Unit-4 Winding Up of a Company

Winding up is a process by means of which the affairs of a company are wound up in a manner to dissolve the company and put an end to the life of a
Company. In the process of winding up, the company’s assets and properties are administered for the benefit of the members and creditors of the Company.
The administrator, called liquidator, realises its assets, pays its debts and finally distributes the surplus, if any, among the members/creditors, in accordance
with their right as provided in the article of the Company. In other words, winding up is a legal process to dissolve the business of a company. The term
“Winding Up” and “liquidation” are used interchangeably. Winding Up involves ending all business affairs and includes the closure of the company (including
liquidation or dissolution), whilst liquidation is specifically about selling off company assets in order to pay creditors and then closing the company. However,
there are various means of winding up, i.e., by way of- members’ voluntary winding up, creditors’ winding up, winding up by the tribunal etc.

Modes of Winding Up The Act, 1956 provides for the following three types of winding up:

1)Winding up by the order of the Tribunal or Compulsory winding up-(Sec 433 to Sec 483)

2)Voluntary winding up; (Sec 484 to Sec 520)

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).
Voluntary Winding Up:

A company may be wound up voluntarily in the following two ways, as discussed below:

By Ordinary Resolution

An organization might be twisted/wound up wilfully by passing an ordinary resolution when the period, assuming any, fixed for the span of the organization
by the articles, has lapsed. Also, when the occasion, assuming any, has happened, on the event of which the articles give that the organization is to be
broken down, the organization may, by passing a normal goal with that impact, start its wilful winding up.

By Special Resolution

A company may at any time pass a special resolution providing that the company be wound up voluntarily. Winding Up commences at the time when the
resolution is passed. Within fourteen days of the passing of the resolution, the company shall give notice of the resolution by advertisement in the Official
Gazette and also in some newspaper circulating in the district of the registered office of the company. The corporate state and powers of the company shall
continue until the company is dissolved, but it shall stop its business, except so far as may be necessary for beneficial winding up.

Voluntary Winding Up is of two kinds:

1.Members’ Voluntary Winding Up;

2.Creditor’s Voluntary Winding Up

If a Declaration of Solvency is made in accordance with the provisions of the Act, it will be a Members’ Voluntary Winding Up and if it is not made, it
becomes the Creditors’ Voluntary Winding Up. The declaration has to be made by a majority of the directors at the meeting of the board and verified by an
affidavit. They have to declare that they have made a full inquiry into the affairs of the company and have formed the opinion that the company has no
debts or that it will be able to pay its debts in full within a certain period, not exceeding three years, from the commencement of winding up.

The declaration, to be effective, must be made within the five weeks immediately before the date of the resolution and should be delivered to the Registrar
for registration before that date. It should also be accompanied by a copy of the report of the auditors on the profit and loss account and the balance sheet
of the company prepared up to the date of the declaration and should embody a statement of the company’s assets and liabilities as at that date.
There is a penalty for making the declarations without having reasonable grounds for the opinion that the company will be able to pay its debts within the
specified period. If the company fails to pay the debts within that period, it will be presumed that reasonable grounds for making the declaration did not
exist. The liquidator should forthwith call a meeting of the creditors because the winding up has then to proceed as if it were Creditors’ Winding Up.

With the passing of the Insolvency and Bankruptcy Code, 2016, a company can now be wound up under the Companies Act, 2013 only by the tribunal. The
concept of voluntary winding up which was earlier available has now been removed. However, the IBC, 2016 provides for voluntary liquidation of
companies. Under the Insolvency and Bankruptcy Code, 2016 a company is eligible to file for voluntary liquidation only when it has no debts or future
promises to pay the full debt from the proceeds of the assets sold under the liquidation process. This is to ensure, that the liquidation process is not to
defraud any of the creditors. But, when a special resolution is passed for winding up of the company by the tribunal then an application may be made by
the company to the tribunal under the Companies Act, 2013.5 The IBC, 2016 has offered an easier exit route to companies opting for voluntary liquidation
as compared to the one laid down by the Companies Act, 2013. The previous process of voluntary liquidation given by the Companies, Act 20013 was very
complex and lengthy and it would the process would go on up to ten years but the procedure laid down by the IBC, 2016 is very simple and short. It typically
comprises with the board of directors gaining approval of the shareholders and appointing a liquidator. If the books of the company show debts, then
two-thirds creditors by value of the debt need to approve the resolution passed by the shareholders. After all approvals necessary are received, it must be
filed with the registrar of companies and the Insolvency and Bankruptcy Board of India. Ideally the process finishes within a year.

