VOLUNTARY CORPORATE EXIT

A research prepared submitted in partial fulfilment of the course

company law for obtaining the degree BBA LLB (Hons.) for the
academic year 2021-2022

Submitted by
RAHUL KUMAR
2032
Submitted to
Ms. Nandita S. Jha

Sept. 2021
Chanakya National Law University, Patna
Mithapur Nayaynagar, Patna

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“The great problem of having corporate citizen is that aren’t like the rest of us. They have no soul to save, and
they have no body to incarcerate.”

- Robert Monks

1. INTRODUCTION

The development of world as a whole is an reflection of the peoples dreams and desires. Something comes to
exist when someone moves forward to make their dream a reality. However, no one in itself can create
something. It is the efforts of many at different stages that makes a dream a reality. One such association
which envisages an goals and ambition of many comes as one to form something we call ‘company’. Whenever
many persons comes together to realise a common goal and ambition, such a association is come to know as
company. It is an instrument that unites the effort of many to reflect their ambition.

In common parlance, company may be defined as “ the association of people formed for a purpose of carrying
out some business, or for some other economic purpose”. The form and structure of the company varies
according to the purpose such as proprietorship, partnership, or corporation. These structures will further
decide the ownership of the company. In Indian legal framework, there can be two main type of organization
namely, corporation and partnership. Though both can be termed as company, Indian law specifically deals
with each with different legal provisions and different code. Where on one hand, corporation govern under
Companies Act. 2013; partnership is considered distinct and dealt under the partnership Act, 1932 and Limited
liability Act, 2008. Both of the legislations are based on the law of agency as under a partnership, each partner
becomes agent to other.

However, corporation incorporates a very distinct and complex structure of company. Large fluctuating
membership, and. An independent entity are some of the characteristics of a corporation. Every such
association become an district legal entity, different from its members and hence, are subject to various rights
and duties on its own. However, in order for a company to obtain such identity of individuality, it must be
registered and incorporated under the provisions of the companies Act, 2013.

The registration and incorporation of a company is equivalent to its birth. Upon the incorporation, a company
acquires similar and equitable rights to that of a natural person. Since, company or incorporation holds similar
rights and are subjected to similar duties, they are considered similar to a person. These type of legal entity
which are born out of the statutes or legislative provisions are known as artificial legal person. Subject to
prevalent law and order, these bodies have all the rights a natural legal person may have and are subjected to
similar liabilities as well. However, it is to not that though they have equitable Rights to that of a legal person,
an incorporation can not be considered as a citizen. As such, though a company is entitled to every
fundamental rights provided to any person, it can not claim those rights which are confined to only citizen.

A company being a creation of statutes does not looses it’s existence merely because of the fall of its
members. A company is an district legal entity and hence, continues to exist beyond its members. Members of
a company may change due to various reasons, but, the company in itself continues to go on. However, like
every other entity, it is not immortal and may wound up under various Circumstances. For instance, a company

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may be created to fulfill a purpose and upon the fulfilment of same, it will come to an end. Similar, it may
come to end when it looses financial stability and becomes insolvent. Also, though a company is an legal entity
in its own, it may still be wound up by the decision of its shareholders.

 Aim
The current research is aimed towards study of winding up process of a company. The study
thoroughly examine different modes of process of winding up as well as the compulsion of the
process.

 Objective
1. The objective of the research is to study modes and process of winding up of a company.
2. The research further dwell into the study to understand whether the complexity of the
process and the effect of such to every stake holder.

 Research methodology
In this part the researcher outlines the research strategy, sources of data, the research method and
the second part deals with review of literature.

1. Research strategy

The research held with respect to the given topic was an applied one, but not new. As such, the
proposed research took the form of a new research but on an existing research subject.

2. Sources of Data

Secondary data is used in this project. Secondary data are the data collected by a party not related to
the research study but collected these data for some other purpose and at different time in the
past. If the researcher uses these data then these become secondary data for the current users.
Secondary data is also used to gain initial insight into the research problem. Secondary data is
classified in terms of its source – either internal or external. The present study relies on information
drawn from various secondary sources including books,
journals, and government survey reports.

