Corporate Breakdown: Winding up, Voluntarily Winding up, Liquidation and Dissolution under Companies Act

Winding up is a process in which life of a company is brought to end and property is utilized for the benefit of members and creditors. It is a means by which dissolution of a company is brought about. It involves permanently shutting down of business of the company. Winding up of a company can takes place due to various reasons:

• If the company has ceased to carry on its enterprise
• there may be a deadlock in the management (Barron v Potter)
• due to Breach of Statutory Provisions
• Shareholders Dispute (Oppression and mismanagement)
• Corporation is acting outside its scope of business.

Winding up and Dissolution sometimes can be used interchangeably but the difference involved is in the procedure to be followed. Even after commencement of winding up, the ownership of property remains with the company until and unless dissolution order is passed. On dissolution company ceases to exist its legal status is withdrawn. Winding up may proceed without the intervention of court, but dissolution can only take place by the order of court. Creditors can prove their debts in winding up, proving of debts is not possible in dissolution. Liquidation on other hand is a stage in process of winding up. It involves disposal of asset proceeds being utilized in repayment of debts and surplus if remaining will be distributed among the members of the company.

Winding up precede Dissolution, when winding up process is initiated the life of company remains intact, then in next stage liquidator is appointed to manage the property and assets of the company. It collects claims of the creditors due to the company. Liquidator is authorized to realize assets of the company and pay off debts from the proceeds received. In the end, court now NCLT passes Dissolution order due to which separate legal status of company comes to an end. The name of the company would strike off from the registrar of companies after dissolution order is passed by the Tribunal.

Who may file petition for Winding up?

According to Section 272 of companies act,2013 a petition of winding up shall be presented to the tribunal by-

• The company
• Any contributory or contributories
• The registrar
• Any person on behalf of the government
• In a case underneath clause (b) of section 271[1], by the central government or a state government.

Effect of Winding up order

When a petition is filed by any person eligible under section 272, the tribunal after studying the application and analyzing various facts can confirm or set aside the case. On confirming the tribunal will appoint a liquidator for carrying on further procedures under the process. When the winding up order has been passed or liquidator has been appointed, no suit or other legal proceeding shall be commenced, or if pending shall be proceeded with, by or against the company, expect with the leave of tribunal and subject to such terms as the tribunal may impose.

In S.V. Kondaskar, Official Liquidator v. V.M. Deshpande, Itd & Anr [SC][2], the only question which require consideration of supreme court in this case was, whether it is necessary for income tax officer to obtain leave of the court, when he wants to reappraise the company for eluding income in respect of past years. The court in its judgement recited that it is necessary to shield the interest of company during pending winding up petition. The court without any delay dismissed the case with costs. No leave of winding up of court was granted to income tax officer.

Modes of Winding Up

• Winding up by the Tribunal
• Voluntary Winding up

Grounds for Winding Up by the Tribunal

According to the old act Companies act,1956[3]. A company may be wound up by the court now (NCLT), If-

• The company has passed a special resolution of its winding up by the court order
• Default is made in filling monetary statements with the registrar of agencies or   maintaining statutory meeting
• It does not commence enterprise within a year from its incorporation or suspends whole business for complete year
• it is not able to pay its debts
• The court is of the opinion that it is miles just and equitable that it ought to be wound   up.

According to the new act Companies act,2013[4]. A company can be wound up by the tribunal if-

• The company is not able to pay debts
• The organization by way of special resolution has decided, it must be wound up by means of the tribunal
• The corporation has acted against the sovereignty and integrity of India, the safety of the state, pleasant relations with foreign states, public order, decency, or morality
• If on the application made through the registrar or any other individual legal through the principal government by way of notification below this act, the tribunal is of the opinion that affairs of the company are conducted in a fraudulent manner or the employer changed into shaped for fraudulent and illegal purpose or the character concerned inside the formation or control of its affairs are responsible of fraud, misfeasance, or misconduct in connection therewith and that it’s far right that the agency be wound up.
• The corporation has made a default in filling with the registrar its financial statements and returns for straight away preceding 5 consecutive financial years
• The court is of the opinion that it is just and equitable that it needs to be wound up.