Liquidator under Companies Act, 2013

A liquidator is an officer who is particularly appointed to wind up the affairs of a company when it decides to end its operations, typically when it goes
bankrupt. He manages the entire liquidation process. Generally, a liquidator is appointed by the court or by the shareholders of a company or by unsecured
creditors. The core variances between a liquidator and an official receiver are not their roles but the insolvency process which they oversee and manage. A
liquidator is appointed in a MVL (members voluntarily winding up )and CVL (creditors voluntarily winding up) by the directors, which enables the directors to
hold a degree of control over the process. An official receiver is appointed by the court as a liquidator when a winding-up order has been passed as a
consequence of a creditor(s) forcing the company into compulsory liquidation.

Company liquidator as defined by the Companies Act, 2013

1) means a person appointed by the Tribunal as the Company Liquidator in accordance with the provisions of section 275 for the winding up of a
company under this Act.
 2) A liquidator is a person with the legal authority to act on behalf of a company in various capacities; however, he is only an additional person helping
the company in the winding up process.
3) As the liquidator is appointed, he/she takes over the control of the company‘s assets. He sells the assets of the company to fetch maximum price
and uses fund realised from such sale is used to pay the company‘s debts and lastly if anything remains he distributes it among the members in
agreement with their rights and share.

Appointment of Liquidator

Section 275 of the Companies Act, 2013 is concerned with the appointment of liquidators to manage the affairs of the company on winding up or to manage
its affairs in the course of hearing the petition for winding up. This Section adopts the shift in policy in the amended Sections 448 and 450 of the 1956 Act in
providing for the appointment of independent professionals as liquidators of the company.

The Tribunal will appoint the Official Liquidator or liquidator from a panel maintained by the Central Government for this purpose. The designation accorded
to the liquidator appointed is "Company Liquidator".

A liquidator appointed pending winding up orders passed is a "Provisional Liquidator". A provisional liquidator will be appointed only from the panel of
liquidators which contains names of professionals–chartered accountants, lawyers, company secretaries or other professionals which is constituted by the
Central Government.

Powers and Duties of Liquidator

Section 290 of the 2013 Act provides for the powers and duties of company liquidator in winding up by the tribunal. The company liquidator can exercise
certain powers subject to the overall control of the tribunal. The tribunal may require the company liquidator to perform any other duty. The powers of the
company liquidator as specified in Section 290(1) of the Act. Following are some of the powers of a liquidator –

Powers:

1. "to carry on the business of the company so far as may be necessary for the beneficial winding up of the company";
2. "to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer such
property to any person or body corporate, or to sell the same in parcels";

3. "to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this
Act";

4. "to inspect the records and returns of the company on the files of the Registrar or any other authority";

5. "to draw, accept, make and endorse any negotiable instruments including cheque, bill of exchange, hundi or promissory note in the name and on behalf of
the company, with the same effect with respect to the liability of the company as if such instruments had been drawn, accepted, made or endorsed by or on
behalf of the company in the course of its business";

6. "to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for
obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company, and in all such
cases, the money due shall, for the purpose of enabling the Company Liquidator to take out the letters of administration or recover the money, be deemed
to be due to the Company Liquidator himself";

7. "to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond or instrument as may be
necessary,— (i) for winding up of the company;

a. for distribution of assets;

b. in discharge of his duties and obligations and functions as Company Liquidator";

When an individual is appointed as the liquidator of a company, he is expected to perform certain duties which are laid down in various provisions of law.