3. Research Methods

This project is based upon doctrinal method of research. It has been done after a thorough research
based upon intrinsic and extrinsic aspects of the project.

 Hypotheses
The researcher while undertaking the research hypotheses that

1. The process of winding up may be compulsory as well as voluntary.

2. The process of winding up affects and involves the right and obligation of every element
of the company.
3. Voluntary winding up enables shareholder and members to settle affairs

-page break-

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 o Meaning of ‘Winding up’

Winding up is the liquidation of Company’s assets which are collected and sold in order to pay the debts
incurred. When the company winding up takes place firstly the debts, expenses and costs are paid away and
distributed among the shareholders.

Once the Company is liquidated it is formally dissolved and the Company ceases to exists.

Winding up is the legal mechanism to shut down a company and cease all the activates that re carried on .
After the Company winding up the existence of the Company comes to an end and the assets are monitored so
that the stakeholders interest is not hampered.

The shareholders of the Company can initiate the winding up of the company anytime. If there are secured or
unsecured creditors or employees on roll then all the dues need to be settled. After settling the dues it is
necessary to close all the Company bank accounts. The GST registration must also be surrendered in case
Company wind up.

Winding up is, however, different from dissolution of the company. Where winding up is a process to realise
the assets, pay off the liability and distribute the surplus, the process itself does not bring the company out of
existence. A company continues to exist until dissolution. Dissolution signifies to the process of ending the
legal existence of a company. Upon dissolution a company no more remains an legal entity and subsequently
does not contain right to own property, or sue or be sued. The legal status of a company cease to exist after
the process of winding up and dissolution.

In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony1, the Supreme Court held that winding-up precedes the
dissolution. There is no statutory provision vesting the properties of dissolved company in a trustee or having
the effect of abrogating. The shareholders or creditors of a dissolved company cannot be regarded as its heirs
and successors. On dissolution, its properties, if any, vest in the government.

Similarly, winding up is different from insolvency. Insolvency means inability of a person to pay their debts
when they fall due. An person becomes insolvent when his liabilities exceeds him assets and against whom
court makes an order of adjudication.

o Modes of winding up

The company can be wound up due to various reasons depending upon the circumstances of the company.
Though broadly speaking, it can either be wind up by its violation i.e., by passing an resolution to wind up the
company, or by compulsion i.e., due to default of law or financial instability etc. It can also be wound up by
necessary implications i.e., if the company is formed for a specific purpose, once that purpose is fulfilled, the
company will have no further objective to exist and hence will come to an end.

Keeping that in mind, winding up of a company may be classified into two categories namely, voluntary
winding up and compulsory winding up. Where a company winds up it’s establishment and processes by its
own violation without the influence of external factors, it can be termed as ‘voluntary winding up' of a
company. On the other hand, where a company faces unfavourable circumstances and becomes unable to pay
back it’s debts, the company is termed as ‘insolvent company' and it is compelled by either credits or debtors
to wind up the company and to liquidate the assets to pay back the debts incurred to the company. Such mode
of winding up is known as ‘compulsory winding up'. Compulsory winding up of a company is initiated by
initiating the proceeding for winding up in the tribunal.

1
2001 104 Comp. Cas 368 All

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In India, winding up of a company is governed through the provisions of the Companies Act, 2013. Before the
enactment of the new companies Act, 2013, the winding up were governed under the Companies Act, 1956.
Under the 1956 Act, both modes of winding up would be governed through the same legislation and the
procedure were given in part VII of the said Act through sec. 425- 560.

