Winding Up

Winding up Winding up or liquidation of a company represents the last stage in its life. A proceeding by which a company is dissolved. Assets of the company are disposed of, debts are paid out Companies Act 1956

According to Prof Gower Winding up of a company is the process whereby its life is ended and its property is administered for the benefits of its creditors and members. And an administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distribute any surplus among the members in accordance with their rights

Contd- Company is not Dissolved immediately on the commencement of the winding up proceedings. Winding up of a company precedes dissolution. On dissolution the company is no more in existence and its name is struck off by the Registrar from the registrar of companies.

Contd- On dissolution the company is no more in existence, and its name is struck off by the Registrar from the register of Companies. But on winding up, a company’s name is not struck off from the register of companies. Thus, in between the winding up and dissolution , the legal status of a company continues and it can be sued in the court of law.

Modes of winding up Winding up by the Tribunal – compulsory winding up Voluntary winding up (a) members voluntary winding up (b) creditors voluntary winding up Winding up subject to the supervision of the tribunal Companies Act 1956

Contd- Prior to the Companies (Second Amendment) Act, 2002 (11 of 2003), the powers to order winding up were vested in the court. Now these have been vested in the tribunal to be known as the National Company Law Tribunal which is to be constituted under the amended Companies Act.

Grounds for compulsory winding up By special resolution - Sometimes, the Company passes special resolution to the effect that the company be wound up by the tribunal. In such cases, the tribunal may order winding up of the company on a petition presented to it by the company. However, the tribunal is not bound to order the winding up of the company. It has discretionary power in this regard and may refuse to wind up the company. Companies Act 1956

Contd- Default in holding statutory meeting- Just and equitable Failure to commence business Reduction in membership Inability to pay debts

Who may petition As petition for compulsory winding up of a company may be presented by: The company itself by passing a special resolution Any creditor or creditors The registrar Any person authorised by th Central Government The official liquidator

Voluntary winding up Winding up by the creditors or members without the intervention of the court. In voluntary winding up, the company and its creditors are left free to settle their affairs without going to court., although they may apply to the court for directions and order if and when necessary. Companies Act 1956

Grounds If the company in the general meeting passes an ordinary resolution for voluntary winding up where the period fixed by the Articles of Association for the duration of the company has expired or the event has occurred on which under the articles the company is to be dissolved. If the company resolves by special resolution that it shall be wound up voluntarily When a company has passed resolution for voluntary winding up, it must within 14 days of passing the resolution, give notice of the resolution by advertisement in official gazette and also in some news paper circulating in the district where the registered office of the company is situated.

Consequences A voluntary winding up is deemed to commence at the time when the resolution for voluntary winding up is passed. The company from the commencement of winding up, must cease to carry on its business except so far as may be required to secure a beneficial winding up although the corporate state and powers of the company continue until final dissolution. All transfer of shares and alterations in the status of the members, made after the commencement are void unless sanctioned by the liquidator. Companies Act 1956

Members winding up Members winding up is possible only when the company is solvent and is able to pay the liabilities in full. Declaration of solvency – Where it is proposed to wind up a company voluntarily, its directors, or in case the company has more than two directors, the majority of the directors, may at the meeting of the Board, make a declaration verified by an affidavit to the effect that they have made a full enquiry into the affairs of the company and having done so they have formed an opinion that the company has no debts, or it will be able to pay its debts in full within 3 years from the commencement of winding up Companies Act 1956

Members voluntary winding up The company in general meeting must (a) appoint one or more liquidators (b)Fix remuneration if any On the appointment of the liquidator all the powers of the BOD shall cease. The company must give notice to the registrar regarding the appointment of the liquidator Within 10 days of his appointment The liquidator, may accept shares, policies or like interests in consideration of the sale of the company undertaking to another comapny

Contd- In case the winding up continues for more than one year the liquidator must call a general meeting of the company at the end of first year the from the commencement of winding up. Lay before the meeting an account of his acts and dealings and the conduct of winding up proceedings during the preceeding year. As soon as the affairs of the company are fully wound up the liquidator must make up an account of the winding up showing how the winding up has been conducted and property of the company has been disposed of.