Following are the duties of a liquidator:

1. The first duty which a liquidator has to fulfil is that of providing notice of his appointment. It is clearly stated under Section 178 (b) of the Income tax act
that an individual who is appointed as a liquidator must within thirty days of him becoming such liquidator, give notice to the Assessing Officer sanctioned to
evaluate the revenue of the company of his appointment.

2. It is the duty of the liquidator to act equitably and impartially the whole winding-up procedure in accordance with the provisions of law and the directions
of the tribunal. It is also his duty to make himself thoroughly acquainted with the state of affairs of the company, and also about the technical hurdles that
the company is facing.

3. The liquidator must bring into his custody and control the property of the company.

4. He must submit a preliminary report to the tribunal within sixty days from the winding up order.

5. He must within 30 days from date of direction from the tribunal shall call a meeting of the creditor and other contributories in order to determine the
persons who are to be made the members of the advisory committee, if such committee is to be appointed. And, he must chair this committee.

6. He must keep all sums received by him on behalf of the company into some scheduled bank, or in accordance to the directions of the tribunal.

7. He must maintain proper books in the prescribed manner in which he must make entries or minutes to be made of the proceedings of meetings and of
other such matters as may be prescribed. The books may be inspected by any creditor or contributory or their agents subject to control of the tribunal.

8. A liquidator owes a duty to act with care and efficiency. He has a duty to exercise his particular professional skills to complete the winding up process and
he shall incur liability if he fails to show the required degree of care and skill which, by accepting the office. Therefore, a high standard of care and diligence
is required of a liquidator.

9. As the liquidator is acquainted with all the state of affairs of the company and has all the records and accounts of the company, it is his duty to maintain all
these records and accounts safely and not disclose this information to any person not authorized to access them or has legitimate reason to gain access to
them.

Removal and Resignation of Liquidator

The Companies Act, 2013, under Section 276 provides for the grounds for Removal and Replacement of Liquidator. Section 276 of Companies Act, 2013,
states the following grounds:

1.Misconduct
2.Fraud and Misfeasance

3.Failure in exercising Due Care and Diligence in performing his Powers and Duties

4.Professional Incompetence

5.Inability to act as Company Liquidator or Provisional Liquidator

6.Lack of Independence Conflict of Interest during his/her term of Appointment which would justify Removal

Different methods/types of removal:

1.Removal by Resignation

Under the Companies Act, 2013, the Company Liquidator can be removed if he/she resigns from the position. To resign the Company Liquidator can
summon up a meeting and submit his/her resignation in the meeting. The Tribunal can transfer the assigned work of the earlier Liquidator to another
Company liquidator.

2.Removal by Creditors

The creditors when thinks that the Company liquidator is guilty of any of the grounds mentioned in Section 276 of the Companies Act, 2013, can go for
the Removal and Replacement of Liquidator. In case of Removal of Company Liquidator, the Tribunal can assign the work of earlier Liquidator to another
Company Liquidator.

3.Removal by Death

The Death of Company Liquidator will vacate the office of the Liquidator in the Company. The Tribunal in case of death of Company Liquidator can transfer
the work assigned to him/her to another Company Liquidator.

4.Removal by Central Government

According to Section 275 of Companies Act, 2013, the Central Government can appoint a Company Liquidator. The Central Government on account of any
of grounds mentioned in Section 276 of the Companies Act, 2013, can remove the Company Liquidator. The Central Government before the Removal of
Liquidator should provide him/her a reasonable opportunity of being heard.
There are some key considerations which should be looked during Removal and Replacement of Liquidator:

a.There should be reasonable cause shown for the Removal and Replacement of Liquidator.

b.The reasons given should be recorded in writing for the Removal and Replacement of Liquidator.

c.If the Tribunal thinks the Company Liquidator has caused loss to the Company by conducting fraud or misfeasance or failure to exercise due care and
diligence while performing his powers and duties, the Tribunal can recover the loss or damages from the Company Liquidator.

d.The Tribunal can pass orders as it may think fit for the recovery of loss done by the Company Liquidator.

e.The Tribunal should give a reasonable opportunity of being heard to the Company Liquidator.

f.The Removal and Replacement of Liquidator should be done with properly written and recorded reasons for such Removal and Replacement of Liquidator.
Effect of winding up order - Stay of suits
What is Effect of winding up order What is stay of suits, etc., on winding up order What is the Jurisdiction of Tribunal Section 278, 279 and 280 of Indian
Companies Act 2013.

