The process of a company’s dissolution is called winding up of a company. It is a process in which a company’s assets are collected and then sold in order to clear its debts. The company ceases to do its business like they did before while winding up too. The sole purpose of winding up of a company is to sell off the stocks, pay off the creditors, and distribute the remaining assets to partners or shareholders. After the completion of the winding up of the company, it is formally dissolved and it ceases to exist. Winding up of a company is the condition when the life of a company is brought to an end.
STEPS OF WINDING UP OF A COMPANY
Following are the steps followed in case of winding up of a company –
1. An Administrator also called as a liquidator, is appointed for liquefaction or for the winding up.
2. The control of the company, assembling of the company’s assets, payment of the debts of the company and the final distribution of any surplus amongst the members according to their rights and liabilities are done by the liquidator of the company.
3. At the end of liquefaction or winding up of a company, it has no assets or liabilities left.
4. When the company’s assets and liabilities are completely wound up then dissolution takes place.
5. After winding up, the company’s name is struck off from the list of the companies and its identity as a separate legal person is lost.
6. The company is considered insolvent and to compulsory wind up when a company is unable to pay its debts or the debts are taken by the company is worth more than the assets it owns and no agreement has been made with the creditors.
7. A person must be owed a minimum Rs.750 without dispute before he can ask for a winding up.
8. The liquidator is known as official liquidator if the company’s winding up is processed in the court of law.
9. Under the supervision of the court, the official liquidator acts through recpgnized reporting system.
HOW WINDING UP OF A COMPANY WORKS?
It is a legal process regulated by the company’s articles of association or partnership agreement as well as the corporate laws. Winding up of a company can be compulsory by the court or tribunal’s order or any company could voluntarily apply for wind up the company.
According to Section 270 of the Companies Act, 2013, winding up of a company can be of two ways. First, the Court can wind up a company. Secondly, the “voluntary winding up”, in which the shareholders or the creditors or the company themselves wind up the company.
A. Winding up of a company by a Court or a Tribunal
A court can legally force the company to wind up. The company is ordered by a court to appoint a liquidator who will manage the sale of assets and liabilities and the distribution of the proceeds to the creditors.
When a company’s creditors files a suit against a company then the court orders to wind up. They are often the one to realize that a company is insolvent as the bills have remained unpaid. The winding up of a company is often is the final conclusion of a bankruptcy. A company may not have sufficient assets to fulfill all its debtors need, and then the creditors will have to face an economic loss.
Compulsory winding up of a company happens when a creditor of an insolvent company asks the court for a wind up. If a company goes into liquidation then the tribunal appoints a liquidator for liquidation.
- The liquidator has to raise funds which are needed to pay the creditors.
- The name of the company will be struck off from the companies list in the registrar’s office and then the company will be dissolved.
- The surplus money if left will be distributed amongst the shareholders of the company.
- The company ceases to exist anymore once the name of the company is stuck off from the companies list.
Winding up involves –
- Each and every contract of the company including individual contracts are completed or transferred or ended. So the company is not able to do business further.
- Any legal disputes are settled.
- The assets of the company are sold.
- Creditors collect the funds raised.
- Shareholder collects the surplus funds left with the company.
According to Companies Act, 2013, a tribunal or a court can wind up the company on the basis of the following reasons:
- Special resolution passed by the company asking winding up of the company by the tribunal.
- When the company fails to report a statutory report at the registrar’s office.
- Non commencement of a company within one year from the incorporation.
- For the public company the number of members reduced below 7 and for private company below 2.
- Company is not able to pay the debts,
- Balance sheet or annual return for five financial years consecutively not filed by the company.
- When the company acted against the sovereignty and integrity of the country.
Filing of Winding Up Petition
According to Section 272 of the Companies Act, 2013, a winding up petition has to be filed. The petition for winding up can be presented by the following persons:
- The Company
- The creditors
- Any contributories
- By the central or state government
- By the registrar of any person authorized by central government for that purpose.
Effects of Winding Up of a Company by Court Order
When a court or tribunal orders winding up of a company, the winding up should be deemed to have commenced at the time of making of the application for the winding up of the company.
The directors and the secretary of the company should deliver the statement of company’s affairs to the liquidator who then files a copy of the statement to the tribunal within 14 days of the winding up order. The statement of affairs delivered by the directors and the secretary of the company contain the company’s details of assets and liabilities and information required by the Official Receiver or the liquidator and enables the liquidators to investigate into the matters of the company.
The company or its creditors or its shareholders can apply to restrain any pending proceedings against the company in the court after filing the application of winding up. No action against the company can be started or continued without the leave of the court after the winding up order has been made by the court. No transfer of shares and disposition of the company’s property are allowed after the commencement of the winding up order of court and shall be void unless the Court orders otherwise.
The Second Schedule of the Insolvency, Restructuring and Dissolution (Corporate Insolvency and Restructuring) Rules 2020 defines the proceedings of Court Fees payable for filing of documents for Compulsory Winding up.
B. Voluntary Winding Up of a Company
By the mutual consent of the members of the company, the company can be winded up under the following circumstances-
1. For winding up of the company, an ordinary resolution is passed in the general meeting of the company.
2. In case of an event as per the article of association of the company, under which it needs to be dissolved.
3. If the pre-fixed period by the articles of associations has been expired.
4. For winding up the company, all the members of the company pass a special resolution for voluntary winding up.
5. In order to convene a general meeting, a minimum notice of twenty-one days must be given.
6. A general meeting can be convened with a shorter notice with the consent of the members of the company.
7. After the above mentioned resolution has been passed then a voluntary winding up starts.
8. The voluntary winding up is done by applying to the registrar of company within 14 days of commencement of the liquidation.
9. At the place of the registered office of the company, the news must be published in a newspaper about the winding up of the company.
10. The company cannot conduct any commercial business after starting the process of winding up.
11. But the business can be conducted for the benefit of winding up process i.e., payment of debts of the company’s creditors.
Voluntary Winding up of a company takes place when a company becomes insolvent and unable to pay its debts and discharge its liabilities. If the shareholder of the company faces challenges with the company hen they may call for a resolution to wind up the business.
According to Section 270 of the Companies Act, 2013, the procedure of winding up of the company can be done by the two process discussed above, one by the tribunal and another by voluntarily. These are the two ways by which the company can be winded. The winding-up or liquidation of the company is the process by which a company’s assets are collected and sold to pay debts of the company.
This Article is Authored by Manisha Singh, 5th Year B.A.LL.B Student at Heritage Law College, Kolkata.