However, the new companies Act, 2013 superseded the earlier enactment. Initially this code too contained
both the modes of winding up of a company in chapter IX of the Act. But subsequently, in the year 2015,
Insolvency and Bankruptcy Code, 2016 was passed w.e.f. 28th of may, 2016. The said Act made the process of
voluntary winding up given under Companies Act, 2013 obsolete and were removed. The Act moved those
processes under the Insolvency and Bankruptcy Code,2016 for the better and effective methods under the Act.
With the passing of the said Act, a company can now be wound up under the Companies Act, 2013 only by the
tribunal. The newly amended sec. 2(94A) as amended by the Insolvency and Bankruptcy Code, 2016 defines
'the winding up of a company’ as winding up under the Companies Act,2013 or liquidation under the
Insolvency and Bankruptcy Code, 2016.

The Insolvency and Bankruptcy Code, 2016 came into effect on 28 th May 2016. The aim of the code was to
Consolidate and amend the laws relating to insolvency resolution of companies and limited liability entities,
partnership and individuals, which are scattered throughout various legislations, into one single legislation. He
main focus of this legislation is at providing resurrection and resolution in a time bound manner for
maximization of value of debtor’s assets. The Code has put forth an overarching framework to aid sick
companies to either wind up their business or engineer a revival plan, and for investors to exit. Notably, the
Code has also empowered the operational creditors (workmen, suppliers etc.) to initiate the insolvency
resolution process, if default occurs.

The code further provide provisions for the Insolvency resolution process as well as the process for liquidation
of a company. The code also provides for the voluntary winding up of a company. Consequently, the provisions
relating to voluntary winding up of a company has been omitted from the companies Act,2013. Subsequently,
sec.304-323 has been deleted and Chapter XIX of the Act, dealing with the Revival and Rehabilitation of Sick
Companies has been omitted and Sections 253-269 of the Act have been deleted. Further more, two grounds
for winding up of a company by tribunal has also been deleted – due to inability to pay debts, and winding up
under chapter XIX.

 Winding up by tribunal under The Companies Act, 2013

A company may initiate process of winding up by tribunal under sec. 271 of the companies Act, 2013. The
order for winding up of a company can be made by the tribunal upon the application of any of the person
mentioned under section 272 of the act.

Sec. 271 of the Act deals with circumstances under which compulsory winding up of a company may follow.
Those circumstances are as follows:

a) Through special resolution made by the company,

b) If the company has acted against the sovereignty and integrity of India, the security of the state,
friendly relations with foreign states, public order, decency, and morality,
c) On the application of the registrar or any other person author by the government, if the tribunal is of
the opinion that company has conducted affairs in fraudulent manner or the company was formed for
a fraudulent or unlawful purpose,
d) If the company has made default in filing with the registrar it’s financial statements for preceding five
years,
e) If the tribunal is of the opinion that it is just and equitable.

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Two of the grounds for winding up by the Tribunal - Inability to pay debt and winding up under Chapter XIX of
the Act - have been deleted with the passing of Insolvency and Bankruptcy Code.

Sec. 272 deals with the people who may petition for the winding up of the company on the grounds covered
under sec. 271 of the Act. The petition may be presented before the tribunal by –

a) The company;
b) Any contributory or contributories;
c) The registrar or any person authorised on his behalf;
d) In cases of consequences for winding up under clause (b) of sec. 271, the state government or the
Central Government.

 Winding up through special resolution made by the company

The company may by special resolution resolve that it can be wound up by the tribunal. The resolution may be
passed for any cause. The tribunal, however, has to see that it must not be opposed to public order or the
interest of the company as a whole. 2 The tribunal is also look into the possibility of the revival or rehabilitation
of a company from its financial crisis which evidently led to passing of the resolution. The tribunal must not
allow any underlying design to cause frustration into an arbitration proceeding where there is a significant
amount involved.3

The clause (a) of the said section is based on the premise that, except circumstances beyond, shareholders are
the best of judge to decide whether a company should run or go out of existence. Given the fact that
shareholders are the creators of the company, the right to decide whether it continue or not exist with them
as well. However, the directors are not to decide such, the right exist solely into the shareholders. The director
may not file the petition to dissolve the company without the authority of the general meeting. However,
general meeting may ratify the application of winding up by the directors. 4 In order to pass the special
resolution, the company has to call for a general meeting and specifically state their resolve to wind up the
company by tribunal. The company also have to specify in the explanatory statements as to why winding up of
the company was called for.

