Different Modes Of Winding Up Of A Company – Explain

Abstract:

Through this informative article explains I have explained how a company, organization or corporation shuts down its operations. The article begins by shedding a light on how the Indian judiciary defines ‘wind up’ and under which sections ambit does it fall. It further elucidates on how it splinters off into three modes. The three modes are defined in an exhaustive manner covering every aspect, by defining their workings and how the law interprets them and utilizes them in its day-to-day functioning. The article’s coda gives the reader an understanding of the act’s practical approach.

Wind up: Definition

Winding up is a method of dissolving an organization or association by auctioning off the entirety of its resources, gathering any outstanding income, ensuring that creditors are paid from the returns, and appropriating anything that remains over (net assets). Anything that remains over might be conveyed in cash or in kind, at first to the preferred shareholders, and afterward to the remaining stockholders. The term winding up is synonymous to ‘liquidation’ which is the process of converting assets to cash.

Winding up due to fraudulent conduct of business is defined under section 339[1] of the Indian Companies Act, 2013 which lays down that if in the course of the winding-up of an organization, it creates the impression that any business of the organization has been continued with an aim to cheat creditors of the organization or some other people or for any fraudulent purpose, the Tribunal may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or then again any people who were intentionally parties to the carrying on of the business in the way aforementioned.

The proceedings of winding up are governed under the provisions of the Companies Act 2013 as well as the Insolvency and Bankruptcy Code 2016[2]. The winding-up of a company may be processed through ways that are mentioned in Section 270 of the Indian Companies Act, 2013. The subsequent modes are-

1. By the National Company Law Tribunal (NCLT)
2. Voluntary Winding Up

Section 248[3] of the Companies Act, 2013 provides discretionary powers to the registrar to remove the names of companies from the register of companies under reasonable cause.

Different Modes of wind up:

A. By the Tribunal[4]–

As per Section 271[5] of the Companies Act 2013, a company can be wound up by a tribunal under six conditions, mentioned hereinafter-

1. If the company is unable to pay prior pending debts;
2. If the company has by the means of special resolution resolved that it be wound up by the tribunal;
3. If the company has acted against the interest of the integrity or morality of India, the security of the state, or has spoiled any kind of friendly relations with foreign or neighboring countries;
4. If the Tribunal passes an order for the company to be wound under chapter XIX;
5. If the Tribunal comes to the conclusion that the company has engaged in fraudulent activities or was formed for unlawful purposes or the persons who have been engaged in the formation of the company have priorly been guilty of fraud;
6. If the company defaults in the filing of financial statements or annual returns with the registrar for immediately preceding five consecutive financial years;
7. If the Tribunal finds that it is just and equitable that the company be wound up;

Filling of the winding up petition:

Section 272[6] of the Act provides the provisions that a winding up petition can only be presented to the Tribunal by the aforementioned entities.

1. The company
2. The creditors; or
3. Any contributory or contributories
4. By the central or state govt.
5. By a registrar authorized by the central govt. for that purpose

Final Order and its Contents:

The tribunal in the wake of hearing the appeal, has the ability to excuse it or to make an interim request as it might see fit or it can appoint the provisional liquidator of the organization till the passing of winding up order.

B. Voluntarily winding up

The procedure for Voluntary winding up of the company has been stated in the Insolvency and Bankruptcy code, 2016 and is applicable to a corporate person. The decision to voluntarily wind up a company can be made after the approval of its members after which the process of liquidation is set in motion. Voluntary wind up is done with the aim to discontinue operation, liquidate its assets and distribute them while also paying off the debts.

The procedure for winding up a company as stated under the Insolvency and Bankruptcy Code,2016:

Under section 59 clause 1[7] of the IBC,2016 it is stated that voluntary liquidation proceedings of an organization, company, a business can only be initiated by a corporate person who has committed any default.

