Winding Up

“Winding up is a means by which the dissolution of a company is brought about and its assets
realised and applied in payment of its debts, and after satisfaction of the debts, the balance, if any,
remaining is paid back to the members in proportion to the contribution made by them to the capital
of the company.” “The liquidation or winding up of a company is the process whereby its life is
ended and its property is administered for the benefit of its creditors and members. An
Administrator, called a liquidator, is appointed and he takes control of the company, collects its
assets, pays its debts and finally distributes any surplus among the members in accordance with
their rights.” Thus, winding up ultimately leads to the dissolution of the company. In between
winding up and dissolution the legal entity of the company remains and it can be sued in a court of
law/Tribunal.
Dissolution

A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the
company’s name shall be struck off by the Registrar from the Register of companies and he shall
also get this fact published in the Official Gazette. The dissolution thus puts an end to the existence
of the company. Dissolution of a company may be brought about in any of the following ways:
Through transfer of a company’s undertaking to another under a scheme of reconstruction or
amalgamation. In such a case the transferor company will be dissolved by an order of the Tribunal
without being wound up. Through the winding up of the company, wherein assets of the company
are realised and applied towards the payment of its liabilities. The surplus, if any is distributed to
the members of the company in accordance with their rights.

Modes of Winding up

A company may be wound up in any of the following two ways:

1. Winding up by the Tribunal. (Section 270,271 272)
2.Voluntary Winding up
Compulsory Winding up

Winding up a company by an order of the Tribunal is known as compulsory winding up.

Ground of Compulsory Winding up

As per section 271, Tribunal may order for the winding up of a company on a petition submitted to
it under section 272 on any of the following grounds:
1. Passing of special resolution for the winding up. When a company has by passing a special
resolution resolved to be wound up by the Tribunal, winding up order may be made by the
Tribunal. The resolution may be passed for any cause whatever. Tribunal may not order for the
winding up if it finds it to be opposed to public interest or the interest of the company as a
whole.
2. Inability to pay debts. As per section 271(2), a company shall be deemed to be unable to pay
its debts under the following circumstances:
a) Notice for payment. If a creditor to whom the company owes a sum exceeding one lakh rupees
has served on the company a demand for payment and the company has for three weeks
thereafter neglected to pay the sum or otherwise satisfy the creditor, it shall be deemed that the
company has become unable to pay its debt. It is essential that the debt is payable presently.
 Negligence in paying a debt on demand is omitting to pay without reasonable cause. Mere
omission by itself will not amount to negligence. Further, where a debt is bonafide disputed,
there is no negligence to pay. Failure to pay public deposits on their due dates amount to
inability to pay debts. A dividend 3 when declared becomes a debt due by the company and the
shareholder can also apply for company’s liquidation if the company is unable to pay his
dividend.
b) Decree. If a decree or order issued by a Tribunal/court in favour of a creditor of the company
on execution remains unsatisfied on its execution.
c) Commercial Insolvency. It is proved to the satisfaction of the Tribunal that the company cannot
pay its debts. This implies commercial insolvency (when company’s assets are insufficient to
meet its existing liabilities) of the company as is disclosed by its balance sheet. The mere fact
that the company is incurring losses does not mean that it is unable to pay its debts, for its assets
may be more than its liabilities. Liabilities for this purpose will include all contingent and
prospective liabilities and even if the debt relied upon in the petition is disputed bona fide, the
company may be wound up if the applicant can prove the insolvency of the company. However,
non-payment of a bona fide disputed claim is no proof of insolvency.

