CHAPTER-4

WINDING UP OF COMPANIES

Introduction to winding-up

 Winding up is a process whereby the existing company's affairs is brought to an

end.
 It is a very complex situation where the companies which came into existence in
an aspire to grow higher with the passage of each day, ‘turn- off their entire
business either voluntarily or by the Tribunal's involvement The statutory provisions
of the winding up and its procedure are dealt under Chapter XX Sections 270 to
378 of the Companies Act, 2013.

Meaning of winding-up

 If incorporation is the process of bringing the company into existence, then winding up is
the process of bringing an end to the existence of that company.
 A company cannot die a natural death. It has an indefinite life span, but if such reasons
have emerged which make it desirable to bring an end to its corporate life, then necessary
legal mechanisms have to be put into operation to get it done. This mechanism is the
process of winding up.
 It is a process by which the properties of the company are administered for the benefit of
its members and creditors.
 The person appointed for administering the assets and liabilities is called “Liquidator”.
 In case of compulsory winding up, the liquidator is appointed by the Tribunal under section
275 of the Act; or, in case of voluntary winding up, the liquidator is appointed by the
company itself under section 310 of the Act.
 Winding up is also referred as “Liquidation”.
 On liquidation, the company’s name is deleted from the list of companies by the registrar
of companies and the same is published in the official gazette.
Definition of winding-up

According to Prof. Gower’s “winding up of a company is a process where by its life is ended
and its property administered for the benefit of its creditors and members. An administrator, called
liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and
finally distributes the surplus among the members in accordance with their rights”.

Modes of winding-up

Section 270 of the Companies Act, 2013 provides for two modes of winding up, that is

1. Winding up by Tribunal (i.e., compulsory winding up); or

2. Voluntary winding up
A. Members Voluntary winding up
B. Creditors Voluntary winding up

The procedure for winding up order in compulsory winding up is as follows

1. Petition in Tribunal
2. Hearing of petition by the Tribunal
3. Appointment of Liquidator
4. Winding-up order

The procedure for winding up order in Voluntary winding up is as follows

1. Resolution passed by Company
2. Declaration of Solvency
3. Notice to Registrar
4. Appointment of Liquidator
5. Final Meeting
6. Dissolution
7. Publication in Official Gazzette
Difference between Compulsory Winding up & Voluntary winding up
compulsory winding up Voluntary winding up
Petition is filled before the Tribunal No petition is filled before the Court. In
either by This, the company passes the special
 The company or resolution in its meeting; or it passes a
 Any creditors or general resolution in case of expiry of the
 Contributory or period of its duration (Sec. 304).

 Registrar or
Any person a u t h o r i z e d b y the Central
Government (Dec. 272).
In this case the Tribunal, at the time of In this case the company appoint the
Passing the order of winding up, appoint an Company liquidator from the panel prepared
official liquidator or the liquidator from the by the Central Government for the purpose
panel maintained by the Central of winding up (Sec. 310).
Government (Sec. 275).
The official liquidator can be removed by The company liquidator can be
the Tribunal on the grounds mentioned in removed by the company (if it is appointed
Sec. 276. by the company), or by the creditors gif it is
appointed by the creditors) on the grounds
mentioned in Sec. 311
The order o f w i n d i n g u p o f t h e In this case, the company shall from
Company shall operate in favored of all the the commencement of the winding up cease
creditors and all contributories of the to carry on its business except as far as
company as if it had been made out on the required for the beneficial winding up of
joint petition of creditors and its business. Sec. 309.
contributories Sec. 278.
Difference between Members Voluntary winding up & Creditors Voluntary
winding up
sl.no Members Voluntary winding up Creditors Voluntary winding up
1. Such winding up takes place only when Such winding up takes place in case
the company is in a position to pay its debts. when the company is not in a position to
pay its debts.
2. Declaration of solvency is made by the No such declaration is made.
directors.
3. The liquidator is appointed and The liquidator in fact is appointed by the
remuneration is fixed by the company creditors and remuneration is fixed by the
itself. committee of inspection.
4. No committee of inspection is appointed. Committee of inspection is appointed.