The tribunal is at the discretion in the said and is not under obligation to order winding up merely because the
company has resolve to do so. Sec. 433 of the 1956 Act (or sec. 271 of the 2013 Act), having ‘may’ suggests
that the tribunal is at the discretion at taking a decision. However, such discretion must be exercised judicially. 5

It is also to be noted that a company’s right to file Petition for winding up does not exhaustive solely by special
resolution. The company may file winding up petition without special resolution on other grounds provided
under Sec. 271 of the 2013 Act.

 The company acting against the sovereignty and integrity of India, the security of the
state, the friendly relations with foreign states, the public order, decency, or morality (sec.
271(b))

Any company acting against the circumstances provided under Clause (b) of Sec. 271 may be wound up by the
tribunal. In this case, the company may be wound up on the petition filed by the state government or the
Central Government, or any authority authorised specifically. The first three circumstances are illustrative of

2
B. Viswanathan v. Seshasayee Paper and Boards Ltd. [1992] 73 Comp. Cas. 136 (Mad.).
3
Advance Television Network Ltd. V. ROC [2011] 108 SCL 702 (Delhi)
4
Galway & Salt Hill Tramways Co., In re [1918] 1 IR 62/521 LG 93.
5
New Kerala Chits & Traders (P.) Ltd. V. Official Liquidator [1981] 51 Comp. Cas. 601 (Ker.).

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themselves as to why the company should be wound up. These circumstances not only goes against the
interests of the company but only compromise the security and integrity of the nation. However, latter three
circumstances are not clear from the reading of the act. It is not clear as to how the company may affect the
public order, decency or morality.

The tribunal only entertain the petition under the said clause only if the state government or the Central
Government files petition for such winding up. Also, the reading of the provision makes it clear that in this case
the tribunal will order winding up upon receiving the petition. Thus, the tribunal has no discretion under this
clause and is bound to wind up the company upon the petition.

 Company conducting business in fraudulent or unlawful manner(Sec.271(c))

The registrar or any person authorised by the Central Government may make a petition for the winding up of a
company. On such application, the tribunal may order winding up upon the following ground:

i. The business being conducted in the fraudulent manner;

ii. The company formed for the fraudulent or unlawful purpose; or
iii. The person related to the formation of the company has been found guilty of fraud, misfeasance or
misconduct in relation to the company or its management.

It is to note that application for winding up of a company under this clause may only be made by the registrar
or the person authorised by the Central Government. The tribunal is empowered to order investigation under
Sec. 213(b) into the affairs of the company under the ground provided therein. The grounds provided under
sec.213(b) are similar to grounds for winding up provided under sec.271(c). The Central Government may also
file Petition to the tribunal for winding up of a company under Sec. 224(2)(b)

 Company making default in filing with the registrar it’s financial statements and annual
return for immediately proceeding five consecutive financial years (Sec. 271(d))

It is not note that Sec. 164 states that any person who is or has been a director has not filed financial
statements or Annual return for the three consecutive years shall not be eligible for appointment as director.
On similar lines, Sec. 272(d) states that the company which does not file with registrar, financial statements
and annual return for five consecutive years will be bound to be wound up. The said provision applies equally
to the private as well as the government company. The provides no exception to this rule.

The said provision provide two grounds for non-compliance namely, in filing financial statements, and in filing
Annual report. The non-compliance of either ground attracts the invocation of aforementioned clause. It is not
necessary that both the grounds be violated. In case of violation of either of two grounds, the clause can be
invoked. However, it is necessary that the non-compliance continues for five consecutive years.

