Winding up of a company: Protecting the interest of creditors

The winding-up of a company is the process of bringing a company to the end of its existence. It is the dissolution of a company by selling all its assets to pay off its debts.

The assets get disposed of to pay off the debts, remove the liabilities, and distribute the remaining amount to the company members as per their shareholding in the company.

This process of dissolution of the company is also called liquidation of the company.

Both the companies act, 2013 and insolvency and bankruptcy code (IBC), 2016, governs the winding up of a company.

According to section 270 of the companies act, 2013, the winding up of a company can either be done voluntarily or by the tribunal.

The winding-up of a company is the same as the liquidation of a company under IBC, 2016.

Difference between Winding up and Dissolution

The dissolution and winding up of a company, the two different terms have different meanings.

  • Winding up is the step to initiate the dissolution process. Dissolution is the last of the closure of a company while winding up is done before dissolution.
  • In winding up, the liquidator gets appointed to sell the company’s assets, remove the liabilities and debt of the company, and file an application to the national company law tribunal for dissolution.

    In dissolution, the company gets dissolved or closed completely, and no further step is required to get done in the company’s name.

  • Winding up is just a step to meet the end result of dissolution.

    Dissolution is the result by which the company’s name gets struck off from the register of ROC.

  • The legal existence of the company continues at the commencement and during the winding-up process.

    The dissolution process ends its legal entity status.

  • Dissolution is an administrative function while winding up is a judicial function.
  • In winding up, the liquidator has a vital role. In contrast, in the dissolution process, the liquidator has no role. The NCLT plays the leading role in passing the order for the dissolution of the company.

Stages of dissolution

The liquidation proceeding under the insolvency and bankruptcy code involves two stages:-

  • Firstly, the corporate insolvency resolution process (CIRP) is initiated by the creditors’ assessing the debtor’s business, and its reorganisations and restructuring get done.
  • Secondly, in case of CIRP failure, the company’s assets are sold to repay the debts to its creditors. The remaining amount of money gets distributed to the shareholders as per their shareholding in the company.

Modes of closure of the company

There are various modes of closure of a company. These are:-

  • Removing the name of the company by the ROC from the register of companies.
  • Winding up by the tribunal
  • Liquidation of the company under IBC 2016

Removal of Names of Companies from the Register of Companies as per section the Companies Act, 2013 read with Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016.

By the Registrar of Companies by suo-motu decision

Suppose the registrar of companies has reasonable cause to believe that a company has failed to commence its business within one year of its incorporation. In that case, it can initiate the process to remove the company’s name from the register of companies.

For example:- A company is not functioning or carrying on any business for a period of immediate previous two financial years and has not made any application within such period for obtaining the status of a dormant company under Section 455.

In such a case, ROC should send a notice to the Company and all the directors of his intention to remove the company’s name from the register, requesting them to send their representations and relevant documents within 30 days from the date of the notice.

Suppose:

  • the subscribers to the memorandum have not paid the subscription amount even after submitting a declaration to pay at the time of incorporation of a company and a declaration to this effect has not been filed within 180 days of incorporation; or
  • It is found that after the physical verification, the company’s registered office is not carrying on any business or operations;

In such a case, the registrar of companies can strike off the companies’ names upon filing an application with the Registrar on all or any of the grounds mentioned above.

A company can also decide to remove its name from the register of companies after extinguishing all its liabilities and pass a special resolution or take consent of seventy-five per cent members in terms of paid-up share capital.

Even if, after serving the notice, the registrar of companies doesn’t receive any objection, he can strike off the company’s name from the register and publish the notification in the official gazette, which makes it stand dissolved.

Winding up and the dissolution by the tribunal

The Companies Act, 2013 Section 271 lays down circumstances in which the tribunal may wind up the company under the following circumstances:

  • If the company agrees by special resolution that the Tribunal
  • If the company’s conduct is against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality
  • Suppose on an application made by the registrar or any other person authorised under this Act; the Tribunal finds that the company’s affairs have been conducted fraudulently or the company was formed for an unlawful purpose. In that case, it will be appropriate to wound up the company.
  • If the company defaults in filing its financial statements or annual returns for immediately preceding five consecutive financial years with the registrar
  • If the Tribunal, in its opinion, is just and equitable that the company should wind up.

The Companies Act, 2013 Section 272 clarifies the list of persons, who shall be entitled to file a petition for the winding-up of a company-

  • the company;
  • any paid-up shares’ holder
  • all or any persons specified in clauses (a) and (b)
  • the Registrar
  • Anyone authorised by the Central Government on that behalf
  • in a case falling under clause (b) of section 271, the Central Government or a State Government.

The dissolution of a company by tribunal occurs as per section 302 of the companies act, 2013.

After winding up a company, the liquidator applies to the company law tribunal for the dissolution of the company under sub-section (1) of section 302.

