4/22/23, 5:04 PM Corporate Breakdown: Winding up, Voluntarily Winding up, Liquidation and Dissolution under Companies Act

Subject-Wise Law Notes

Corporate Breakdown: Winding Up, Voluntarily Winding Up, Liquidation And Dissolution Under Companies
Act

Corporate Breakdown: Winding up, Voluntarily

Winding up, Liquidation and Dissolution under
Companies Act
Corporate Law Subject-Wise Law Notes

LawBhoomi ● January 10, 2021

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Winding up is a process in which life of a company is brought to end and property

is utilized for the benefit of members and creditors. It is a means by which
dissolution of a company is brought about. It involves permanently shutting down
of business of the company. Winding up of a company can takes place due to
various reasons:

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If the company has ceased to carry on its enterprise

there may be a deadlock in the management (Barron v Potter)
due to Breach of Statutory Provisions
Shareholders Dispute (Oppression and mismanagement)
Corporation is acting outside its scope of business.

Winding up and Dissolution sometimes can be used interchangeably but the

difference involved is in the procedure to be followed. Even after commencement
of winding up, the ownership of property remains with the company until and
unless dissolution order is passed. On dissolution company ceases to exist its legal
status is withdrawn. Winding up may proceed without the intervention of court, but
dissolution can only take place by the order of court. Creditors can prove their
debts in winding up, proving of debts is not possible in dissolution. Liquidation on
other hand is a stage in process of winding up. It involves disposal of asset
proceeds being utilized in repayment of debts and surplus if remaining will be
distributed among the members of the company.

Winding up precede Dissolution, when winding up process is initiated the life of

company remains intact, then in next stage liquidator is appointed to manage the
property and assets of the company. It collects claims of the creditors due to the
company. Liquidator is authorized to realize assets of the company and pay off
debts from the proceeds received. In the end, court now NCLT passes Dissolution
order due to which separate legal status of company comes to an end. The name of
the company would strike off from the registrar of companies after dissolution
order is passed by the Tribunal.

Contents
1. Who may file petition for Winding up?
2. Effect of Winding up order
3. Modes of Winding Up
4. Grounds for Winding Up by the Tribunal
5. Winding up by the Tribunal
6. Voluntary winding up
7. Appointment of Liquidator
8. Powers and Functions of Liquidator
9. Conclusion-

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Who may file petition for Winding up?

According to Section 272 of companies act,2013 a petition of winding up shall be
presented to the tribunal by-

The company
Any contributory or contributories
The registrar
Any person on behalf of the government
In a case underneath clause (b) of section 271[1], by the central government
or a state government.

Effect of Winding up order

When a petition is filed by any person eligible under section 272, the tribunal after
studying the application and analyzing various facts can confirm or set aside the
case. On confirming the tribunal will appoint a liquidator for carrying on further
procedures under the process. When the winding up order has been passed or
liquidator has been appointed, no suit or other legal proceeding shall be
commenced, or if pending shall be proceeded with, by or against the company,
expect with the leave of tribunal and subject to such terms as the tribunal may
impose.

In S.V. Kondaskar, Official Liquidator v. V.M. Deshpande, Itd & Anr [SC][2], the only
question which require consideration of supreme court in this case was, whether it
is necessary for income tax officer to obtain leave of the court, when he wants to
reappraise the company for eluding income in respect of past years. The court in its
judgement recited that it is necessary to shield the interest of company during
pending winding up petition. The court without any delay dismissed the case with
costs. No leave of winding up of court was granted to income tax officer.

Modes of Winding Up
Winding up by the Tribunal
Voluntary Winding up

Grounds for Winding Up by the Tribunal

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According to the old act Companies act,1956[3]. A company may be wound up by

the court now (NCLT), If-

The company has passed a special resolution of its winding up by the court
order
Default is made in filling monetary statements with the registrar of agencies
or   maintaining statutory meeting
It does not commence enterprise within a year from its incorporation or
suspends whole business for complete year
it is not able to pay its debts
The court is of the opinion that it is miles just and equitable that it ought to
be wound   up.