 Winding up under Insolvency and Bankruptcy Code, 2016

Another way of Winding up of a company is through the provisions of insolvency and Bankruptcy Code, 2016.
Under this code, any company may voluntary wind up through the procedure provided therein. The code was
enacted to promote liquidation of the company without excessive involvement of the court (or tribunal) and to
enable its members and creditors to settle their affairs among themselves.

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The winding up of a company under this code is provided under Sec. 59 of chapter V of part II. The chapter V
consist of only one section, I.e., sec. 59.

The main objective of voluntary winding up under insolvency and Bankruptcy Code, 2016 is to suspend all
business operations and dispense all its assets while also disbursing all its debts and liabilities. 6

It is to note that in order to invoke winding up process under the code, the company must not have committed
any default. Only those companies which are free of any illegality and are willing to wound their business up in
the favour of the interests of the company may initiate the process. Thus, the eligibility to file for voluntary
winding up under this code lies only with solvent companies. The company may be wound up under several
circumstances including expiry of the period of operations fixed by the articles of association for its dissolution.

2. winding up of a company
A voluntary winding up (liquidation) is a self-imposed wind-up and dissolution of a company that has been
approved by its shareholders. Such a decision will happen once a company’s leadership decides that the
company has no reason to continue operating. It is not ordered by a court (it is to be noted that such is neither
compulsory).

The purpose of a voluntary winding up is to terminate a company’s operations, wrap-up its financial affairs,
and dismantle its corporate structure in an orderly fashion, while paying back creditors according to their
assigned priority.

A voluntary winding up resolution is initiated by a company’s board of directors or ownership. Voluntary

winding ups are then enacted when a resolution to cease operations is approved by its shareholders.

Voluntary winding ups stand in contrast to involuntary winding ups or compulsory winding ups. A shareholder
vote allows the company to liquidate its assets to free up funds to pay debts. As such, voluntary winding ups
may happen due to poor operating conditions (operating at a loss or the market moving in another direction),
or due to business strategy considerations. Such reasoning may be to exact a degree of tax relief for shutting
down, or reorganizing and transferring assets to another company in exchange for an ownership or equity
stake in the acquiring company. Voluntary winding ups may also be approved because the liquidating company
was only meant to exist for a limited amount of time or for a specific purpose that has been fulfilled.

In addition, voluntary winding up may happen if a key member of an organization leaves the company, and the
shareholders decide not to continue operations.

o Voluntary winding up under Companies Act, 1956: position prior to enactment of

IBC, 2016

Prior to enactment of the Insolvency and Bankruptcy Code,2016, voluntary winding up was administered by
the provisions of The companies Act, 1956 as neither the code nor the relevant sections were in force. It is
note that though the proposed code did contain provisions for the voluntary winding up of a company under
the new companies Act,2013, it never came into force. The companies Act, 2013 came into force with
modification which subsequently omitted the relevant sections relating to voluntary winding up of a company.
Section 484 and 303 of the 1956 Act and 2013 Act respectively, dealt with voluntary winding up of a company.
Under 1956 Act, the procedure of voluntary liquidation was divided into two Categories- creditor’s voluntary
winding up and member’s voluntary winding up.

6
https://www.trcconsulting.org/blog/voluntary-liquidation-under-ibc-how-it-works, (Last visited on Sept.
02, 2021.)

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  Member’s voluntary winding up -

It is only possible in the case of solvent companies which are capable of paying their liabilities in full. The board
of directors make a declaration of solvency a company would be able pay debts within three years from the
date of commencement. Any false declaration will punishable by 6 months or fine up to Rs. 50000 or both. In
Shri Raja Mohan Manucha v. Lakshminath Saigal7, it was held that where the declaration of solvency is not
made the resolution for winding up and all subsequent proceedings will be null and void. Such a declaration
must be made within five weeks immediately preceding the date of passing of resolution for winding up of
company and be delivered to Registrar before that date. The declaration must be accompanied with auditor’s
report on balance sheet and profit and loss account as at latest practicable date.

