Unit-4

Winding up of companies
Meaning:
Winding up companies
Winding up of a company is the stage, where by the company takes its last breath. It is a
process by which business of the company is wound up, and the company ceases to exist
anymore. All the assets of the company are sold, and the proceedings collected are used to
discharge the liabilities on a priority basis.
Definition of Winding Up
The process of selling all the assets of a business, paying off creditors, distributing any
remaining assets to the principals or parent company, and then dissolving the business. Winding
up can refer to such a process either for a specific business line of a corporation or to the
dissolution of a corporation itself.
The different modes of winding up company.
There are 3 modes of winding up a company. viz.
1) Winding up by the court.
2) Voluntary winding up. This may be
a) Members voluntary winding up, or
b) Creditors voluntary winding up
3) Winding up subject to the supervision of the court (Sec. 425)
I. Winding up by the court:-Winding up a company under the order of a court is also known
as compulsory winding up. As per Sec. 433, a company may be wound up by the court in the
following cases.
a) Special resolution of the company:- Winding up under this head is not commonbecause the
members would prefer to wind up the company voluntarily since it is cheaper than court
winding up.
b) Default in holding statutory meeting :-If a default is made in delivering the statutory report
of a Public Co., to the Registrar of companies the court may make a winding up order.
c) Failure to commence business:- The company is wound up if the business is not commenced
within a year from its incorporation.
d) Reduction in membership:- If the number of members of a company is reduced in case of
public co., below 7, in the case of private co, below 2, the company may be ordered to be
wound up.
e) Inability to pay debt:- A Company may be ordered to be wound up if it is - unable to pay its
debt, in case of demand for payment neglected, decree debt unsatisfied and commercial
insolvency.
f) Just and equitable The court may order winding up under the head just and equitable in the
following cases.
(i) When the substratum of the company is gone When the object for which it was incorporated
has substantially failed, when the business carried is at loss and Its remaining assets are
insufficient to pay its debt.
(ii) When the majority of shareholder are using their powers unfairly or when the management
is carried on in such a way that the minority is disregarded or oppressed.
II: Members Voluntary winding up
a) Members voluntarly winding up: In Voluntary winding up, the declaration shall be made by a
majority of the directors at a meeting of the Board that the Company has no debts or that it will
be able to pay its debts in full within 3 years from the commencement of winding up. The
declaration shall be verified by an affidavit. The declaration shall be made within 5 weeks
immediately before passing resolution for winding up the Company and delivered to the
Registrar for registration. The decision of winding up is taken by the members i.e., Board of
Directors of the Company.
b) Creditors Voluntary winding up: When no declaration about the solvency of the Company is
made and filed with the registrar by the Board of Director, the Company will be wound up by
the decision taken at the meeting of the creditors of the Company. Such a winding up is called
Creditor's Voluntarily winding up. The decision to wind up is taken by creditors.
III. Winding up subject to the supervision of the Court
After Company has passed special resolution for Voluntary winding up, the Court may pass an
order that the Company should be under its supervision, to protect the interest of all the
Company, the members and the creditors. If Court passes such an order, it can exercise full
control over the winding up of the Company. A liquidator or additional liquidator will be
appointed.
The consequences upon commencement of winding up of a company.
The following consequences shall arise upon the commencement of the winding up of a
company:
(1) A voluntary winding up shall be deemed to commence from the date or the passing of the
resolution to that effect (Sec. 486).
(2) From the commencement of voluntary winding up, the company ceases to carry on its
business, except so far as may be required for the beneficial winding up thereof (Sec. 487).
(3) The possession of the assets of the company vests in the Liquidator for realization and
distribution among the creditors. The corporate state and powers of the company shall,
however, continue until it is dissolved (Sees. 456 and 487).
(4) A resolution to wind up voluntarily operates as notice of dis-charge to the employees of the
company, except when the business is continued by the Liquidator for the beneficial winding up
of the company, or when the liquidation is only with a view to reconstruction.