3. Just and equitable. The Tribunal may order for the winding up of a company if it thinks that
there are just and equitable grounds for doing so. The Tribunal has very large discretionary power in
this case. This power has been given to the Tribunal to safeguard the interests of the minority and
the weaker group of members. Tribunal, before passing such an order, will take into account the
interest of the shareholders, creditors, employees and also the general public. Tribunal may also
refuse to grant an order for the compulsory winding up of the company if it is of the opinion that
some other remedy is available to the petitioner to redress his grievances and that the demand for
the winding up of the company is unreasonable. A few of the examples of ‘just and equitable’
grounds on the basis of which the Tribunal may order for the winding up of the company are given:
(i) Oppression of minority. In cases where those who control the company abuse their power to
such an extent that it seriously prejudices the interests of minority shareholders, the Tribunal may
order for the winding up of the company.
(ii) Deadlock in management. Where there is a complete deadlock in the management of the
company, the company may be ordered to be wound up.
(iii) Loss of substratum. Where the objects for which a company was constituted have either failed
or become substantially impossible to be carried out, i.e., ‘substratum of the company’ is lost.
(iv) Losses. When the business of a company cannot be carried on except at a loss, the company
may be wound up by an order of the Tribunal on just and equitable grounds. But mere apprehension
on the part of some shareholders that the company will not be able to earn profits cannot be just and
equitable ground for the winding up order.
(v) Fraudulent object. If the business or the objects of the company are fraudulent or illegal, or
have become illegal with the changes in the law, the Tribunal may order the company to be wound
up on just and equitable grounds. However, the mere fact of having been a fraud in the promotion or
fraudulent misrepresentation in the prospectus will not be sufficient ground for a winding up order,
for the majority of shareholders may waive the fraud.
4. 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.
5. 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.
6. 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.

Who may file petition

An application for the winding up of a company has to be made by way of petition to the Court. A
petition may be presented under Section 272 by any of the following persons:
(a) the company; or
(b) any creditor or creditors;
(c) any contributory or contributories;
(d) all or any of the parties specified above in clauses (a), (b), (c) together
(e) the Registrar;
(f) any person authorized by the Central Government in that behalf;
(g) by the Central Government or State Government in case of company acting against the interest
of the sovereignty and integrity of India
Section 272 provides that the petition for compulsory winding up of a company may be filed in the
tribunal by any of the following persons:
1. Company.
A company can make a petition to the Tribunal for its winding up by an order of the Tribunal, when
the members of the company have resolved by passing a special resolution to wind up the affairs of
the company. Managing director or the directors cannot file such a petition on their own account
unless they do it on behalf of the company and with the proper authority of the members in the
general meeting. (Section 272(5)).
2. Creditors.
A creditor may make a petition to the Tribunal for the winding up of the company, when he is able
to prove that the company is unable to pay off his debts exceeding Rs. 1, 00,000 within three weeks
of the notice of demand or where a decree or any other process issued by the Tribunal in favour of a
creditor of a company is returned unsatisfied in whole or in part. Law does not recognize any
difference between the secured and unsecured creditors for this purpose. ‘A secured creditor is as
much entitled as of right to file a petition as an unsecured creditor.’ But in case of secured creditor’s
petition, winding up order shall not be made where the security is adequate and no other creditor
supports the petition.

A contingent or prospective creditor can also file a winding up petition if he obtains the prior
consent of the Tribunal. The Tribunal shall grant the permission only when:
(i) It is satisfied that there is a prima facie case for the winding up of the company; and
(ii) The creditor provides such security for costs as the Tribunal thinks reasonable. The Tribunal
may, before passing a winding up order, on a creditor’s petition, ascertain the wishes of other
creditors. If the majority of the creditors in value oppose, and the Tribunal having regard to the
company’s assets and liabilities considers the opposition reasonable, it may refuse to pass a
winding up order.
3. Contributories.
A contributory shall be entitled to present a petition for the winding up of a company,
notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no
assets at all or may have no surplus assets left for distribution among the shareholders after the
satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them
were either originally allotted to him or have been held by him, and registered in his name, for at
least six months during the eighteen months immediately before the commencement of the winding
up or have devolved on him through the death of a former holder. (Section 272(3))
4. Registrar.
Registrar may with the previous sanction of the Central Government make petition to the Tribunal
for the winding up the company only in the following cases:
a) when it appears that the company has become unable to pay debts from the accounts of the
company or from the report of the inspectors appointed by the Central Government under section
210; or
b) 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.
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 on an application made by the Registrar or any other person authorised 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 6
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.