In order to initiate an procedure of member’s winding up, there are two conditions that must be fulfilled:

a. A declaration as stated above must be made by the majority of directors, or by all of them if there are
only two directors. The declaration just specify that the company must be able to pay all its debts
within the stipulated time of the years. The declaration must be accompanied by a copy of the report
of auditors on Profit & Loss Account and Balance Sheet, and also a statement of assets and liabilities
up to the latest practicable date (Sec. 488); and
b. The company must pass an ordinary resolution (on expiry of fixed period as provided under articles of
association) or a special resolution (in every other cases) For winding up of a company. (Sec. 484)

The provisions relating to member's winding up of a company as given in the companies Act, 1956 are as
follows –

a. Power of the company to Appoint liquidator and the fixation of his remuneration by the general
meeting (Sec. 490);
b. Cessation of Board's power on appointment of liquidator except so far as may have been sanctioned
by the General Meeting, or the liquidator. (Sec. 491);
c. Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator by the
general meeting subject to an arrangement with the creditors. (Sec. 492);
d. Sending the notice of appointment to the office of registrar. (Sec. 493);
e. Power of liquidator to accept shares or like interest as a consideration for the sale of business of the
company provided special resolution has been passed to this effect. (Sec. 494);
f. Duty of the liquidator to call for the creditor’s meeting in case of Insolvency. (Sec. 495);
g. Duty of the liquidator to convene general meeting at the end of each year. (Sec. 496);
h. Liquidator's duty to make an account of winding up and lay the same before the final meeting. (Sec.
497)

The appointed liquidator has to take follow steps in case the company decide to wind up their affairs –

a. Call for the general meeting of members of the company and to lay before them the whole picture of
the accounts, the process of winding up, and the procedure of liquidation of properties.
b. The meeting is to called through advertisement in the newspaper circulating the area where the
regional office is located as well as in the official gazette specifying the time, place and object of the
meeting.
c. The liquidator shall send to, the Registrar and official Liquidator copy of account, within one
week of the meeting.
d. 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.

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5 (1963) 33 Comp. Cas. 719

9
 e. 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.

However, there are few exceptions to this mode of winding up. Not every company may be wound up by the
member’s voluntary winding up. Insolvent company is one such example. In order for the company to be
wound up by members, the company must be solvent at the time of commencement of winding up. The
directors must execute an declaration of solvency in that regard stating their assets and liabilities. Also, where
a company is a corporate trustee of a number of trusts and if one or more of these trusts are continuing, the
company can not be wound up by the members.

 Creditor’s voluntary Winding up –

Palmer’s company precedents contains the following statement,

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.” 8

Creditor’s voluntary winding up is initiated in the case of Insolvent companies. In this case, the declaration of
solvency is not filed by the members. In this case, it is required for the creditor’s meeting to be held along with
the meeting of members right from the beginning of the voluntary winding up process. The right to appoint
liquidator lies with the creditors And hence, the position dominant are held by creditors. In Pankaj Mehra v.
State Of Maharashtra, SC it was laid down that once a petition for winding up is presented it is not a necessary
concomitant that the winding up would follow. 9 This position was cleared in section 440(2) which reads the
court shall not make a winding up order on a petition presented to it under Sub-section (1), unless it is satisfied
that the voluntary winding up or winding up subject to the supervision of the Court cannot be continued with
due regard to the interests of the creditors or contributories or both. 10

The provisions in regard to creditor’s voluntary winding up as given under Companies Act,1956 are as follows –

a. The Board of Directors shall convene a meeting of creditors on the same day or the next day after the
meeting at which winding up resolution is to be proposed. Notice of meeting shall be sent by post to
the creditors simultaneously while sending notice to members. It shall also be advertised in the
Official Gazette and also in two newspapers circulating in the place of registered office. (Sec. 500);
b. A statement of position of the company and a list of creditors along with list of their claims shall be
placed before the meeting of creditors;
c. It shall be done at respective meetings of members and creditors. In case of difference, the nominee
of creditors shall be the liquidator. (Sec. 501);
d. The members and creditors in their respective meeting may nominate their liquidator. In case where
there is a difference between nomination, the person nominated by the creditors will be the
appointed liquidator. (Sec. 502);
e. A committee of inspection consisting of five members is to be appointed to supervise the work of
liquidator;
f. Fixation of remuneration of the liquidator by the creditors or the inspection committee. (Sec. 504);
g. Cessation of board’s power on appointment of liquidator. (Sec. 505).

