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Indian Journalof Law and Legal Research Volume IV Issue III ISSN: 2582-8878
Rajat Rana, Shivam Sureka & Bhavya Aggarwal, B.COM.LL.B (H), Amity Law School,
Noida
ABSTRACT
1. Introduction
A company's death can be compared to a man's deaths. When a person dies, he completes all
of his affairs and departs from his life. In corporate law, winding up a company entails
gathering all assets and liquidating them in order for the company to cease operations. "A
winding up is a procedure for bringing about the dissolution of a company and in the course of
which its assets are collected and realized; & applied in payment of its debts; & when these are
satisfied, the remaining amount is applied for returning to its members the sums that they have
contributed to the company in accordance with the Articles of Association 6 ." A firm can wind
up in 2 ways: voluntarily or involuntarily. Members or creditors may petition the company
tribunal for winding up voluntarily, but the court may wind up the firm involuntarily7 . Reasons
for which a firm may be wind up are: i. When a corporation is not able to pay off its debts, it
is forced to wind up. The High Court in Reliance Infocomm Ltd v. Sheetal Refineries Private
Ltd8 , defined "inability to pay debts" as a condition in which a corporation is commercially
bankrupt, meaning that the debts and liabilities of the firm outnumber its assets. ii. The
corporation proceed with a special resolution requesting the tribunal to wind up the corporation.
If India's sovereignty and integrity has been violated, as well as the security of state's, ties
with foreign countries, public morality, order, and decency. iv. The Tribunal has ruled that the
company should wind up. v. If the registrar or any other person who is authorized by the Central
Government's believes that there have been some fraud in affairs of business, the corporation
is formed for some illegal objectives, or the people involved have been guilty of misconduct,
misfeasance, or fraud. vi. The annual returns or financial statements of 5 successive financial
years have not been submitted to the registrar, vii. Winding up the company is just and
9equitable in the opinion of the tribuna1 9
.
5 Jyotsna Jain, "Corporate Law: Winding Up of a Company" Pen Acclaims: A Multi-disciplinary National Journal
(2019).
6 Hardinge Stanley Giffard Halsbury and Earl of Quintin Hogg Hailsham of St Marylebone Baron, Halsbury's
Laws of England 535 (London, Butterworths, 1973).
7 The Companies Act, 2017, s.272.
when they are used to pay its debts; and when they are used to pay its debts. After requirements
are met, the residual funds are used to refund the funds to the members. According to AOA,
which they have provided to Co." 10
The following is Professor Gower's definition of winding up: "A tangle of a tangle of a tangle
of a tangle The process by which a company's life is ended and its property is administered for
the benefit of others is known as a company."
"A petition for winding up is an entirely appropriate means of enforcing the payment of a just
obligation. It is the method of execution that a creditor can use against a firm that is unable to
pay its debts." 12
Palmer also included incapacity to pay debts1 3 in his book, which is also referenced in the
Companies Act,2013 14 , it states that the inability to pay back the debts fundamentally arises
under 3 situations: The following are some of the circumstances in which courts have
previously broken down organizations on this basis:1 5
2. Oppression of Minority : It is ethical and equitable to close a company where the principle
is oppressed. Shareholders have been subjected to a coercive, harsh, or squeezing strategy
aimed at the minority.1 7
A request for the Tribunal to wind up can be rescinded on the same grounds additionally. 18
A company is dissolved through the process of winding up. The assets are sold, the liabilities
are discharged, and any surplus is dispersed to the shareholders/members in proportion to their
10 Hardinge Stanley Giffard Halsbury and Earl of Quintin Hogg Hailsham of St Marylebone Baron, Halsbury's
Laws of England 535 (London, Butterworths, 1973).
" Haniefuddin, Shaik et.al., Vogelaar and Chester 1973.
12 Francis Beaufort Palmer, Palmer's Company Precedents 25 (Stevens & Sons Ltd, UK,
Part 11, 1960).
13 Topham Alfred Frank (ed.), Palmer's company law : a practical book for lawyers and business men (Stevens
&
ownership stake in the firm. The laws of this Act as well as the IBC, 2016 govern the winding
up procedure.
In this paper, we will focus on the Companies Act 2013 and delve into the types, reasons, and
consequences of a company's winding up in order to simplify the process, promote better
understanding, and also guide through the process of a company's winding up in a step-by-step
and easier-to-understand manner.
1. What are the various means by which a corporation can wind up?
The methodology adopted in this research paper is Descriptive and Analytical. The first i.e.
Descriptive method comprises of enquiries, findings and surveys. The second i.e. Analytical
method is a method, where the researcher uses facts or information or data already accessible
and analyse them to create an essential evaluation of the information.
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Indian Journalof Law and Legal Research Volume IV Issue III ISSN: 2582-8878
This paper also contain some research questions which are answered by analysing and
compiling the already accessible information and presented it in a much more simpler way.