Steps for compulsory winding up or winding up by a tribunal

The Companies (Winding Up) Rules, 2020 provides the rules governing compulsory winding up
process of a company along with required forms and particulars. This, the steps involved in the
process are:
• Step 1- the petition for winding up must be presented in Form WIN 1 or Form WIN 2. The
petition must be verified by an affidavit by a person making the petition or if the petition is
made by the company by its director, secretary or any other authorised person. The affidavit
must be in accordance with Form WIN 3.
• Step 2- the statement of affairs has to be filed within 30 days in accordance with Section 274
of the Companies Act, 2013. It must contain the information till the date when the statement
is filed. The statement must be filed in Form WIN 4 and accompanied by an affidavit of
concurrence of the statement.
• Step 3- the petition will be posted before the tribunal and a date will be fixed for hearing the
petitioners. If the petition is not made by the company, notice will be sent to the company and
an opportunity to be heard must be given before advertisement directions to be given with
respect to the petition.
• Step 4- according to Rule 6, every contributories will be served a copy of the petition by the
person making the petition within 24 hours of making payment in this regard.
• Step 5- notice of the petition will be given in advertisement 14 days before fixing a date of
hearing in a daily newspaper which is widely circulated in the state where the office of
registrar is located. The newspaper must be either in English or any vernacular language of
such area. Further, rule 8 provides that an application for winding up cannot be withdrawn
without the permission of the tribunal
 • Step 6- Any objection can be filed in the form of an affidavit in objection within 30 days from
the date of order and the same will be served to the petitioner.
• Step 7- The reply to the objection must be filed in the form of an affidavit within 7 days
before the date fixed for hearing of petition.
• Step 8- provisional liquidator will be appointed after the admission of petition by the tribunal
and upon sufficient grounds for his appointment in accordance with Rule 14. The order of
appointment of provisional liquidator will also contain restrictions and limitations on his
powers. The same will also be intimated to the provisional liquidator and the registrar of
companies within 7 days from the date of order of appointment.
• Step 9- order of winding up by the tribunal will be in accordance with Form WIN 11 and will
be sent by the registrar to the company liquidator and the registrar of the companies within 7
days and the same will also be advertised.
• Step 10- after the affairs of the company have wound up completely, the company liquidator
will apply for the dissolution of the company within 10 days along with audited final accounts
and auditors certificates and the tribunal will order for dissolution. The process of winding up
will be concluded on the day on which the order of dissolution has been reported to the
registrar of the company.

Appointment of official liquidator

The official liquidator is an officer who is appointed to proceed with the winding up of a company
and its affairs. Section 275 provides that in order to wind up a company, the tribunal will appoint an
official liquidator from a panel maintained by the Central Government which consists of names of
advocates, Chartered Accountants, Company Secretaries, Cost Accountants etc. having at least ten
years of experience in the matters related to the company. However, if a provisional liquidator is
appointed, his powers will be restricted by an order of appointment by the tribunal. A provisional
liquidator is a person appointed by the court or tribunal to carry on the process of winding up of a
company.
The central government also has the power to remove the name of any person from the panel on the
grounds of misconduct, fraud, breach of duties, professional incompetence etc, but before doing so
an opportunity to be heard must be given to him. The liquidator so appointed must within seven
days of appointment make a declaration regarding conflict of interest or lack of independence with
respect to his appointment with the tribunal.
According to Section 276, a provisional liquidator or a company liquidator appointed by the
tribunal can be removed by the tribunal on the following grounds:
• Misconduct;
• Fraud or misfeasance;
• Professional incompetence or failure to exercise due care and diligence;
• Inability to act as a liquidator;
• Conflict of interest or lack of independence during the term of appointment
Appointment of advisory committee
According to Section 287, the tribunal can direct the appointment of an advisory committee in order
to advise the company liquidator. The committee will consist of a maximum of 12 members. The
company liquidator will convene a meeting of creditors and contributories within thirty days from
the date order or winding up has been passed by the tribunal in order to determine the member of
the committee.
The committee has been empowered to inspect the books of accounts and other documents along
with assets and properties of the company under liquidation. The Section provides that the
committee will be chaired by the company liquidator and the provisions related to convening of
meetings, the procedure to be followed in the meetings and conduct of the business of the
committee will be prescribed accordingly.