1. The Directors of the company make a declaration of bankruptcy in the form of an affidavit.
2. The Board of directors need to recognize a registered insolvency professional, who will act as the liquidator and conduct the voluntary wound up process.
3. Convene a meeting of the board of directors.
4. A general meeting of the shareholders has to be convened within 4 weeks of the declaration of solvency.
5. The appointed professional liquidator files the resolutions to the Registrar of companies and the Insolvency and Bankruptcy Board of India. The process of voluntary liquidation is said to be in process from the date of the filing of the resolutions subject to the approval of the creditors.
6. The appointed professional liquidator takes charge of the company and has the powers to consult any shareholder who is entitled to the distribution of proceeds.
7. The appointed liquidator is to make a public announcement within 5 days of his assignation.
8. The liquidator is to file a preliminary report under 45 days from the initiation of the liquidation. The report is to be submitted to the company.
9. A bank account is opened by the liquidator in a scheduled bank under the name of the company with the words “in voluntary liquidation” following it, to receive all the dues and realize the assets to meet the cost of liquidation.
10. A No-objection letter is to be obtained by the liquidator from the tax authorities of the place where the registered office of the company is situated.
11. The liquidator will recuperate and understand the resources of the organization in a time-bound way maximizing the estimation of the shareholders. The assets realized will be stored in the bank account opened for this reason.
12. The cash which is realized from the profits will be dispersed to the shareholders.
13. The process of liquidation has to be completed by the appointed liquidator within 12 months from the date of initiation of the liquidation.
14. After the liquidation process is complete the liquidator has to prepare a final report to the Registrar and the Insolvency and Bankruptcy Board of India.
15. An application is made to the National Company Law Tribunal for the dissolution of the company who then pass an order after which the company is said to stand dissolved.

C. Winding up under the “The Fast Track Exit Scheme”[8]:

The Ministry of Corporate Affairs informed Section 248 of the Companies Act, 2013 on December 26, 2016. The part manages the power of the Registrar to eliminate the name of a Company from the Register of Companies. This segment gave an occasion to defunct/idle Companies to get their names struck off from the Register. It comes as an invite measure for huge corporates to shut down a portion of their non-operative Companies and evade yearly Compliance costs.

Conditions under which the registrar can send a notice and strike off the name of a company:

Section 248 clause 1[9] of the Act states the circumstances under which a non-functioning company can have its name denounced.

1. A company fails to commence operations within one year of its incorporation
2. The organization isn’t continuing any business or activity for a time of two immediately preceding fiscal years.

The modus operandi of a company to apply to a Registrar for striking off its name:

The procedure for the aforementioned wind up is expressed under Section 248 clause 2[10] of the Companies Act, 2013.

A Company can after extinguishing all its liabilities file an application along with fees of INR 5000/- to the Registrar for removing the name of the company from the register of companies on all or any of the grounds designated under Section 248 (1).

Real-world illustration of wind-ups:

The most recent example of a company wind up is American Motorbike Manufacturer Harley Davidson, Inc halting its manufacturing and sales operations in India. The company faced its worst international market by selling less than 2500 units[11] in the last fiscal year whilst also performing poorly in the United States of America. The company has done this as a part of restructuring actions that they refer to as the ‘The Rewire’ strategy. The strategy which has been outlined by the company’s President and Chief Executive Officer, Mr. Jochen Zeitz is expected to take one year from August 2020 and will cost $169 Million[12].

[1]https://www.mca.gov.in/SearchableActs/Section339.htm

[2]https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[3]https://www.mca.gov.in/SearchableActs/Section248.htm

[4]http://mca.gov.in/SearchableActs/Section273.htm

[5]http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17705

[6]http://mca.gov.in/SearchableActs/Section272.htm

[7]https://ibclaw.in/section-59-voluntary-liquidation-of-corporate persons/#:~:text=59.,the%20provisions%20of%20this%20Chapter.

[8]http://www.mca.gov.in/MinistryV2/fasttrackexitmode.html

[9]https://www.mca.gov.in/SearchableActs/Section248.htm

[10]https://www.mca.gov.in/SearchableActs/Section248.htm

[11]https://www.moneycontrol.com/news/business/poor-sales-may-force-harley-davidson-to-shut-operations-in-india-report-5732661.html

[12]https://www.carandbike.com/news/harley-davidson-decides-to-discontinue-india-operations-2300494

This Article is Authored by Aditya Ojha, 3rd Year B.A.LLB Student at Ajeenkya D.Y Patil University.