Contd- Call a general meeting of the company for the purpose of laying the account before it Within one week after the meeting the liquidator must sent the report to the registrar and the official liquidator each a copy of the account and return regarding the holding of meeting. On receipt of the above documents the registrar will register them and the official liquidator shall make a scrutiny of the books and papers of the company and report to the court the result of his scrutiny.

Contd- If the report of the official liquidator shows that the affairs of the company have not been conducted in the manner prejudicial to the interest of its members or to public interest then from the date of submission of report to the court the company shall deemed be dissolved. In case of an unfavourable report the court shall direct the official liquidator to make further investigations of the affairs of the company.

Contd- On receipt of the report of the official liquidator on such further investigation, the court may either make such order that the company stands dissolved with effect from the date specified in the order or make such order as the circumstances of the case brought out in the report permit

Creditors voluntary winding up Based upon the assumption that the company is insolvent From the beginning the meeting of creditors is held along with the members. The chief power to appoint the liquidator is in the hands of the creditors and there is a provision for appointing a committee for inspection Companies Act 1956

Creditors voluntary winding up Meeting of creditors- When no statutory declaration of solvency has been made and filed as required by the act, the Board of directors acting on behalf of the company must summon a meeting of the creditors, for the same day or the next day after the meeting at which the resolution for voluntary winding up is to be proposed. The BOD must prepare and lay before the meeting a statement of the petition of company’s affairs. Notice to the registrar - A copy of any resolution passed at the creditors meeting must be filed with the registrar within 10 days of the passing thereof.

Creditors voluntary winding up…… Appointment of liquidator – The creditors and members at their respective first meetings may nominate a person to be the liquidator for the purpose of winding up of the affairs of the company. Committee of Inspection (Section 503) The creditors at their first or any subsequent meeting may, if they think fit, appoint a committee of inspection of not more than five members.  

Contd- Fixing of Liquidator’s Remuneration (Section 504) The remuneration to be paid to the liquidator or liquidators has to be fixed by the committee of inspection or if there is no such committee, by the creditors. Where the remuneration is not so fixed, it must be determined by the court. Ant remuneration once fixed shall not be increased in any circumstances whatever, whether with or without sanction of the court.

Contd- Board’s Powers to cease on Appointment of Liquidator (Section 505) On the appointment of Liquidator, all the powers of the Board of Directors shall cease, except in so far as the committee of inspection, or if there is no such committee, the creditors in general meeting, may sanction the continuance thereof.

Contd- Duty of Liquidator to call Meeting of Company and of Creditors at the end of each year (Section 508) In the event of the winding-up continuing for more than one year, the liquidator must call a general meeting of the company and a meeting of the creditors at the end of the first year, from the commencement of the winding up and at the end of each succeeding year, or as soon thereafter as may be convenient within three months from the end of the year or such longer period as the Central Government may allow.

Contd- Further, he may lay before the meeting an account of his acts and dealings and of the conduct of winding upp during the preceding year, together with a statement in the prescribed form and containing the prescribed particulars with respect to the proceedings, and position of the winding up.

Contd- Final meeting and Dissolution (Section 509) As soon as the affairs of the Company are fully wound up, the liquidator must: make up an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of; and call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meeting and giving any explanation thereof.  

Contd- Within one week after the date of the meetings, the liquidator shall send to the Registrar and the Official Liquidator a copy of the account and a return of the meeting held. The Official Liquidator, after scrutiny of the books and papers of the company, shall make a report to the court.

Contd- If this report states that the affairs of the company have not been conducted in a manner prejudicial to the interest of the company or public then from the date of the submission of the report the company shall be deemed to be resolved; otherwise the Court will ask the Official Liquidator to make further investigation and may, after that report, order that the company shall stand dissolved from a specified date [Section 509(6)].