Section 278 of Indian Companies Act 2013 "Effect of winding up order":

The order for the winding up of a company shall operate in favour of all the creditors and all contributories of the company as if it had been made out on the
joint petition of creditors and contributories.

Section 279 of Indian Companies Act 2013 "Stay of suits, etc., on winding up order"

(1) When a winding up order has been passed or a provisional liquidator has been appointed, no suit or other legal proceeding shall be commenced, or
if pending at the date of the winding up order, shall be proceeded with, by or against the company except with the leave of tribunal.
(2) Nothing in sub-section (1) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court.

Section 280 of Indian Companies Act 2013 "Jurisdiction of Tribunal"

The Tribunal shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of, -

(a) any suit or proceeding by or against the company;

(b) any claim made by or against the company, including claims by or against any of its branches in India;

(c) any application made under section 233;

(d) any scheme submitted under section 262;

(e) any question of priorities or any other question whatsoever, whether of law or facts, including those relating to assets, business, actions, rights,
entitlements, privileges, benefits, duties, responsibilities, obligations or in any matter arising out of, or in relation to winding up of the company, whether
such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made or
such scheme has been submitted, or is submitted, before or after the order for the winding up of the company is made.
Consequences of Winding Up:

CONSEQUENCES OF WINDING UP ORDER:

According to section 277 the major consequence of winding up of a company is intimation to company liquidator, provisional liquidator and registrar. When
the Tribunal makes an order for appointment of provisional liquidator or an order for winding up of a company then within 7 days it has to intimate this fact
to the company liquidator, provisional liquidator and registrar. Then the registrar has to make an endorsement in his records relating to the company to that
effect and notify the fact in the Official Gazette.

Firstly, in the case of a listed company the stock exchange where securities of the company were being dealt with has also to be informed.

Secondly, winding up an order of a company is Deemed to be a notice of this charge to the officers and employees of the company except when the business
is continued.

Thirdly, the order operates in favour of all the creditors and all the contributors of the company. Lastly, no suit or legal proceeding can be commenced
against the company except with the leave of the Tribunal and subject to such terms as a Tribunal may impose. Similarly pending suits cannot be for the
proceeding except with similar leave.

In the case of National Transport v. General Co Ltd (1990) court held that directors exercising the power of issuing further capital was held to be a nullity so
that the allottees of such shares could not be regarded as contributors.

1) The Company Liquidator shall maintain proper and regular books of account including accounts of receipts and payments made by him in such form and
manner as may be prescribed.

(2) The Company Liquidator shall, at such times as may be prescribed but not less than twice in each year during his tenure of office, present to the Tribunal
an account of the receipts and payments as such liquidator in the prescribed form in duplicate, which shall be verified by a declaration in such form and
manner as may be prescribed.
(3) The Tribunal shall cause the accounts to be audited in such manner as it thinks fit, and for the purpose of the audit, the Company Liquidator shall furnish
to the Tribunal with such vouchers and information as the Tribunal may require, and the Tribunal may, at any time, require the production of, and inspect,
any books of account kept by the Company Liquidator.

(4) When the accounts of the company have been audited, one copy thereof shall be filed by the Company Liquidator with the Tribunal, and the other copy
shall be delivered to the Registrar which shall be open to inspection by any creditor, contributory or person interested.

(5) Where an account referred to in sub-section (4) relates to a Government company , the Company Liquidator shall forward a copy thereof—

(a) to the Central Government, if that Government is a member of the Government company; or

(b) to any State Government, if that Government is a member of the Government company; or

(c) to the Central Government and any State Government, if both the Governments are members of the Government company.

(6) The Company Liquidator shall cause the accounts when audited, or a summary thereof, to be printed, and shall send a printed copy of the accounts or
summary thereof by post to every creditor and every contributory:

Provided that the Tribunal may dispense with the compliance of the provisions of this sub-section in any case it deems fit.