(5) On the appointment of the Liquidator, all the powers of the Board of Directors, Managing
Director or Manager, shall come to an end except:
(a) for the purpose of giving notice to the Registrar about any vacancy occurring in the office of
Liquidator and of the name of the Liquidator appointed to fill such vacancy, or
(b) in so far as the company in general meeting or the Liquidator or the Committee of
Inspection or the creditors in a creditors' voluntary winding up, may sanction the continuance of
their powers (Secs. 491 and 505).
(6) The company's creditors cannot file suits or continue any pending suits against the company.
They are required to lodge their claims and prove their debts to the Liquidator. In case of
disputed claims, however, a voluntary winding up does notoperate as a stay of any existing
proceedings or prevent the institution of new proceedings.
(7) All transfers of shares or alterations in the status of the members, made after the
commencement of the winding up of the company, shall be void, except when it is made with
the permission of the Liquidator (Sec. 536).
The duties of a Secretary relating to member Voluntary winding up.
The duties of a secretary in respect of members voluntary winding up:
(i) Arrange to hold a Board meeting: To arrange to hold a Board meeting within 5 weeks
immediately preceding the date of passing the resolution for Voluntary winding up, to approve
the draft of declaration of solvency and resolution for winding up.
(ii) Arrange for the preparation and audit: To arrange for the preparation and audit of the
Balance Sheet and Profit and Loss Account for the period commencing after the date of last
Balance Sheet and ending with latest practicable date before the date of declaration as well as
statement of Company's assets and liabilities at that date.
(iii) Prepare the declaration of solvency: To prepare the declaration of solvency, get it
verified by an affidavit before a magistrate and file with the registrar along with audited
Balance Sheet and Profit and Loss Account and statement of assets and liabilities, before the
meeting is held for passing the resolution of winding up.
(iv) Prepare and issue notice: To prepare and issue notice of the General meeting where the
resolution and special resolution for voluntary winding up is passed at the meeting. To see
liquidators are appointed and remuneration fixed up at the same meeting.
(v) Meeting is published in Gazette: To see that the notice of the resolution for winding
passed at the meeting is published in Gazette and newspaper within 14 days of passing of
resolution.
(vi) To see notice of the appointment: To see notice of the appointment of the liquidator is
filed with the registrar within 10 days of passing resolution.
(vii) To see special resolution: To see special resolution for winding up is filed with the
registrar along with the explanatory statement, within 30 days of passing the resolution.
(viii) Winding up commences: To see the winding up commences from the date of passing of
the resolution.
(ix) See every invoice: To see every invoice, order and business letter Issued by the company
during the period of winding up contains statement that the Company is being wound up..
(x) See all books, paper: To see all books, paper and documents as well as moveable and
immovable property of the company are delivered to the liquidator as directed and to appear
before the Court if called upon for public examination and give evidence as required.
Who is liquidator
Liquidator refers to a person appointed by the shareholders or unsecured creditors or on a court
order, to manage the winding up of a firm by selling off its assets. Liquidator is appointed when
a company goes into winding-up or liquidation that has responsibility for collecting in all of the
assets of the company and settling all claims against the company before putting the company
into dissolution.
Who is official liquidators
The Official liquidator is the officer of high court. He is appointed from the date of the order of
the winding up. He has certain duties to perform under the Companies Act and he has to do all
the required things in respect of compulsory winding up of a company according to the
instruction of the high court.
Write short note on official liquidator.
or
official liquidator
1.Appointment: The Official Liquidator is appointed by the Central Government under Section
448 of the Companies Act, 1956. He is attached to High Court of the State for the purpose of
conducting liquidation proceedings of those companies which are ordered to be wound up by
the High Court..
2.Supervision and Control: Functionally the Official Liquidator is under the supervision and
control of the High Court but administratively is under the control of the Central Government
through the Regional Director.
3.Primary function: The Primary function of the Official liquidator is to administrate the
assets of companies under liquidation, sale of the assets and realization of all debts of
companies. Then he is responsible for the purpose of distributing the same among the various
creditors and other shareholders of the companies. And then to finally dissolve such companies
after the affairs are completely concluded.