The tribunal, after reviewing the application and finding it reasonable to pass an order for the dissolution of the company. The liquidator must submit an order copy to the company’s registrar, who will record the minute in the register related to the dissolution of the company.

Liquidation of the company under IBC 2016

Under this process, the liquidation of the corporate person is done under the Insolvency and bankruptcy code under section 59.

If a corporate person wants to liquidate itself voluntarily may pass a declaration with the consent of the majority of directors.

It can get done when the corporate person has no pending debts or can pay its debts by realising its assets.

A voluntary declaration can be made in the company’s general meeting and appoint an insolvency professional called a liquidator.

A corporate person can get liquidated if its duration expires as per articles of association or the purpose for which it was formed is over.

The company will inform the ROC about the resolution to liquidate the corporate person within a specified period.

Subject to the creditors’ approval, the company’s affairs wind up, and assets get liquidated. The liquidator makes an application to the adjudicating authority for dissolution of the corporate person.

The tribunal may pass an order for the dissolution after reviewing the application and finding it reasonable to give an order for the dissolution of the corporate person.

The liquidator must submit a copy of the order to the authority where the corporate person gets registered within fourteen days, who will record the minute in the register related to the dissolution of the company.

Liquidation in case of default

This liquidation of the corporate person can also get initiated if the company has made any default.

The amount of this default must be a minimum of 1 lakh and can go maximum up to 1 crore.

When a corporate debtor commits a default, a financial or operational creditor or a corporate debtor itself can initiate the corporate insolvency resolution process (CIRP) by directly applying to the national company law tribunal.

A CIRP process must get finished within 180 days from the date on which the application gets admitted. This period is extendable by 90 days on passing a resolution by a vote of 75% of creditors.

The adjudicating authority, after admitting the application may

  • Declare a moratorium period
  • Publicly announce for initiation of CIRP and call for submission of claims
  • Appoint an interim resolution process

The committee of creditors can appoint an interim resolution professional or replace one.

The interim resolution professional manages all the affairs of the corporate person and exercises all the powers of the board of directors or partners.

The interim resolution professional submits a resolution plan to the tribunal to pass an order for the corporate person’s liquidation.

How does the winding-up process work?

When the company files a Petition for winding up the corporate person to the adjudicating authority, it can only get admitted if a statement of affairs is annexed.

Whereas if it is filed by any person other than the corporate person if the tribunal is satisfied that a prima facie case for winding up of the company gets made out; It will direct the company to file its objections along with a statement of its affairs within 30 days by passing an order.

The tribunal may pass an order within 90 days from the date of presentation of the petition.

  • Can dismiss the petition, with or without costs
  • Can pass any interim order
  • May appoint a provisional liquidator for the company till a winding-up order gets passed.
  • Pass an order for the winding-up of the company with or without costs

The Tribunal, when passing the winding-up order, may appoint an Official Liquidator or the Liquidator from amongst the Insolvency Professionals registered under the IBC, 2016 as the provisional liquidator or a company liquidator who will be responsible for the conduct of the affairs of the company and winding up proceedings.

Exceptions under the closure of the company

There are some exceptions to the closure of the company. A company cannot make an application for the removal of company’s name to the registrar if the company is:-

  • A delisted company.
  • Vanishing company.
  • Companies in which investigations and prosecutions are pending
  • A company whose application for the compound is at a pending stage
  • A company having outstanding public deposits
  • A company has charges pending against him.
  • A company in winding up process
  • A section 8 company.

An unregistered company cannot apply for winding up to an adjudicating tribunal as per section 375 of the companies act.

Conclusion

Previously winding up of a company in India was governed by the companies act 2013. But, after the insolvency and bankruptcy code 2016, the liquidation of the company and the liquidation procedure is more organised to facilitate the process of winding up the closure of a company.

The creation of dormant companies will lead to an increase in burden, leading to its closure. The winding-up of the company aids in avoiding unnecessary burden on the members of the companies and protect the interests of financial and operational creditors.

Applying these laws for inspections and investigations of companies’ conduct helps in the effective implementation of laws. Further, it aids in keeping a check on fraudulent and unlawful activities by any of the companies.

FAQs

Where are the modes for winding up of a company prescribed?

The modes of winding up a company get prescribed under section 270 of the companies act, 2013.

Which section of the companies act prescribes the provision for the appointment of a company liquidator?

Section 275.

What is form STK-7?

Form STK-7 gets used for the notice of striking off the name of the company and dissolution.

ROC may strike off the company's name from the register and issue a notice in the official gazette under which provision?

According to section 248(5) of the companies act read with rule 9 of the companies (removal of names of companies from the register of companies) rules 2016, the ROC, upon giving reasonable and specified time for objection, can strike off the name of the company from the register and declare it dissolved.

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