Distinction between Members’ Voluntary Winding-up and Creditors’ Voluntary Winding-up Members’ voluntary winding-up can be resorted to by solvent companies and thus requires the filing of a ‘declaration of solvency’ by the directors of the company with the Registrar, Creditors’ winding-up, on the other hand, is resorted to by insolvent companies. In Members’ voluntary winding-up there is no need to have creditors’ meeting. But in the case of creditor’ voluntary winding up, a meeting of the creditors must be called immediately after the meeting of the members.

Contd--- Liquidator, in case of members’ winding-up is appointed by the members. But in the case of Creditors’ voluntary winding up, if the members and creditors nominate two different persons as liquidators, creditors’ nominee shall become the liquidator. In the case of creditors’ voluntary winding up, if the creditors so wish, a “Committee of Inspection” may be appointed. In the case of Members’ voluntary winding-up, there is no provision for any such committee.  

Voluntary winding up under supervision of the court At any time after a company has passed a resolution for voluntary winding up, the court may make an order that the voluntary winding up should continue subject to the supervision of the court. Application for such supervision order may be made either by a creditor, a contributory, the company or the liquidator. Powers to order compulsory winding up – The court may pass an order for compulsory winding up superseding the order of winding up under its supervision.

Liquidators The commencement of winding up of a company does not put an end to the existence of the company. The assets are to be realised and distributed among debenture holders, creditors, shareholders etc. For this purpose, somebody has to act as an agent of the company. Such an agent is called the liquidator. For the purpose of filing income tax return for the income earned during the winding up it has been held that the liquidator will be regarded as principal officer of the company

IN COMPULSORY WINDING UP Appointment of official liquidator On winding up order being made in respect of a company, the official liquidator , by virtue of his office becomes the liquidator of the company. { the court has no power to appoint private persons as liquidators} An official liquidator is attached to each high court and is appointed by the Central Government. The official receiver attached to the District Court for insolvency purposes shall be the official liquidator attached to the district court.

Powers of liquidators With the sanction of the court: Institute or defend any suit, civil or criminal in the name and on behalf of the company. To carry on business of the company so far as may be necessary for the beneficial winding up of the company. To sell movable and immovable properties of the company by public auction or private contract. To raise any money required on the security of the assets of the company. To do all such other things as may be necessary for the winding up of the affairs of the company.

Powers of the liquidator Without sanction of the court To do all acts and to execute , in the name and on behalf of the company, all deeds, receipts and other documents and for the purpose to use when necessary, the company’s seal. To inspect the records and return of the company on the files of the registrar without the payment of any fee. To draw accept and make and endorse any bill of exchange, promissory note etc.

Duties of liquidator He must conduct equitably and impartially all proceedings in the winding up according to the provisions of law He must bring into his custody and control the property of the company He must submit a preliminary report to the court, as to- The capital issued, subscribed and paid up and the estimated amount of assets and liabilities If the company has failed as to the causes of the failure Whether in his opinion further enquiry is desirable as to any matter relating to the promotion , formation or failure of the company or the conduct of the business therof

Contd- Within two months from the date of the direction of the court, the liquidator must call a meeting of the creditors for determining the persons who are to be the members of the committee of inspection He must keep all sums received by him on behalf of the company into some scheduled bank. The liquidator shall maintain the minutes of the proceedings at the meetings He must present at least twice in each year, present to the court an account of his recipts and payments as liquidator

IN VOLUNTARY WINDING UP A body corporate cannot be appointed as a voluntary liquidator and any such appointment would be void. If for any cause whatever, there is no liquidator acting, the court may appoint the official liquidator or any other person as liquidator. Within 30 days from his appointment he must publish the notice of the appointment in the official gazette and deliver it to the registrar

Status of liquidator In compulsory winding up, he is officer of the court as well as an agent of the company. In voluntary winding up he is an agent of the company and not an officer of the court. He may be liable to a creditor or contributory for breach of his statutory duty. But he is not a trustee of the company’s assets. property of the company is not vested in him. But still he is in a fiduciary position in relation to the company and will be held liable for paying an invalid claim.