According to the new act Companies act,2013[4]. A company can be wound

up by the tribunal if-

The company is not able to pay debts

The organization by way of special resolution has decided, it must be wound
up by means of the tribunal
The corporation has acted against the sovereignty and integrity of India, the
safety of the state, pleasant relations with foreign states, public order,
decency, or morality
If on the application made through the registrar or any other individual legal
through the principal government by way of notification below this act, the
tribunal is of the opinion that affairs of the company are conducted in a
fraudulent manner or the employer changed into shaped for fraudulent and
illegal purpose or the character concerned inside the formation or control of
its affairs are responsible of fraud, misfeasance, or misconduct in connection
therewith and that it’s far right that the agency be wound up.
The corporation has made a default in filling with the registrar its financial
statements and returns for straight away preceding 5 consecutive financial
years
The court is of the opinion that it is just and equitable that it needs to be
wound up.

Consistent with the latest amendments, Insolvency, and bankruptcy code,2016 has
substituted segment 271 of the organizations act,2013. The subsequent grounds
were eliminated from segment 271:

The enterprise is not able to pay debts

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The tribunal has ordered winding up of the organization underneath

bankruptcy XIX

Winding up by the Tribunal

Analysis on the grounds of commencement of business
If an employer has failed to commence its business inside twelve months of
its incorporation or
An agency is not always carrying on any enterprise or operation for a
duration of right now preceding financial years
The subscribers to the memorandum have not paid the subscription which
they had undertaken to pay on the time of incorporation of an organization
and an assertion to this impact has now not been filed inside a hundred and
eighty days of its incorporation.
Just and Equitable Clause
Where whole object of the company was Fraudulent[5]
Where the substratum of the company has gone[6]. The substratum of the
company is deemed to have gone where:

               (1) The difficulty depends on business enterprise is gone, Or

              (2) The item for which it turned into fashioned has failed, or

              (3) it is miles impossible to carry at the business of the organization except
at a loss,

              (4) the existing and feasible assets are inadequate to meet the existing
liabilities of

 Agency.

Where the main object of the company for which it was incorporated has
been successfully completed.
Where there has been mismanagement and misapplication of funds by the
directors of private company.[7]

Inability to Pay Debts

According to section 433(e) of the companies act 1956, if a company is unable to

pay its debts, it can be wound up by the court. After the substitution by Insolvency
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and bankruptcy code,2016 this point has been deleted. It is not necessary if the
assets fall short of liabilities, the company is not able to pay debts. They can even
satisfy the demands of its creditors. The court after proper analysis of the
company’s financial statements concluded that they are not able to pay its debts,
winding up order would have passed. The inability to pay debts arise under
following grounds-

when the corporation fails to make fee of debt within three weeks without
delay                           
Preceding the day when amount was demanded             
where execution issued on a decree or order of court
wherein its miles proved to the pride of court that the organization is not
Capable of repaying the amount back.

A Petition for winding up due to inability to pay debts must disclose all relevant
information regarding debts due, it must also disclose whether the assets are
sufficient to pay off the liabilities. If the debt is subject to dispute, court cannot
pass winding up order. In K. Appa rao v. Sarkar Chemicals (P) Ltd, the Andhra
Pradesh high court held that if the company has proper defense or in good faith
there is a dispute of its obligations to discharge the debts and liabilities, the court
may not pass winding up order.

Voluntary winding up

Voluntary winding up is a process of winding up in which company wounds up on

its own motion. Earlier Voluntary winding up was dealt under section 304-323 of
the companies act, 2013. With the introduction of Insolvency and bankruptcy
code,2016 it promises to change all.[8]

Approvals must be taken from registrar of companies and other authorities that no
dues are outstanding against the company. In AIR FRANCE GROUND HANDLING
PVT.LTD, The official liquidator has filed petition on behalf of the company for
voluntary winding up. It states official liquidator has received no objections from
the ROC and other authorities. An affidavit is filed by the voluntary liquidator of
company to official liquidator that the company has no outstanding dues. The
company is wound up according to provisions of the act and stand dissolved with
effect from the date of filing petition.

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According to companies act,2013 there are two kinds of voluntary winding

up-

1. Members Voluntary Winding Up[9]–

It takes place only when the company is solvent i.e., they can pay its debts and
creditors approval is not required. A declaration of solvency is filed by company in
this case.