Powers of liquidator
According to Section 277(5), a company liquidator will be the convener of meetings of the winding
up committee which will assist in the liquidation proceedings and related functions like:
• Take over the assets.
• Examination of statement of affairs.
• Recovery of property and other assets of the company.
• Review of audit reports and accounts.
• Sale of assets.
• Finalising the list of creditors and contributories.
• Compromise and settlement of claims.
• Payment of dividends.
• Any other function.
The company liquidator is also required to submit a report along with minutes of meetings of the
committee before the tribunal. The report will be submitted on a monthly basis and will be signed
by the members present in the meeting till a report for dissolution of the company is submitted
(Section 277(6)). He will also prepare a draft final report for the approval of the winding up
committee (Section 277(7)).
According to Section 290, the Company liquidator will have the power to:

• Manage the business of the company for the process of winding up.
• Execute deeds, receipts and other documents on behalf of the company and use its seal if
necessary.
• Sell the immovable and movable property and actionable claims of the company, either by
public auction or private contract.
• Sell the undertaking of the company.
• Raise money required for the security of assets of the company.
 • Institute or defend suits or other legal proceedings, whether civil or criminal, on behalf of the
company.
• Settle claims of creditors, employees or any other claimant and distribute the sale proceeds.
• Inspect the records and returns of the company.
• Draw, accept, make and endorse any negotiable instrument which includes a cheque, bill of
exchange, hundi or promissory note on behalf of the company.
• Obtain any professional assistance from any person or appoint any professional for the
protection of assets of the company.
• Take actions and steps and sign, execute and verify papers, deeds, documents, applications etc
for winding up of the company, distribution of assets and discharge of duties and obligations
of liquidator.

Duties of company liquidator

According to Section 288, it is the duty of the company liquidator to make periodical reports to the
Tribunal and make reports at the end of each quarter regarding the progress of winding up of the
company. Section 292 deals with the exercise and control of powers of company liquidators. The
company liquidator is required to give regard to the directions given by the creditors or
contributories in a resolution at any general meeting or by the advisory committee. The directors of
creditors and contributories will override those given by the advisory committee in case of conflict.
The company liquidator can also:

• Summon the meetings of creditors or contributories.

• Summon meetings as and when directed or requested by the contributories and creditors in
writing by not less than one-tenth.

If a person is aggrieved by the decision or any act of the company liquidator, he can make an
application to the tribunal, which can further confirm, reverse or modify the decision. Section
294 of the Act further provides another duty of the company liquidator to maintain proper and
regular books of accounts, receipts and payments which will be presented to the tribunal two times
in each year during his tenure. The tribunal can cause the accounts to be audited, and the company
liquidator will have to furnish such vouchers and information to the tribunal as required. One copy
of the audited accounts will be filed with the tribunal and the other will be delivered to the registrar.
If the account refers to a government company, the company liquidator will give a copy to the:

• Central Government if it is a member of the government company.