Consistent with the latest amendments, Insolvency, and bankruptcy code,2016 has substituted segment 271 of the organizations act,2013. The subsequent grounds were eliminated from segment 271:

• The enterprise is not able to pay debts
• The tribunal has ordered winding up of the organization underneath bankruptcy XIX

Winding up by the Tribunal

• Analysis on the grounds of commencement of business
• If an employer has failed to commence its business inside twelve months of its incorporation or
• An agency is not always carrying on any enterprise or operation for a duration of right now preceding financial years
• The subscribers to the memorandum have not paid the subscription which they had undertaken to pay on the time of incorporation of an organization and an assertion to this impact has now not been filed inside a hundred and eighty days of its incorporation.
• Just and Equitable Clause
• Where whole object of the company was Fraudulent[5]
• Where the substratum of the company has gone[6]. The substratum of the company is deemed to have gone where:

               (1) The difficulty depends on business enterprise is gone, Or

              (2) The item for which it turned into fashioned has failed, or

              (3) it is miles impossible to carry at the business of the organization except at a loss,

              (4) the existing and feasible assets are inadequate to meet the existing liabilities of

 Agency.

• Where the main object of the company for which it was incorporated has been successfully completed.
• Where there has been mismanagement and misapplication of funds by the directors of private company.[7]

• Inability to Pay Debts

According to section 433(e) of the companies act 1956, if a company is unable to pay its debts, it can be wound up by the court. After the substitution by Insolvency and bankruptcy code,2016 this point has been deleted. It is not necessary if the assets fall short of liabilities, the company is not able to pay debts. They can even satisfy the demands of its creditors. The court after proper analysis of the company’s financial statements concluded that they are not able to pay its debts, winding up order would have passed. The inability to pay debts arise under following grounds-

• when the corporation fails to make fee of debt within three weeks without delay                           
• Preceding the day when amount was demanded             
• where execution issued on a decree or order of court
• wherein its miles proved to the pride of court that the organization is not
• Capable of repaying the amount back.

A Petition for winding up due to inability to pay debts must disclose all relevant information regarding debts due, it must also disclose whether the assets are sufficient to pay off the liabilities. If the debt is subject to dispute, court cannot pass winding up order. In K. Appa rao v. Sarkar Chemicals (P) Ltd, the Andhra Pradesh high court held that if the company has proper defense or in good faith there is a dispute of its obligations to discharge the debts and liabilities, the court may not pass winding up order.

Voluntary winding up

Voluntary winding up is a process of winding up in which company wounds up on its own motion. Earlier Voluntary winding up was dealt under section 304-323 of the companies act, 2013. With the introduction of Insolvency and bankruptcy code,2016 it promises to change all.[8]

Approvals must be taken from registrar of companies and other authorities that no dues are outstanding against the company. In AIR FRANCE GROUND HANDLING PVT.LTD, The official liquidator has filed petition on behalf of the company for voluntary winding up. It states official liquidator has received no objections from the ROC and other authorities. An affidavit is filed by the voluntary liquidator of company to official liquidator that the company has no outstanding dues. The company is wound up according to provisions of the act and stand dissolved with effect from the date of filing petition.

According to companies act,2013 there are two kinds of voluntary winding up-

1. Members Voluntary Winding Up[9]–

It takes place only when the company is solvent i.e., they can pay its debts and creditors approval is not required. A declaration of solvency is filed by company in this case.

A declaration of solvency made in members voluntary winding up has no effect unless-

• It is filed within 5 weeks immediately preceding the date of passing of resolution by the company and is submitted to registrar for registration before due date.
• The Declaration must accompany a statement of assets and liabilities of the company and an auditor’s report on the financial affairs of the company for the period commencing from the date up to which the last date such account was prepared and ending the latest date immediately before making of declaration.
• If a default is made in filling declaration, directors on having no reasonable grounds for proving that the company be liable to pay off its debts, shall be punishable with imprisonment for a term which may extend to 6 months or fine which may extend to 5000, or with both.
• If the provisions are not complied in case of Members voluntary winding up, it will result in winding up as creditors voluntary winding up. In SHAILENDRA KANH BEHARILAL vs SURAT DYES on 24 august,2004. The court came up to a conclusion that provisions of the act are not complied with. Because of failure to comply with mandatory requirements, the members voluntary winding up will end up in winding up as a creditors voluntary winding up.