4.Procedure of liquidation: When a company is put to winding up by an order of the High
Court, the Official Liquidator attached to the said High Court takes possession of the company's
assets, books of accounts, etc. and liquidates the company as per the further orders of the High
Court. The procedure of liquidation is prescribed under the Companies (Court) Rules, 1959.
These rules are approved by the Honorable Supreme Court of India and notified by the Central
Government.
5.Duties and Powers: The duties and powers of the Official Liquidator as laid down in Section
457 of the Companies Act, 1956 are mainly of, filing of claims against, the debtors for
realization of the debts due to the company, sale of movable and immovable assets of the
company taken possession by the Official Liquidator. He can institute. criminal complaints and
misfeasance proceedings against the former Directors of the company for their acts and
omissions, breach of trust etc. He accepts Invitation of claims from the creditors, adjudication
of claims and settlement of list of creditors, payment to creditors by way of dividend and
settlement of list of contributories wherever necessary, and payment of return of capital where
the company's assets exceeded its liability and finally dissolve the company under Section 481
of the Companies Act, 1956.
The roles of official liquidator
The roles of a liquidator in the insolvency process is
(i)Primarily designed to ensure a fair distribution of an insolvent company's assets for the
benefit of its creditors.
(ii) In many cases, the insolvency practitioner (an individual who is authorised to act in relation
to an insolvent company) will try to rescue the business if they believethis will produce a better
return for the creditors.
(iii) If a company rescue is not viable, the official receiver may act as the company liquidator if
the case is relatively straightforward. In more complex cases, they will usually appoint a private
sector insolvency practitioner, usually an accountant orsolicitor, to complete the liquidation.
(iv) Company officers, both current and former, have a duty to co-operate with the official
receiver and private liquidators. Under the Insolvency Act 1986, failure to do so could lead to
jail time.
The powers, duties and responsibilitiesof the liquidator
Whichever method is adopted for the winding of a company, one or more persons are appointed
to windup the affairs of a company, such a person or persons is called official liquidator. They
are appointed for the purpose of winding up of companies by court. They shall be paid the fees
decided by central govt. out of the assets of the Company.
Powers of the official liquidator
(i) Institute or defend suits: To institute or defend suits and other legal proceedings, civil or
criminal in the name and on behalf of the Company.
(ii) Beneficial winding: To carry on the business of the company so far as may be necessary for
the beneficial winding up of the Company.
(iii) Sell the immovable and movable property: To sell the immovable and movable property
and its actionable claims with power to transfer the whole as sell the same in parcels.
(iv) Raise money on the security: To raise money on the security of the company's assets
(v) Distributing its assets: To do all such things as may be necessary for winding up the affairs
of the Company and distributing its assets.
The liquidator may exercise the following powers without the sanction of the Court viz.
powers:
(i)To do all acts and to execute documents and deeds on behalf of the Company under its seal
(ii) To inspect the record and returns of the Company or the files of the Registrar without
payment of any fee
(iii) To prove rank and claim in the Insolvency of any contributory for any balance against his
estate and to receive dividends
(iv) To appoint any agent to do any business which he is unable to do himself.
Duties of the liquidator
(i) Proceedings in winding up - The liquidator shall conduct the proceedings in winding up the
Company and perform such duties in reference thereto as the court may impose.
(ii) Report :- The official liquidator after receipt of the statement of affairs of the Company not
later than 6 months from the date of the order of winding up, submit a preliminary report to the
court.
(iii) Custody of Company's property:- When there is a winding up order, the liquidator shall
take into his custody all the property effects and actionable claims to which the Company is
entitled. If there is no liquidator, all the properties and effects of the Company are deemed to be
in the custody of the court.
(iv) Control of power:- The liquidator should administer the asset of Company and the
distribution thereof among creditors as per the resolution passed in General meeting.
(v) Meeting of Creditors and Contributories:-The liquidators may summon General meetings
of the Creditors or contributories whenever he thinks fit for the purpose of ascertaining the
wishes.
(vi) Directions from the court- The liquidator may apply to the court for directions In relation
to any matter arising in winding up. He has to use his own discretion in the administration of
assets of the Company and in the distribution thereof among the creditors.
