Winding up of a Company
Winding up of a Company
Meaning of Winding-Up
Winding-up is a process whereby the life of a company is ended & property is administered for the benefit of shareholders & creditors.
Structure of Winding-Up
- By court ( NCLT)/ Compulsory Winding-up
- Voluntary Winding-up (provisions related to voluntary winding-up have been repealed and has now been shifted to Insolvency & Bankruptcy code).
Voluntary Winding-Up
In this article, I am only dealing with the provisions of Company Law and so I will not deal with voluntary winding-up. But to give a brief idea, it is a process where the company becomes insolvent and so it decides to wind-up the company before the NCLT does and declares itself to be insolvent. There are two ways by which the company declares voluntary winding-up:
- By Ordinary Resolution: A company may wound up voluntarily if the given period or duration of the company has expired. Such period should be mentioned in the articles of the company or if there is any mentioning in the articles, that company shall dissolve on the occurrence of a particular event and if such event occurs then the company, by passing an ordinary resolution can start the process of winding-up. .
- By Special Resolution: A company may wound up voluntarily after getting 75% majority from its shareholders and board of directors. The process will only start when the special resolution has been passed. After the resolution has passed the same has to be published in the Official Gazette and in leading newspapers of that district/city within 14 days.
Declaration of Solvency
This declaration is done by the majority of directors at a meeting and the same has to be verified by an affidavit.
Declarations to be Made
They have to declare that a full inquiry in the debts of the company has been made and that they will be able to pay their debts in full by selling the assets or that they have no debts.
Such declaration has to be made within 5 weeks before the date of the resolution and informed to the Registrar before that date.
It shall declare that winding-up is not intended to defraud any person.
It shall declare the time period within which debts will be cleared.
If debts are to be paid by selling assets, a valuation report by a registered valuer shall be attached.
If the company fails to pay debt within the specified time, it will be considered that there was no reasonable ground for making the declaration.
The liquidator can then call for a meeting of creditors.
Meeting of Creditors
Creditors are notified through post and a meeting is conducted where they are provided with the list of dues payable to each creditor.
The Board of Directors presents the statement of affairs and declaration of solvency before the creditors.
If majority creditors agree for voluntary winding-up, the company will be wound up voluntarily.
If creditors feel the company cannot clear its debts, an application is sent to NCLT within 14 days.
The same has to be informed to the Registrar within 10 days.
A liquidator is appointed according to Insolvency & Bankruptcy Code.
The liquidator evaluates assets & liabilities and presents the final report to NCLT.
Compulsory Grounds for Winding Up (By NCLT)
1. Inability to Pay Debts
Failure to Pay Demand: If a company owes more than ₹1 lakh and fails to pay within 21 days after notice from creditor.
Decreed Debt: Failure to comply with court order or decree regarding repayment.
Commercial Insolvency: Liability increases while assets do not increase and auditors believe insolvency is likely.
2. Special Resolution
75% majority shareholders pass resolution for winding up, but execution is done by NCLT.
3. Against Sovereignty & Integrity of India
When company acts against sovereignty, integrity, security, morality, decency or public interest.
4. Fraudulent Affairs
Company formed for unlawful purposes.
Management guilty of fraud.
5. Failure to File Returns
Company fails to file annual returns with ROC for 5 consecutive years.
6. Just and Equitable Grounds
Deadlock: Conflict between partners cannot be resolved.
Loss of Substratum: Object of business becomes impossible or illegal.
Losses & Mismanagement: Continuous losses, oppression, mismanagement or public interest issues.
Company Liquidator
When a company becomes insolvent, a company liquidator is appointed by NCLT.
The liquidator understands the financial position of the company, completes ongoing projects and ensures creditors, shareholders and debenture holders are paid.
Powers & Duties of Company Liquidator
Carry on business and complete subsisting contracts.
Execute documents, deeds and receipts.
Deal with movable and immovable properties.
Sell the undertaking as a going concern.
Invite and settle claims of creditors.
Inspect financial records and statements.
Sign negotiable instruments like cheques, bills and promissory notes.
Take professional assistance from Lawyers, CA, CS, etc.
Take actions relating to signatures, execution, petitions and asset distribution under NCLT supervision.
National Company Law Tribunal (NCLT)
NCLT is a quasi-judicial body formed by the Central Government of India on 1st June 2016.
It adjudicates matters related to companies including arbitration, arrangement, compromise, reconstruction and winding up.
Civil courts have no jurisdiction over matters handled by NCLT or NCLAT.
NCLT is also the adjudicating authority under the Insolvency and Bankruptcy Code, 2016.
Constitution of NCLT
Members of NCLT
President
Judicial Members
Technical Members
Qualifications of Members
President: A person who has been a High Court Judge for 5 years.
Judicial Members: High Court Judge / District Judge for 5 years / Advocate for 10 years.
Technical Members:
15 years practice in Indian Legal Service or Joint Secretary.
15 years practice as CA/CS.
Person with specialized knowledge and integrity for 15 years.
President of Labour Court for 5 years.
National Company Law Appellate Tribunal (NCLAT)
NCLAT is the appellate authority of NCLT which deals with appeals arising out of NCLT decisions.
It can review, modify, confirm or set aside orders of NCLT.
If a party is dissatisfied with the decision of NCLAT, they may approach the Supreme Court of India within 60 days on a question of law.
NCLT & NCLAT are required to dispose of cases within 3 months. If delayed, reasons must be recorded within 90 days.