However, it is to note that the above mentioned sections does not confer any right on any person to seek an
order that a company shall be wound up. What it does is confer the power on the court to issue an order of
winding up in appropriate cases. The remedy provided here is discretion of the court and can not be claimed as

8
Palmer’s company precedents, part 11, 1960 ed. at Pg. 25
9
2000 100 Comp. Cas 417
10
Sec. 440(2) of the companies Act, 1956

10
a matter of right. A company will not be wound up merely because it is unable to pay its debts so long as it can
be revived or resurrected by a scheme or arrangement or it still has prospects of coming back to life.

The remedy of winding up with reference to Section 433(e) of the 1956 Act, is an extreme remedy and not to
be invoked frequently. The machinery for winding up will not be allowed to be utilized merely as a means for
realizing debts due from a company. A winding up petition is not a legitimate means of seeking to enforce
payment of a debt which is bona fide disputed by a company. However, the court can hardly exercise any
discretion where the company is so hopelessly insolvent that there is absolutely no chance of resurrection.

o Effect of enactment of Insolvency and Bankruptcy Code, 2016

The enactment of Insolvency and Bankruptcy Code, 2016 had changed many facets of the company dealings.
One of the most significant change took place in the matters of winding of a company and the procedure
involving rehabilitation and recovery of a company. The code aimed to provide for faster and simpler
resolution of the company affairs. It also provides the creditors right to initiate insolvency resolution in case
the company makes default.

Some of the significant changes brought by the enactment of Insolvency and Bankruptcy Code, 2016 are –

a. Before the enactment of Insolvency and Bankruptcy Code, voluntary winding up of a company was
controlled by the companies Act, 1956. This is due to the fact that provisions under 2013 Act was
never notified. After the enactment of the code, the provisions were omitted from 1956 Act and well
as 2013 Act and the mode of winding was this dealt under the IBC code.
b. The former 1956 Act and 2013 Act contained 38 and 20 sections respectively, dealing with voluntary
winding up; however, under IBC, the provisions are contained under chapter V of part II of the IBC,
and sec. 35-53 of chapter III and VII.
c. The definition of ‘winding up’ was modified under sec. 2(94A) to mean winding up as under 2013 Act
or liquidation under IBC.
d. Sec. 270 'modes of winding up’ was deleted and substituted with 'winding up by tribunal’. 11
e. Section 304 of 2013 Act, that deals with the circumstances in which company may be wound up
voluntarily has been omitted by IBC, 2016 along with other sections relating to voluntarily winding up
under the 2013 Act.
f. the MCA issued Companies (Transfer of Pending Proceeding) Rules, 2016, for transfer of pending
legal proceedings from High Court To National Company Law Tribunal bench.
g. Another key distinction made by the enactment of IBC, 2016 was the elimination of classification of
voluntary winding up given under 1956 Act.
h. In terms of Section 59 of the IBC, only a corporate person is allowed to initiate voluntary liquidation
process, which has not committed any default. Default here includes those debts that has become
due and payable.

o Winding up under Insolvency and Bankruptcy Code, 2016: position subsequent

Voluntary winding up of a company under the provisions of IBC, 2016 has been dealt in chapter V which
contains only one section namely, sec. 59. The section mentioned deals with voluntary winding up of a
corporate person. The section exhaustively provides for the provision and procedures that are to be employed
while under taking the voluntary winding up process.