1.5.2 Sources
Secondary data has been used for the purpose of this research i.e. the information was already
collected by other researchers. It includes various publication's, research surveys, Journals, and
other relevant information.
The scope of the paper is limited to understanding all the basics of winding of a company i.e.
need, consequences, modes, procedure of winding up of a company etc. And since secondary
sources of data was used to seek the answers to 1 or 2 questions or legal propositions or various
doctrines, its scope is quite restricted. Moreover, there was not any need to do field work as a
result of which data may not be robust enough to answer complicated issues.
a. Compulsory wind up
The Tribunal has the power to pass a decree for winding up a firm under the following cases: 20
i. Sick Company
If the firm is unable to pay its debts and creditors have a commanding position with respect to
the dues to be collected, the Committee of creditors will choose a person as administrator for
Company, in accordance with the Tribunal's order for winding up process. This occurs when a
corporation is in a sick state, i.e., it is not able to pay off its debts and cannot be revived or
rehabilitated. In such a circumstance, the court may order the firm to wind up.
If the Corporation has agreed to go for wind up by the Tribunal through a special resolution,
the Tribunal's decision on the winding up is final. This exempts the Tribunal's power to wind
up a corporation if it is contrary to the general public interest or the interest of the corporation.
If a firmviolates the integrity and sovereignty of territory of India, the security of the state,
relations with overseas countries, morality, public order, or decency, then the Tribunal may
pass an order for the company to be wound up.
If the Tribunal has reasons to believe that the working of the company has been carried out
fraudulently or that the purpose for which the company was started is fraudulent or for any
illegal purpose, then the tribunal has been granted the authority to pass an order to wind up the
corporation after receipt of an application from the Registrar or any other person who is
authorised by the Central Government.
If the corporation has not filed its annual returns or finance statements with the Registrar for
the previous five 5 years. 2 1
If the Tribunal determines that winding up the company is just and equitable after looking into
the interests of the company, its various shareholders & stakeholders, and the interest of the
public, as well as all other remedies available to resolve the situation, the Tribunal will wind
up the company. 22 Winding up a firm on this ground necessitates a solid foundation to liquidate
the firm.
An application has to be submitted to the Tribunal to wind up a firm, which has to be made by
a petition 23 . The people who are eligible to make this petition are:
a. Company
b. Creditor's
c. Contributories
d. Registrar
ii. Liquidators have a duty to make a report and submit it to the Tribunal following the
above appointment. 25
iii. The Tribunal issues directives to the liquidators in dissolving the company, according
to which the property of the firm is taken into custody in order to first satisfy the
creditors and contributories. 26
iv. Finally, following careful evaluation of audits and reports filed by the liquidator to the
Court, the Court issues an order for dissolution in order to settle the debts owed to the
firm's creditors and other contributors. 27
B. Voluntary winding up
There are 2 situations where a corporation can wind up voluntarily. 28 They are;
i. If the corporation decided to pass a resolution to wind up voluntarily in its general meeting
which maybe because of cessation of the period for its duration, if any, anchored by its articles
or on the happening of any such event in respect of which the articles of the company provide
the company to wind up 29 or
ii. If the corporation has decided to pass a special resolution for voluntary winding up 30
1. A declaration has to be passed by the members of the company including the directors, to be
delivered to registrar within 5 weeks of date of passing of resolution for winding up.3 1
2. The director, directors or in case there are more than 2 directors, the majority of directors
have to make a declaration verified by an affidavit in a board meeting to the effect that a full
inquiry into the company affairs has been made and the company has no debt or whether it has
the capacity to pay off the debts from proceeds of sale of assets if they decide to voluntarily
wind up the company. 32
3. A company meeting will be called where the resolution for voluntary winding up will be
proposed and another meeting of the creditors of the company shall also be called on the same
or the next day and a notice of such meetings has to be sent to the creditors via a registered
post.33
4. The resolution which has been passed has to published in the Official Gazette or the local
vernacular newspaper which is prevalent in that district within 14 days of such declaration.
5. The company will appoint a Company Liquidator in its general meeting where the resolution
of such winding up is passed. The Liquidator appointed must be from the panel prepared by
the Central government and will take care of the winding up affairs. 34
6. A notice has to be given to the Registrar about the appointment of the Liquidator, with the
name and other required details of the liquidator, of any opening which has occurred in his
office, and of the name of the such Liquidator which has been hired to fill such vacancies within
10 days of this hiring or the arising of vacancy 3 5
7. A quarterly progress report has to be sent by the Company Liquidator in a prescribed manner
to all the members and creditors. Also, at least 1 meeting per quarter of each creditors and
members has to be called to update them about the progress of winding up process. If the
Liquidator fails to perform such duty then he may be punished with a fine which may extend
to Rs.10,00,000.