• State government if it is a member of the company
• Both the governments, if they are members of the company.
Submission of reports by the liquidator
According to Section 281, when the tribunal has made an order for the winding up of a company or
appointed a liquidator in this regard, he will within sixty days, submit a report to the tribunal
containing the following particulars:
• Nature and details of assets of the company which includes their value and also state the cash
balance separately. However, the valuation must be obtained from the registered valuers.
• Amount of capital issued, paid up and subscribed.
• Existing and contingent liabilities of the company which include names, addresses, and
occupations of the creditors. The amount of secured and unsecured debts must also be stated
separately. For secured debts, particulars of securities and their value and dates on which they
were given must also be provided.
• All debts due to the company along with the necessary details like names, addresses and
occupations of persons to whom they are due along with the amount.
• Guarantees extended by the company.
• List of contributories and dues to be paid by them and details of unpaid calls.
• Details of trademarks and intellectual properties owned by a company.
• Legal cases filed by or against the company and their details.
• Any other information which the tribunal or company liquidator considers necessary.
The manner in which the company was promoted or formed and whether there has been any fraud
by any officer of the company must be included in the report. He will also make a report on the
viability of the business of the company or steps for maximising the value of assets of a company.
According to Section 281(4), a company liquidator can also make further reports. Further
subsection 5 provides that a person who describes himself as a creditor or contributory can inspect
the report submitted under the Section and take copies or extracts.
Section 282 of the Act deals with the directions of the tribunal on the report submitted by the
company liquidator and provides that on the basis of the report submitted by the liquidator, a time
limit will be fixed by the tribunal to complete the entire proceedings and can revise the same. It will
also order for sale of the company as a going concern or its assets on examination of the report and
can also appoint a sale committee consisting of creditors, promoters, and officers of the company to
assist the company liquidator in the sale. If the report discloses that fraud has been committed in the
company, the tribunal will order for investigation or direct the company liquidator to file a criminal
complaint. The tribunal will also take necessary steps to protect, preserve or enhance the value of
the assets of the company.

Consequences of winding up
According to Section 278 of the Act, the order of winding up will operate in favour of all creditors
and contributories as if it has been made on their joint petition. Section 279 further provides that no
suit or any other legal proceeding can be initiated against a company against whom an order of
winding up has been passed without any permission from the tribunal, against whom the order of
winding up has been passed. An application in this regard will be decided within 60 days.
Voluntary winding up of a company

Corporate Insolvency Resolution Process (CIRP) is a process to resolve the corporate insolvency of
a corporate debtor. It can be initiated by filing an application to the Adjudicating Authority under
Chapter II of Part II of the Code. If this process fails, the company initiates the process of
liquidation. The process of voluntary winding up under IBC may be started by a corporate debtor,
financial creditor or operational creditor.
When a company decides to wind up its affairs and proceed further with the required proceedings
on its own, this Act is called the voluntary winding up of a company. Part II of Chapter XX of the
Act deals with the voluntary winding up of the companies.
Circumstances in which a company can be wound up voluntarily
Section 304 provides the circumstances under which a company can be wound up voluntarily:
• Company passes a resolution in a general meeting regarding voluntary winding up due to the
expiry of its duration fixed by its articles or due to the occurrence of any event for which
articles provide that the company should be dissolved;
• Company passes a special resolution regarding voluntary winding up.
However, this Section and the provisions related to the voluntary winding up of a company were
omitted in 2016. Now, the Insolvency and Bankruptcy Code, 2016 deals with the voluntary winding
up process.