5. Meeting of members is called on Meeting of members and creditors is

completion of proceedings of winding up. called when the proceeding for winding-
up has been completed.
6. The liquidator can exercise some powers The liquidator exercise some powers with
with the sanction of a special resolution the sanction of a special Tribunal.
of the company.
7. Only meeting of members called members Meeting of members and creditors is called
voluntary winding up. creditors voluntary winding up.
Grounds for winding up by the Tribunal (Sec 433)
1. Inability to pay debts
Section 27 1J2) provides that the inability to pay debts primarily arise under
three circumstances, namely,
 Where the company fails to clear the debt of the creditor within three
weeks immediately preceding the of demand for payment being made;
 Where execution or other process issued on a decree or order of any court
in favour of the company is returned satisfied in whole or part; and
 Where it is proved to the satisfaction of the court that the company is
unable to pay its debts.
2. Special resolution
 The company may pass a special resolution that it be wound up by the Tribunal.
 The resolution may be passed for any cause whatsoever.
 However, the Tribunal must see that the winding up is not opposed to public interest
or the interest of the company as a whole.
3. Against National interest
If the company has acted against the interest of sovereignty and integrity of India, the
security of the state, friendly relations with foreign states, public order, decency or
morality.
4. Failure of Scheme
If the scheme of revival and rehabilitation is not approved by the creditors,
then the company administrator shall submit a report to the Tribunal within 15 da s
and the Tribunal shall order for the winding up of the sick company. The Tribunal,
on passing the order of winding up, shall conduct the proceedings for winding up in
accordance with the provisions of Chapter XX [Sec. 27 1(1) (d)].
5. Fraudulent & unlawful affairs
If the Tribunal is of the opinion that the affairs of the company have been
conducted in a fraudulent manner or the company was formed for fraudulent and
unlawful purposes or the persons concerned in the formation or management of its
affairs have been guilty of fraud, misfeasance or misconduct in connection
therewith and that is proper that the company be wound-up; then in such a situation,
the Tribunal may, on a petition filed by any authorized person, pass an order for
the winding up of the company [Sec. 271 (e)].
6. Default in filling Financial statements
If the company has made a default in filling with the Registrar its financial statements
or annual return for immediately preceding five consecutive financial years [Sec. 271(1)
(f)].
7. Just & Equitable
When the Tribunal is of the opinion that it is just and equitable that the company should
be wound up; then the Tribunal may order the winding up of a company.
Consequences of winding up order under compulsory winding-up

1. The Tribunal must intimate to the official Liquidator and Registrar within a period not
exceeding seven days from the date of passing of the order (sec 277).
2. The petitioner and the company must also file with the registrar a certified copy of the
order. If default is made, then every person responsible for default shall be liable to
punishment with fine up to Rs. 1000 for every day.
3. The order of winding up is the notice of discharge to the officers, employees and
workmen of the company except when the business of the company is continued for
the beneficial winding up of the company [Sec.277(3)].
4. All actions and suits against the company are stayed, unless the Tribunal gives leave to
continue or commence proceedings. Further, any suit or proceeding pending in any other
court shall be transferred to the Tribunal in which the winding up of the company is
proceeding (sec 279).
5. The order operates in the interests of all the creditors and all the contributories, no matter
who in fact asked for it (sec 278).
6. The official liquidator by virtue of his office became the liquidator of the company and
takes possession and control of the assets of the company (sec 275).
7. All the powers of the board of directors cease and the same are then exercisable by the
liquidator.
8. On the commencement of winding up, the limitation remains suspended in favour of the
company till one year after the winding up order is made (sec 358).
9. Any disposition of the property of the company, and any transfer of shares in the company
or alteration in the status of members made after the commencement of the winding up
shall be void (sec 334).
10. Any attachment, distress or execution put in force, without leave of the Tribunal, against
the estate or effects of the company after the commencement of the winding up shall be
void [sec 335(1) (a)]; but not for the recovery of any tax or impost or any dues payable to
government [sec 335 (2)].
11. Any sale held, without leave of the Tribunal, of any of the properties or effects of the
company after the commencement of winding up shall be void [sec 335 (1) (b)].
12. Any floating charge created within 12 months immediately preceding the commencement
 of winding up his void unless it is proved that the company after the creation of the charge
was solvent (sec 332).
Consequences of voluntary winding up
1. Effect or status of company (Sec 3O9): The Company shall cease to carry on its
business except if it is required to secure a beneficial winding up.
2. Board’s power to cease (Sec. 313): on the appointment of the Liquidator, all the powers
of the Board of directors cease and went into the hands of the Liquidator.
3. Avoidance of transfers ( Sec.334): All transfer of shares and alterations in the status of
members, made after the commencement of winding up, are void unless sanctioned by the
Liquidator or the transfer is made to the Liquidator.
4. Discharge of employees (Sec 334): A resolution to wind up voluntarily operates as notices
of discharge to the employees of the company.
LIQUIDATOR
A liquidator is a person who is appointed when a company is about to wind up either
by compulsion or voluntarily in order to carry out the liquidation process of the company.

A liquidator comes into the picture only at the time of winding up of a company,

An official liquidator is appointed,

 By the court at the time of compulsory winding up.

 By the members of the company at the time of voluntary winding up.