8. Finally, a last meeting will be called by the Liquidator, where he shall present the report
about the winding up showing the disposition of assets and the amount of debts discharged and
a general meeting will be called for the information regarding the final winding up of accounts
and offer any explanation thereof. 36
9. Within 2 weeks of such meeting, the Liquidator has to, send a copy of the final wound up
accounts to the registrar, along with copies of resolutions passed in these meetings. It also has
to file an application relating to winding up of the firm, which has to be presented before the
tribunal 3 7
. The firm will continue to exist as a separate legal entity until it is completely dissolved.
. While the company is going through the phase of liquidation, all the business activities
are administered by the liquidator.
" Every transaction of share during the liquefaction done without the approval of the
liquidator is considered void.
* Creditors are not allowed to file a suit against the firm without court's consent
* If the creditors already have some pending decrees, they are not allowed to go ahead
with its implementation.
. Creditors have to explain and account for their claims to the liquidator.
" When a liquidator is appointed, all the authority of the chief executives, directors, and
other officers cease to exist.
" The members only have the power to send notice of resolution and the power to
appoint a liquidator during the firm's winding up.
* The disposition of the companies property must be approved by the court or the
liquidator otherwise it will be considered void.
A company can wind up by a tribunal if a petition is submitted under the given situations:
" The corporation passed a special resolution directing the tribunal to pass an order to
wind up the firm.
" The company failed to file a statutory report with the registrar.
" Non-commencement of business activity by the firm within 12 months after its
incorporation.
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Indian Journalof Law and Legal Research Volume IV Issue III | ISSN: 2582-8878
" The number of members in a public corporation has decreased below 7 and in a private
firm has decreased below 2.
" The tribunal's decision to wind up the corporation is just and equitable.
" For the past five financial years, the company has not been filed its balance sheet or
annual return.
" The company has violated the integrity and sovereignty of the territory of India.
Application to wind up
The following entities must file an application for winding up with the petition for winding up:
* Company
* Creditors
* Contributory company
Upon receipt of the petition, the tribunal will proceed according to the processes outlined in
section 439-481 of Act.38
The circumstances in which a court may wind up a firm based on a petition presented to a court
are justified by Section 305 of the Act. 39
" If the company decides that it should wind up through a special resolution by the court.
" If the company is deemed to have missed two consecutive years of delivering required
reports to the registrar, hold statutory meetings, or hold 2 annual general meetings.
" If the corporation does not begin operations within one year of its establishment or if
" If the members of the private, public, or listed firm is reduced to less than 2, 3, or 7, the
company will be considered private, public, or listed.
" If it is discovered that the corporation is no longer able to pay off its dues.
o Managed and run by people who are not able to maintain proper accounts or are
involved in fraud or any other corrupt activities.
* If the company, even though it's a listed company, it cease to act like one.
o Recurring losses
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Indian Journalof Law and Legal Research Volume IV Issue III ISSN: 2582-8878
3. Conclusion
The Act has taken a wonderful initiative in establishing a prudent corporate governance
structure in India. The Act clearly prescribes the modes by which a firm can wind up. A
company can wind up by compulsory mode or voluntary mode. Then, we talked about the
procedure by which a company maybe wound up compulsorily, the parties which can file a
petition for such winding up on occurrence of certain circumstances. We also talked about the
procedure for voluntary winding up of a company. Then, we dealt with the consequences of
such winding of various parties comprising of creditors, shareholders, company and
management. Finally we talked about the circumstances in which a corporation can be wound
up by a tribunal in case a petition has been filed. Thereby, we have talked in brief about the
kinds, consequences and reasons for winding up of a company under Act in detail and in a
summarized form.
4. Suggestions
Shutting down the company is not as simple as letting go off employees and repaying investors.
Regulations prescribe the manner in which payments need to be made and procedure to be
followed. As a result of which company which may have already been shut down may be be
forced to continue to operate as a zombie until finally it is dissolved. Though the provisions of the
Act are clear about the processes for winding up of a company yet the processes are so time
consuming that it may take anywhere from 6 months to infinity to fully dissolve a company. "Ease
of exit is as important as ease of setting up a business". Though the time for minimum time
required for winding up a company has been significantly brought down from 2 years to 6 months
further improvements in the act is needed to bring out the mountain of formalities and simplify
the procedures of winding up. Which in turn will help in attracting more companies to set up
operations in India and contribute towards the nation's economy.
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Indian Journalof Law and Legal Research Volume IV Issue III ISSN: 2582-8878
5. Bibliography
5.2 Books
Shareholders'Remedies (2016).
https ://lawcorner.in/modes-of-winding-up-of-a-company-and-their-
procedure/#CONCLUSION
https://www.researchgate.net/publication/349807377_AStudyOnLiquidationOfCompa
nies_Under_CompaniesActComparedWith_LiquidationOfCompanies_Under_Insolven
cyAnd_B ankruptcyCode
https://blog.ipleaders.in/comparative-analysis-winding-company-companies-act- 1956-
companies-act-2013 -insolvency-bankruptcy-code-2016/
Page: 14