• Creditors Voluntary Winding Up-

This type of Winding up cannot takes place without the approval of creditors. This kind of winding up comes in picture when company has defaulted in filling declaration of solvency. A meeting of members and creditors simultaneously must be called and conducted after passing of resolution of voluntary liquidation in board meeting, for taking approval on the same. The members must approve the scheme by passing special resolution. Then the creditors meeting will be held for their approval. The creditors will proceed with appointing a liquidator of their choice who will take charge of the winding up process. The liquidator will take in control of all the assets of the company and will settle the claims of the creditors.

According to recent amendments, Section 59 of Insolvency and bankruptcy code,2016 governs Voluntary winding up. The procedure is as follows-

• Board meeting is conducted in which voluntary winding up is proposed.
• A declaration is filed by majority of directors, that either company has no debts, or they will be able to pay debts in full by realizing its assets. The company does not aim to defraud any person along with the declaration, following attachments should be filed with ROC –

1. Audited financial statements and record of business operations of the company for previous 2 years or for period since its incorporation whichever is later.

2. A report of valuation of assets of the company, prepared by a registered valuer.

• Within 4 weeks of passing of declaration by the directors, shareholders must approve the proposal scheme of voluntary winding up by passing a special resolution.
• Any debt is due to any person by the company, creditors holding 2/3^rd in value of debt must approve such resolution. A voluntary winding up for a company deemed to begin on the date when resolution is passed.

Appointment of Liquidator

Tribunal while passing the order of winding up, shall appoint an official liquidator or liquidator from the panel maintained under sub section (2) as the company liquidator [section 275(1)]. Terms and conditions relating to the appointment of the liquidator, fee to be paid will be specified by the tribunal. The liquidator must file a declaration in prescribed form within 7 days of its appointment disclosing lack of independence and conflict of interest, if any.

Powers and Functions of Liquidator

Section 290 of companies act,2013 lays down power and duties of the liquidator

They are-

• To sell whole of the undertaking of a company as a going concern.
• To obtain any professional assistance or appoint any professional to discharge its duties for protection of assets of the company or to defend their rights.
• To raise any money required on the security of assets of the company.
• To inspect any records or returns of the company, filed with registrar or any other authority.
• To invite and settle claims of creditors and employees.
• To carry on business for the beneficial winding up of the company.
• To do all acts in the name and behalf of the company.

Liquidator has also got powers to access the information systems, for proof of the claims made by creditors. To gather information regarding debtors’ financial position and its operations. This information can be gathered from the database maintained by the board, agency of government and even from the registrar of companies. If creditors want any details regarding the financial affairs of the debtor, the liquidator is bound to provide details within seven days of receiving request.

Conclusion-

Corporate collapse or breakdown can occur due to various reasons like disputes, inability to pay debts etc. It can take place by following different methods like winding up, dissolution, liquidation and even striking off by registrar of companies. The proper procedure must be followed according to the prescribed provisions of the act and by the prior approval of authorities. Proper advertisements should be issued both at the time of filling petition and after the judgement is pronounced by the honorable court. Every person whose rights will get affected by the decision must be priorly informed and suggestions must be taken into consideration.

[1] Section 271 of companies act, 2013 states the circumstances in which a company may be wound up by the tribunal. Clause (b) includes winding up order can be given by the tribunal if company acted against the sovereignty and integrity of India.

[2] AIR 1972 SC 878; (1972) 42 Comp Cas 168 SC; (1972) 83 ITR 685 SC; (1972) 1 SCC 438; (1972) 2 SCR 965.

[3]According to Section 433 of companies act,1956

[4] According to Section 271 of companies act,2013.

[5] In Re. German Date Coffee Co

[6] Seth Mohan Lal v. grain chambers ltd.

[7] Lock v. John Blackwood Ltd

[8] Notification no IBBI/2016-17/GN/REG010 dated 31^st march, 2017 IBBI has notified the IBBI (voluntary liquidation process) regulations 2017.

[9] In the matter of TMD FRICTION INDIA PVT LTD

Author Details: Shruti Batra [CS Professional Student]