Winding Up of A Company And Its Consequences

Have you ever thought about why some companies with flourishing business had to wind up? What are the circumstances which take a company to absolute nullity? And what happens next? I am bringing you a brief insight that will clear your doubts about what winding up of the company means and its immediate repercussions.

What is Winding up of Company?

The first question we will address is- What is the Winding up of a company? Winding up of a company essentially means that a company is in the process of ending up its life. It is a method wherein the dissolution of a company is brought out. It will not make a company lose its entity, though. A company continues to exist until dissolved. The underlying winding up idea is to call up for liquidation where the company pays off creditor, dealt its asset, and distributes remaining assets and surplus among its shareholders.

Winding up can be put into motion by two methods, including compulsory winding up under Tribunal and voluntary winding up. We must note that Tribunal’s compulsory winding is regulated under Company Act, 2013, whereas voluntarily winding up (which was abolished from the Companies Act, 2013) is now under the Insolvency and Bankruptcy Code, 2013. 

Who is “company liquidator”?

Before we embark on the winding-up let’s know who administers this process. A company liquidator is a person appointed for controlling and regulating the winding-up process. A company liquidator in the case of winding up by the Tribunal, is appointed by the Tribunal itself. Whereas in case of voluntary winding up, the company or creditor appoints the company liquidator.

Winding up by Tribunal

When the court is satisfied that a company cannot continue its business, it orders winding up. This is also known as compulsory winding up.

Grounds for Winding up by Tribunal

Company Act, 2013, sets out a basic rationale for the Tribunal to pass the order to wind up a company. The following are the grounds on which Tribunal can order winding up.

(a) Special resolution-

When the company is in the position where it is resolved that it should wind up, it can go to the Tribunal. The company makes a special resolution for this purpose. However, this method of winding up is not preferable as it is comparatively more time-consuming and costly than voluntary winding up.

(b) Acts against sovereignty-

The court orders winding up of the company when it acts against India’s sovereignty.

(c) Default in submitting final statements to the registrar-

When the company does not file with the registrar its financial statement for immediately preceding five consecutive financial years, the Registrar or contributary can file a petition against the company for winding up.

(d) Fraudulent conduct-

No fraudulent conduct! This happens to be the most important point in the formation of any company. If the Tribunal finds out that the company is carrying out its business in a fraudulent manner or the purpose on which the company is formed is fraudulent and highly unconventional, winding up is only the best course of action it can take. Even if a person associated with the company’s formation or management has been guilty of fraud, misfeasance, or misconduct, it is proper that the company be wound up.

(e)”Just and equitable”-

This point highly depends upon the opinion of the Tribunal. The word “just and equitable” itself gives Tribunal a discretionary power. There is no hard and fast rule regarding what is just and equitable on which Tribunal is bound to construe.

The courts in the past have dissolved companies in the following circumstances:

(1) Deadlock:

There is a complete deadlock in the company’s management due to a lack of probity, and it is impossible to continue its undertaking. Winding up on the just and equitable ground is applicable.

In Yenidje Tobacco Co. Ltd, re (1916) 2 Ch 426, court-ordered winding up even though its business was in a profitable state. Hostility between the company’s partner made it difficult, in fact, impossible for a company to carry on its business, and as a consequence, there was a complete deadlock.

(2) Loss of substratum:

Loss of substratum means when the underlying foundation of the company is lost. In such a case, it is subject to wind up under just and equitable ground. Following are some of the reasons due to which the company may lose its substratum: –

Firstly, a company lost its substratum when its main object is no more existing. In German Date Coffee Co., re (1882) LR 20 Ch D 169, the company was established for fracturing coffee from dates. The Government of Germany did not grant the patent for the same, but the company embarked upon other patents. Court hence held that the company’s substratum had failed, and subsequently, it was ordered to wind up on the just and equitable ground.

Secondly, where the company had come to a standstill position because its only basis of survival has vanished, its substratum is no more alive.

Thirdly, when the company is going through a loss which makes it difficult to carry on its business any further even in the future, it has lost its substratum. The order of the court relies on the shareholder’s will. If the majority shareholder is against the winding-up, the court cannot order the same.

Lastly, when the company’s liability is so huge that its asset is insufficient to meet it. It was held that the company had lost its substratum under just and equitable ground, and it should be liquidated.

(3) Oppression of minority:

It is considered just and equitable to wind up the company where the nature of its policy is such that it tends to oppress or disregard the minority. Therefore, it is just and equitable to wind up the company where the interest of the minority shareholders is prejudiced.

(4) Losses:

It is just and equitable when the company’s losses are so overwhelmed that there is no possibility whatsoever to get out of its losses. In such cases a company can only have losses in its hand if it continues to carry it business

Consequences of winding up Order

When the court orders winding up, the immediate consequence results in the commencement of winding up. However, other consequences are as follows: –

1. When the order of winding up is made, and the provisional appointment is made, immediate intimation is provided to the company liquidator, provisional liquidator, and Registrar.

2. After such an order is made, the company is obligated to submit a certified copy of the order within 30 days to the registrar.

3. The order of winding up shall be adjudicated as the discharge of the company officials and employees. But in the event where the company’s business is in operation, this rule will not apply. If the company has hired employees for a specific period of time, and the term has not expired when the order of winding up is passed, the company cannot discharge such employee. Upon such discharge, the company will be liable to a branch of contract.

4. When the order has been made, no legal proceeding or suit shall be commenced except with the Tribunal leave. Similarly, any pending suits cannot be activated except with the leave of the Tribunal. When court grant such leave, all the circumstances of the case is taken into consideration. This is done to secure the unsecured creditors and to preserve the assets of the company.

Voluntary winding up

Voluntary winding up is a method where the members or creditors of the company winds up the company. The underlying idea of voluntary winding up is to prevent the court from intervening in the company’s matters. The company is free to settle their affair by themselves. However, it can reach the court to follow any direction.

Voluntary winding up is of two kinds: –

  1. Members’ voluntary winding up
  2. Creditors’ voluntary winding up

Grounds of voluntary winding up

1. Ordinary resolution-

Shareholders or creditors of the company can pass a resolution for the company’s winding up by passing a simple majority vote. An ordinary resolution is usually made when the company’s period or fixed duration, as specified in the Article, has expired.

2. Special resolution-

If the company at any given time resolves that it should wind up, it can pass a special resolution. Whenever voluntary winding up occurs, members of the company shall not be liable to give any reason for such winding up. A company can wind up even if the Article of association does not mention any such winding up.

Consequences of voluntary winding up

1. The consequence on shareholders and members- if a company has limited shares, its shareholders are liable to pay the full amount up to their face value. He is not free of his obligation even if the company is liquidated.

2. The consequence on the creditors-

  1. Solvent company- where the company is solvent, all debts payable on a contingency and all claims against the company present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company.
  2. Insolvent company- if a company is insolvent and has wound up, it also has to follow the same rule as provided above.

It should be noted that the security of every secured creditor is subject to Pari passu (at equal footing) charge in favour of the workman.

This article has been written by Oruj Aashna, BA.LLB (4th year) student at Calcutta University.

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