11
Subs. By Act 31 of 2016. And eleventh sch. Para 9 for sec. 270.

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The steps that are to be taken in the process of voluntary winding up are as follows –

a. Declaration or announcement of solvency by board of directors or elected members

The company or the management on behalf of the company has to make the declaration of solvency
in the form of affidavit conforming following –

i. That company has not default in paying any debts.

ii. That the company is solvent in its credit standing and can pay the debts in full by
liquidating the assets under IBC, ,2016.
iii. That by liquidating the company is not intending to defraud anyone.

The Statement of declaration shall contain the corporate body’s debt status along side with the
Annual financial statements and the report of operations of the company for the preceding two
years.

The Declaration of the solvency under voluntary winding up regulations should be filed in form GNL
2 with the registrar of the company.

b. Summon a board meeting

The company has to summon a board meeting to discuss and decide –

i. Authorising the voluntary liquidation of the company under IBC.

ii. Appointment of liquidator
iii. Fixing the day, date and time for the company’s general meeting and issue EGM
notice that contains the proposed resolutions and the clarifying statement.

c. Arranging the general meeting of shareholders

The company is to arrange the general meeting of shareholders within 4 weeks of declaration of
solvency to pass the resolutions herein under mentioned.

i. Ordinary resolution for the liquidation of the company where the period fixed
has passed or, the event has passed upon which the company is to liquidate as
mentioned in articles of association, or, special resolution in every other case of
voluntary winding up under IBC.
ii. Resolution for electing an liquidator for the procedure of voluntary winding up
of a company.

Where the company owe debt, a resolution has to be passed by the creditors who hold 2/3 rd of the
balance due, within 7 days duration of the decision.

d. Filing with the registrar of company and IBBI

Company’s liquidator has to file the voluntary liquidation resolution to the registrar of companies
and IBBI. Subject to the approval of creditors, the procedure of liquidation has deem to be
commenced in the date of passing of resolution.

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Once the members in general meeting passes the special resolution and appoints the liquidator, all
the power of the boards of directors, key managerial personnel and partners of company debtor
comes to end and are vested into the role of liquidator.

e. Liquidator takes charge of the company

The liquidator takes charge of the company and moves to take action for the furtherance of
liquidation process. These actions include –

i. Realisation of assets of the company;

ii. Settlement of understanding dues;
iii. Distribution of proceeds to the stakeholders.

f. Make public announcement

The company liquidator is obliged to make a public announcement within 5 days from his date of
appointment in ‘Form A of Schedule I’, calling shareholders to present their claims in 30 days from
the commencement date of the liquidation. Besides, the liquidator has to verify all claims, within 30
days from the last date of receipt of claims, and choose to either accept or refuse the requests.

g. Preliminary reports and statements

The liquidator needs to submit a preliminary report addressed to the company within 45 days of the
commencement of the winding up of the company stating –

i. The capital structure of the corporate body,

ii. The estimation of the assets and liabilities of the company at the date of
commencement of the winding up, and
iii. Suggested of action to carry out the liquidation under IBC.

h. Opening a bank account

The liquidator is bound to open a bank account in the listed bank that is to be followed by the words
‘in voluntary liquidation' for getting all the money’s due and realise liquidation cost.

i. No objection certificate from tax authorities

The liquidator has to get a No-Objection Certificate/Letter from appropriate Tax authorities of the
area where the company’s registered office is located.

j. Realisation of the company’s assets

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The liquidator is to sale assets, recover money due to corporate persons, and realise uncalled capital
and unpaid capital contribution. The liquidator is under obligation to maximize the value of the
shareholders.

The Monet so obtained through the process is to be deposited into the account made under the
company’s name.

k. Distribution and supply

The money so obtained and ascertain shall be distributed to the shareholders within 6 months from
the money’s receipt after deducting all liquidation cost.

l. Submission of final report

The liquidator, after the process of winding up completes, has to submit final report to the corporate
body along with application to the National Corporate Law Tribunal (NCLT) for the dissolution of
corporate body.

m. Submission of NCLT order

The order of dissolution shall be send to the registrar of the companies, where the company is
officially registered.

3. Conclusion

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References

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