Meeting of creditors
It is necessary to inform the creditors of the company which can be done through the post. A
meeting is conducted where they are notified about the amount of money due to each creditor. The
board of directors will then put forth the statement of affairs and if the majority opines that the
company should be wound up voluntarily, the process is initiated. However, if the majority opt for
compulsory winding up of the company or winding up by a tribunal, application must be sent in this
regard to the tribunal within 14 days and inform the same to the registrar within 10 days. A
company liquidator is appointed to carry on the process of voluntary winding up according to the
Insolvency and Bankruptcy Code, 2016 who finally evaluates the assets of the company and
submits the report to the tribunal.
Procedure of voluntary winding up
Further, Section 59 of the Insolvency and Bankruptcy Code, 2016 deals with the voluntary
liquidation of corporate persons. It provides that a corporate person who wants to liquidate itself
voluntarily and has not committed any default may initiate the liquidation proceedings under the
Act. However, the proceedings of a registered corporate person must satisfy the following
conditions:
• There must be a declaration from the majority of the directors of the company which must be
verified by an affidavit and must state that:
 ◦ A full inquiry into the affairs of the company has been made and an opinion has been
formed that the company has no debt or will be able to pay its debts in full from
selling its assets in the voluntary liquidation.
◦ The company is not liquidated in order to defraud any person.
• The declaration must be accompanied by the following documents:
◦ Financial statements and record of the company’s operations for the preceding two
years or since its incorporation.
◦ Valuation report of the assets of the company which is prepared by a registered
valuer.
• A special resolution regarding the voluntary winding up of the company must be passed
within four weeks of declaration or a general resolution must be passed in a general meeting
regarding voluntary winding up due to the expiry of its duration fixed by its articles or due to
occurrence of any event for which articles provide that the company should be dissolved.
Further, the Section provides that the company must notify the Registrar and Board about the
resolution being passed for the liquidation of the company within seven days from the date such
resolution is approved by the creditors. With the approval of creditors, the liquidation proceedings
of the company will be deemed to have commenced from the date such resolution is passed. When
the affairs of a company have wound up completely and its assets have been liquidated completely,
an application will be made by the liquidator to the Adjudicating Authority for the dissolution of
such a company. The Authority will pass an order regarding dissolution of the company and it will
be dissolved accordingly and the copy of said order must be given to the required authority with
which the company is registered within fourteen days.
Powers and duties of company liquidator under the Code
According to Section 35 of the IBC, a liquidator will perform the following functions and duties:
• Verify the claims of creditors of the company.
• Take into custody all the assets, properties and actionable claims belonging to the company.
• Evaluate the assets and property of the company and prepare a report in this regard.
• Take measures to protect and preserve the assets and properties of the company.
• Carry on the business for beneficial liquidation.
• He can also sell the immovable or movable property of the company.
• Draw, accept, make and endorse any negotiable instrument including the bill of exchange,
hundi or promissory note on behalf of the company.
• He can also obtain any professional assistance in order to discharge his duties.
• Institute or defend the suits by or against the company.
• Investigate the financial affairs of a company.
Duties related to dissolution of a company under the Companies Act, 2013 prior to 2016
Before 2016, the Companies Act, 2013, under Section 318 provided that once the affairs of a
company are wound up completely, the company liquidator is required to prepare a report of the
same showing that the assets of the company have been disposed of and the debts have been
discharged and then call a general meeting of the company in order to finally wind up the accounts.
If in case the majority of the members decide to wind up the company after considering the report
of the company liquidator, they may pass a resolution for its dissolution.
Within two weeks of this meeting, the company liquidator must send the following documents to
the registrar and file an application along with a report related to the winding up of the company
before the tribunal in order for it to pass an order for dissolution of the company:
• Copy of final accounts related to winding up of the company and make a return with respect
to each meeting.
• Copy of resolutions passed in such meetings.

Winding up of unregistered companies

Part II of Chapter XXI deals with the winding up of unregistered companies. Section 375 of the Act
provides that an unregistered company cannot be wound up voluntarily under the Act. It provides
that such a company will be wound up under the following circumstances:
• The company is dissolved or ceases to carry on the business or is continuing to carry on the
business only for the purpose of winding up.
• The company is not able to pay its debts.
• It is just and equitable in the opinion of the tribunal to wind up the company.
The Section further provides that an unregistered company will include any partnership firm,
limited liability partnership, society or cooperative society, association etc but will not include:
• A railway company incorporated under any Act of Parliament or any other Indian law.
• Any company registered under the Act.
• Any company registered under the previous company law but not a company whose office
was in Burma, Aden, or Pakistan.
According to Section 376, a foreign company incorporated outside India but carrying business in
India can be wound up as an unregistered company if it ceases to carry business in India.