Professional Documents
Culture Documents
Winding Up Under Company Act & IBC
Winding Up Under Company Act & IBC
Winding Up Under Company Act & IBC
An individual (for convenience sake called “XY”) lends his fleet of trucks to a
Company (for convenience sake called “AB”) used for transporting goods to and
fro from the factory of AB; despite repeated demands AB fails to pay to XY the
accumulating dues of Rs.3,50,000/- payable for the fleet of trucks lent to AB with
interest accrued thereon.
First, let us understand what winding up means. Earlier, neither the Companies
Act, 1956 nor the Companies Act (Second Amendment) Act 2002 defined the term
“winding up”. Under the Halsburys Laws of England, winding-up is defined as a
proceeding by means of which the dissolution of a company is brought about and
in the course of which its assets are collected and realized: and applied in payment
of its debts; and when these are satisfied, the remaining amount is applied for
returning to its members the sums which they have contributed to the company in
accordance with Articles of the Company. In the Indian context, definition of
“winding up” was introduced by the Indian Companies Act, 2013 whereby Section
2(94A) was inserted which stated that it means “winding up under this Act or
liquidation under the Insolvency And Bankruptcy Code, 2016, as applicable”.
In the year 2016, the Insolvency and Bankruptcy Code, 2016 (referred to as “the
Code”) came into effect by which the Parliament sought to consolidate a single
law for insolvency and bankruptcy in India. The Code basically provides for a
mechanism, within a time-bound manner, to deal with and resolve the non-
payment of debt to various debtors in a time bound manner by utilizing the value
earned from the sale of its assets, at the same time balancing the interest of all the
stakeholders.
With the coming into effect of the Code, it brought about certain changes in the
laws relating to winding up of Companies: -
(i) Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was repealed
– this Act applied only to Industrial Companies whereas the amendments
introduced by the Code brought all kinds of Companies, partnership firms,
proprietorship firms within its fold.
(1) Section 270 which dealt with modes of winding up was deleted.
(2) Section 271 of the Act was amended to exclude the term “unable to pay its
debts” as a ground available and specified following 5 grounds available, for
persons authorized by Section 272, to invoke the winding up jurisdiction of the
National Company Law Tribunal (“NCLT” for short) under the Companies Act:
(3) Section 304 and related sections (304-323) which dealt with voluntary winding-
up were deleted.
Part II of the Code brings all kinds of Companies, partnership firms, proprietorship
firms, or any other person incorporated with limited liability under any law, who
have defaulted to pay their debt, within its fold – minimum amount of debt payable
being Rs.1 Lakh. A combined reading of definition of the words “Corporate
debtor”, “Corporate person” and “person” under Sections 3(8), Section 3(7) and
3(23) of the Code makes it clear that apart from a Company registered under the
Companies Act, the Code also applies to an individual, a Hindu Undivided Family,
a trust, a partnership, a limited liability partnership and any other entity established
under a statute.
A creditor, i.e. a person to whom a debt is owed, can invoke provisions contained
in Part II Chapter II of the Code. Such a creditor is broadly classified into 2
categories:
(a) a “Financial Creditor” – a person to whom a financial debt is owed and includes
a person to whom such debt has been legally assigned or transferred to [Section
5(7)] – banks and financial institutions come within its ambit.
Under Section 6 of the Code, a financial creditor and an operational creditor can
file an application before the NCLT seeking initiation of CIRP. The process to be
followed in respect of a financial creditor and an operational creditor are different
and are specified under Section 7 and 8-9 respectively.
(a) the insolvency resolution process costs and the liquidation costs to be paid in
full;
(b)the following debts shall rank equally between and among the following:—
(c) wages and any unpaid dues owed to employees other than workmen for the
period of twelve months preceding the liquidation commencement date;
(e) following dues shall rank equally between and among the following:—
any amount due to the Central Government and the State Government
including the amount to be received on account of the Consolidated Fund of
India and the Consolidated Fund of a State, if any, in respect of the whole or
any part of the period of two years preceding the liquidation commencement
date;
debts owed to a secured creditor for any amount unpaid following the
enforcement of security interest;
(f) any remaining debts and dues;
Thus bringing an end to the entire process and resolution of a debt ridden corporate
debtor.