Tribunal shall give notice to the company and afford a reasonable opportunity to it to
make its representations, if any, unless, for special reasons to be recorded in writing,
the Tribunal thinks fit to dispense with such notice:

Provided also that the Tribunal shall not refuse to make a winding-up order on the
ground only that the assets of the company have been mortgaged for an amount equal
to or in excess of those assets, or that the company has no assets.

Where a petition is presented on the ground that it is just and equitable that the
company should be wound up, the Tribunal may refuse to make an order of winding up,
if it is of the opinion that some other remedy is available to the petitioners and that they
are acting unreasonably in seeking to have the company wound up instead of pursuing
the other remedy.

● Distinction between dissolution and winding up of a Company

● The term winding up and dissolution do not mean the same thing under the
company law. The following are the main points of the distinction.

● 1. In order to bring the company’s life to end in a lawful manner is divided into
two stages. In stage one, winding up takes place where assets of the company
are realized, liability is paid off and the surplus, if any, distributed among the
members. In the second stage, dissolution takes place where the whole
existence of the company comes to an end in a lawful manner.

● 2. The legal entity does not get dissolved during the process of the winding-up, it
is only in the dissolution stage that the legal entity of the company comes to an
end.

● 3. During the winding-up process the liquidator can represent the company while
its power will cease to exist only when the dissolution order is passed by the
court.

● 4. All the necessary business of the company can continue during the winding-up
process but at the stage of dissolution, the company cease to exist.

Grounds on which winding up may take place

In case of Compulsory winding up

The winding up of a company by the order of court is called compulsory winding up.
Section 433 of the Act, 1956 envisaged the following circumstances under which the
affairs of a company wound up by the Tribunal:

1. If the company, of its own, passes a Special Resolution that it should be wound up by
the court, and presents a petition to the court for same.

2. If the company makes any default in filing the statutory report with the registrar of
companies or in holding the statutory meeting within the prescribed time
3. If the company does not commence business within one year from the date of its
incorporation or suspends its business for a whole year

4. If the number of members falls below seven in the case of a public company, and
below two in the case of a private company.

5. If the company is unable to pay its debts

6. If the court is of the opinion that it is just and equitable that the company be wound
up.

7. If the company has made default in filing its Balance sheet and Profit and Loss
account or annual return for any five consecutive financial year.

8. If the company has acted against the sovereignty or integrity of India, the security of
the state or friendly relation with foreign state etc,

9. If the tribunal is of the opinion that the Company should be wound up under
circumstances mentioned under Section 424G (sick company).

Winding Up by A Tribunal

Winding up of a company takes place by a tribunal by appointing a liquidator if the

company is unable to pay its debts or the company has passed a special resolution to
that effect or the company is acting against the interest or morality of India, security of
state, or has spoiled any kind of friendly relations with foreign or neighbouring countries
or the company has not filed the financial statements or annual returns for preceding
five consecutive years or it is deemed just and equitable to the tribunal to wind up the
company or the company has undertaken fraudulent activities or any other unlawful
business or any person or management connected with the formation of company is
found guilty of fraud or any kind of misconduct.

Under section 272 of the companies act, the petition for winding up of a company in any
of the circumstances stated above can be filed by any of the following parties-
Such winding up petition shall be filed in form no. 1, 2 or 3, as required along with the
statement of affairs in form no. 4. The statement of affairs shall contain facts up to
specific date which shall not be more than 15 days prior of the date on which the
statement of affairs is filed. Also, it shall be certified by a certified chartered accountant.
Significant Takeaway

The winding-up of the company is a complex process through which all the business
operations of the company to cease. There are two modes of winding up i.e., by a
tribunal and voluntary. While the tribunal has been conferred the power to wound up a
company based on grounds provided under the Companies Act, 2013 the voluntary
winding up is a discretionary power of the members of the company based on
circumstances they deem necessary to do so. The inclusion of insolvency and
bankruptcy code, 2016 which provides for voluntary winding up of the company has
removed the complexities of the winding up and thereby streamlined the whole process
at the convenience of the members of the company.
Case Law:
1. Karnataka High Court
Airwings Private Ltd. vs Viktoria Air Cargo Gmbh. on 17 August, 1994
Equivalent citations: 1995 82 CompCas 447 Kar
Author: S Majmudar
Bench: S Majmudar, T S Thakur
JUDGMENT: S.B. Majmudar, C.J.

2. Gujarat High Court

Reserve Bank Of India vs Piramal Financial Services Ltd. on 20 October, 2000
Equivalent citations: (2000) 4 GLR 700
Author: K Mehta
Bench: K Mehta
JUDGMENT K.M. Mehta, J.