A declaration of solvency made in members voluntary winding up has no effect

unless-

It is filed within 5 weeks immediately preceding the date of passing of

resolution by the company and is submitted to registrar for registration
before due date.
The Declaration must accompany a statement of assets and liabilities of the
company and an auditor’s report on the financial affairs of the company for
the period commencing from the date up to which the last date such account
was prepared and ending the latest date immediately before making of
declaration.
If a default is made in filling declaration, directors on having no reasonable
grounds for proving that the company be liable to pay off its debts, shall be
punishable with imprisonment for a term which may extend to 6 months or
fine which may extend to 5000, or with both.
If the provisions are not complied in case of Members voluntary winding up,
it will result in winding up as creditors voluntary winding up. In SHAILENDRA
KANH BEHARILAL vs SURAT DYES on 24 august,2004. The court came up to a
conclusion that provisions of the act are not complied with. Because of failure
to comply with mandatory requirements, the members voluntary winding up
will end up in winding up as a creditors voluntary winding up.

Creditors Voluntary Winding Up-

This type of Winding up cannot takes place without the approval of creditors. This
kind of winding up comes in picture when company has defaulted in filling
declaration of solvency. A meeting of members and creditors simultaneously must
be called and conducted after passing of resolution of voluntary liquidation in
board meeting, for taking approval on the same. The members must approve the
scheme by passing special resolution. Then the creditors meeting will be held for
their approval. The creditors will proceed with appointing a liquidator of their
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choice who will take charge of the winding up process. The liquidator will take in
control of all the assets of the company and will settle the claims of the creditors.

According to recent amendments, Section 59 of Insolvency and bankruptcy

code,2016 governs Voluntary winding up. The procedure is as follows-

Board meeting is conducted in which voluntary winding up is proposed.

A declaration is filed by majority of directors, that either company has no
debts, or they will be able to pay debts in full by realizing its assets. The
company does not aim to defraud any person along with the declaration,
following attachments should be filed with ROC –

1. Audited financial statements and record of business operations of the company

for previous 2 years or for period since its incorporation whichever is later.

2. A report of valuation of assets of the company, prepared by a registered valuer.

Within 4 weeks of passing of declaration by the directors, shareholders must

approve the proposal scheme of voluntary winding up by passing a special
resolution.
Any debt is due to any person by the company, creditors holding 2/3rd in
value of debt must approve such resolution. A voluntary winding up for a
company deemed to begin on the date when resolution is passed.

Appointment of Liquidator

Tribunal while passing the order of winding up, shall appoint an official liquidator
or liquidator from the panel maintained under sub section (2) as the company
liquidator [section 275(1)]. Terms and conditions relating to the appointment of the
liquidator, fee to be paid will be specified by the tribunal. The liquidator must file a
declaration in prescribed form within 7 days of its appointment disclosing lack of
independence and conflict of interest, if any.

Powers and Functions of Liquidator

Section 290 of companies act,2013 lays down power and duties of the liquidator

They are-

To sell whole of the undertaking of a company as a going concern.

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To obtain any professional assistance or appoint any professional to

discharge its duties for protection of assets of the company or to defend their
rights.
To raise any money required on the security of assets of the company.
To inspect any records or returns of the company, filed with registrar or any
other authority.
To invite and settle claims of creditors and employees.
To carry on business for the beneficial winding up of the company.
To do all acts in the name and behalf of the company.

Liquidator has also got powers to access the information systems, for proof of the
claims made by creditors. To gather information regarding debtors’ financial
position and its operations. This information can be gathered from the database
maintained by the board, agency of government and even from the registrar of
companies. If creditors want any details regarding the financial affairs of the
debtor, the liquidator is bound to provide details within seven days of receiving
request.

Conclusion-

Corporate collapse or breakdown can occur due to various reasons like disputes,
inability to pay debts etc. It can take place by following different methods like
winding up, dissolution, liquidation and even striking off by registrar of companies.
The proper procedure must be followed according to the prescribed provisions of
the act and by the prior approval of authorities. Proper advertisements should be
issued both at the time of filling petition and after the judgement is pronounced by
the honorable court. Every person whose rights will get affected by the decision
must be priorly informed and suggestions must be taken into consideration.

[1] Section 271 of companies act, 2013 states the circumstances in which a
company may be wound up by the tribunal. Clause (b) includes winding up order
can be given by the tribunal if company acted against the sovereignty and integrity
of India.

[2] AIR 1972 SC 878; (1972) 42 Comp Cas 168 SC; (1972) 83 ITR 685 SC; (1972) 1
SCC 438; (1972) 2 SCR 965.

[3]According to Section 433 of companies act,1956

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