(vii) Proper books :- Liquidator shall keep proper books for making entries of recording
minutes of the proceeding at meeting.
(viii) Audit of Accounts - The liquidators shall, at such times as may be prescribed but atleast
twice each year during his tenure of office, present to the court an account of his receipts and
payments as liquidator.
(ix) Appointment of committee of Inspection.
(x) Pending liquidation - The liquidator shall within 2 months of the expiry of each year from
the commencement of winding up, file a statement duly audited by a qualified Auditor of the
Company with respect to the proceedings in and position of the liquidation.
Responsibilities of the liquidator:
The following are the duties and responsibilities of a liquidator:
a. Proceedings in winding up:- The liquidator shall conduct the proceedings In winding up the
Company and perform such duties in reference thereto as the court may impose.
b. Report :-The official liquidator after receipt of the statement of affairs of theCompany not
later than 6 months from the date of the order of winding up, submit a preliminary report to the
court.
c. Custody of Company's property:-When there is a winding up order, the liquidator shall
take into his custody all the property effects and actionable claims to which the Company is
entitled. If there is no liquidator, all the properties and effects of the Company are deemed to be
in the custody of the court.
d. Control of power:- The liquidator should administer the asset of Company and the
distribution thereof among creditors as per the resolution passed in General meeting.
e. Meeting of Creditors and Contributories:-The liquidators may summon General meetings
of the Creditors or contributories whenever he thinks fit for the purpose of ascertaining the
wishes.
f. Directions from the court:- The liquidator may apply to the court for directions in relation to
any matter arising in winding up. He has to use his own discretion in the administration of
assets of the Company and in the distribution thereof among the creditors.
g. Proper books:- Liquidator shall keep proper books for making entries of recording minutes
of the proceeding at meeting.
h. Audit of Accounts:- These liquidators shall, at such times as may be prescribed but atleast
twice each year during his tenure of office, present to the court an account of his receipts and
payments as liquidator.
Defunct company
Meaning:-
It is a company where the condition of a company, whether publicly traded or private, that has
gone bankrupt and ceased to exist.
FOLLOWING TYPE OF COMPANIES ARE NOT REMOVED UNDER FTE
1.Listed companies: The companies listed in stock exchange.
2. Delisted Companies: Companies that have been delisted due to non-compliance of listing
regulations or listing agreement or any other statutory laws.
3.Vanishing companies: The company registered under the act or previous company law or
any other law for the time being in force and listed in stock exchange which has failed to file its
return with the registrar of companies and stock exchange for a consecutive period of two years
and is not maintaining its registered office at the address notified during commencement of
business.
4. Companies under investigation or any litigation pending in the court: Companies where
inspection or investigation is ordered and being carried out or actions on such order are yet to
be taken up or were completed but prosecutions arising out of such inspection or investigation
are pending in the Court. Companies against which any prosecution for an offence is pending in
any court.
5. Notices under Section 234 issued: Companies, where notices under Section 234 of the
Companies Act, 1956 (1 of 1956) or Section 206 or Section 207 of the Act have been issued by
the Registrar or Inspector and reply, thereto, is pending or report under section 208 has not yet
been submitted or follow-up of instructions on report under section 208 is pending or where any
prosecution arising out of such inquiry or scrutiny, if any, is pending with the court.
6. Application for compounding is pending: Companies whose application for compounding
is pending before the competent authority for compounding the offences committed by the
company or any of its officers in default;
7. Companies with outstanding payments: Companies, which have accepted public deposits
which are either outstanding or the company is in default in repayment of the same. Companies
having charges which are pending for satisfaction.
8. Companies registered under Section 25: The companies registered under Section 25 of the
Companies Act 1956, or Section 8 of Companies Act, 2013.
The procedures for dissolving a defunct company
Procedure for dissolving:
a) An application for removal of the name of the company from the register of the ROC to be
filed in form STK 2 along with a fee of Rs.5000/
b) If the company is regulated by any other authority, no objection letter from such authority
need to be mandatorily submitted along with application.
c) The documents to be submitted alongwith closure application are;
d) Duly notarised Indemnity bond from all directors
e) A statement of account certified by a Chartered Accountant stating the assets and liabilities
of the company not older than 30 days prior to the date of filing the application
f) An affidavit from all directors of the company
g) Special Resolution duly attested by all directors of the company or Consent Letter from the
members of the company as on the date of application.
h) A statement in relation with pending litigations if any.
Action will be taken by the Registrar after filing the application
a. The registrar shall verify the application and if it is in order
b. Publish a notice in official gazetted
c. Public notice to be published at least once in English and vernacular language newspaper.
d. Send notice of intimation to other regulatory authorities such as Income Tax, Sales Tax,
Service tax etc. having jurisdiction over the company and if no objection is not received from
the concerned authorities within 30 days from the date of notice it shall be presumed that they
have no objection for the proposed action of strike off the name.
Final Striking off the name of the company once all the procedures completed, the registrar
shall publish a notice in prescribed format in the Official Gazette and dissolve the company.
NCLT[National Company Law Tribunal]
The National Company Law Tribunal (NCLT) was setup by the Central Government in 2016
under Section 408 of the Companies Act, 2013. The National Company Law Tribunal has been
setup as a quasi-judicial body to govern the companies registered in India and is a successor to
the Company Law Board. In this article, we look at the National Company Law Tribunal, its
functions and powers in detail.
Advantages for National Company Law Tribunal
(i)NCLT is a specialized court only for Corporates, i.e., companies registered in India.
(ii) This will be no more than a Tribunal for the Corporate Members.
(iii) NCLT will reduce the multiplicity of litigation before different forums and courts.
(iv) NCLT has multiple branches and is able to provide justice at a close range.
(v) NCLT consists of both judicial and technical members while deciding on matters.
(vi) The time taken to windup a company is reduced.
(vii) Speedy disposal of cases will help reduce the number of cases.
(viii) NCLT & NCLAT have exclusive jurisdiction.
The powers of NCLT
National Company Law Tribunal enjoys a wide range of powers. Its powers include:
(i) Power to seek assistance of Chief Metropolitan Magistrate.
(ii) De-registration of Companies.
(iii) Declare the liability of members unlimited.
(iv) De-registration of companies in certain circumstances when there is registration of
companies is obtained in an illegal or wrongful manner.
(vi) Remedy of oppression and mismanagement.
(vii) Power to hear grievance of refusal of companies to transfer securities and rectification of
register of members.
(viii) Protection of the interest of various stakeholders, especially non-promoter shareholders
and depositors.
(ix) Power to provide relief to the investors against a large set of wrongful actions committed by
the company management or other consultants and advisors who are associated with the
company.
(x) Aggrieved depositors have the remedy of class actions for seeking redressal for the
acts/omissions of the company which hurt their rights as depositors.
(xi) Powers to direct the company to reopen its accounts or allow the company to revise its
financial statement but do not permit reopening of accounts. The company can itself also
approach the Tribunal through its director for revision of its financial statement.
(xi) Power to investigate or for initiating investigation proceedings. An investigation can be
conducted even abroad. Provisions are provided to assist investigation agencies and courts of
other countries with respect to investigation proceedings.
Insolvency code
Meaning:-Insolvency code provides for a time-bound process to resolve insolvency. When a
default in repayment occurs, creditors gain control over the debtor's assets and must make
decisions to resolve insolvency within 180 days.
What is meant by NCLT?
The National Company Law Tribunal was setup by the Central Government in 2016 under
Section 408 of the Companies Act, 2013. The National Company Law Tribunal has been setup
as a quasi-judicial body to govern the companies registered in India and is a successor to the
Company Law Board.
Give the meaning of special courts.
A Special Court shall consist of a sitting Judge of a High Court nominated by the Chief Justice
of the High Court within the local limits of whose jurisdiction the Special Court is situated, with
the concurrence of the Chief Justice of India. Explanation.- Any reference to a High Court or to
the Chief Justice or Judge of a High Court shall, in relation to a Union territory having a Court
of the Judicial Commissioner, be construed as a reference to the said Court of the Judicial
Commissioner or to the Judicial Commissioner or any Additional Judicial Commissioner, as the
case may be.