ROLES & RESPONSIBILITIES OF LIQUIDATOR

The liquidator has a host of powers, depending on the type of liquidator that he\she is
administering.
Their main responsibility is to convert any remaining assets or property of the company into
cash to repay as many creditors as possible.
In addition to a wide range of admin tasks, such as paperwork, he\ she will have to
investigate director conduct and schedule meetings with creditors and directors.
The specific duties of the liquidator will also include the following,
 To assess all debts and decide which should be repaid in full or in part.
 Bring to an end any outstanding contracts or legal disputes.
  Seek valuations for company assets to maximize returns for creditors.
 Closely inspect the restoration of property that may have been sold at
undervalue.
 Keep creditors informed and involved in the decision-making process where ever
appropriate.
 Communicate how creditor claims are progressing, the reasons why the
company failed as well as details about the redistribution of assets.
 Distribute funds to creditors fairly, taking into account the repayment
structure which begins with the fees and expenses of the liquidation
process itself.
 Interview and report on the factors that 1ed to the company's demise and
liquidation. Report to the Secretary of State if he or she identifies director
misconduct or fraud.
 Dissolve the company.

DEFUNCT COMPANY

 A defunct company is a company who has no asset and no liability and failure to commence
business within one year of incorporation.
 The most awaited fast track exit came into existence on 5-4-2017 for striking off the
defunct companies.
 The ministry of corporate affairs (MCA) introduced strike- off mode to allow the defunct
companies to get their names removed from the register of companies (ROC).

INSOLVENCY CODE

INTRODUCTION TO INSOLVENCY CODE

 Prior to insolvency and bankruptcy code, there are multiple overlapping laws and
adjudicating forums dealing with financial failure and insolvency of companies and
individuals in India.
 The previous legal and institutional framework did not aid lenders in effective and timely
recovery or restructuring of defaulted assets and causes undue strain on the Indian credit
system.
  Recognizing that reforms in the bankruptcy and insolvency regime are critical for
improving the business environment and removing distressed credit markets, the
government introduced the Insolvency and Bankruptcy (IBC) code Bill in November 2015.
 It was drafted by a specially constituted “Bankruptcy Law Reforms Committee (BLRC)”
under the Ministry of finance.
 After a public consultation process and recommendations from a joint committee of
parliament, both houses of parliament have passed the Insolvency and Bankruptcy code,
2016.
 While the legislation of the Code is a historical development for economic reforms in
India, its effect will be seen in due course when the institutional infrastructure and
implementing rules as envisaged under the Code are formed.
 The IBC bill introduced in Lok Sabha on July 26, 2021.
 The code provides a time bound process for resolving the insolvency of corporate debtors
(within in 33o days) called the corporate insolvency resolution process (CIRP).

ADMINISTRATION OF NCLT (National Company Law Tribunal)

NCLT is a quasi-judicial authority incorporated for dealing with corporate disputes that are
of civil nature arising under the companies Act.
The central government has constituted NCLT under section 408 of the companies Act,
2013 w.e.f. 01-06-1016.
In the first phase the Ministry of corporate affairs have set up eleven benches,
o One principal Bench at New Delhi and
o One each Regional Benches at New Delhi, Ahmedabad, Allahabad, Bengaluru,
Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai.
o These benches will be headed by the president and 16 judicial members and 9
technical members at different locations.

SCOPE OF NCLT

The National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction of
various bodies, namely,

 Company Law Board

  Board for Industrial and Financial Reconstruction (BIFR)
 The Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and
 The powers relating to winding up or restructuring and other provisions,
vested in High Courts.
Hence, the National Company Law Tribunal will consolidate all powers to govern the
companies registered in India

Advantages for National Company Law Tribunal

1. NCLT is specialized court only for Corporates, i.e. companies registered in India.
2. This will be no more than a Tribunal for the Corporate Members.
3. NCLT will reduce the multiplicity of litigation before different forums and courts.
4. NCLT has multiple branches and is able to provide justice at a close range.
5. NCLT consists of both judicial and technical members while deciding on matters.
6. The time taken to windup a company is reduced.
7. Speedy disposal of cases will help reduce the number of cases.
8. NCLT & NCLAT have exclusive jurisdiction.

POWER OF NCLT

a) Power to seek assistance of Chief Metropolitan Magistrate.

b) De-registration of Companies.
c) Declare the liability of members unlimited.
d) De-registration of companies in certain circumstances when there is registration of
companies is obtained in an illegal or wrongful manner.
e) Remedy of oppression and mismanagement.
f) Power to hear grievance of refusal of companies to transfer securities and rectification of
register of members.
g) Protection of the interest of various stakeholders, especially non-promoter shareholders
and depositors.
h) Power to provide relief to the investors against a large set of wrongful actions committed
by the company management or other consultants and advisors who are associated with
the company.
 i) Aggrieved depositors have the remedy of class actions for seeking redressal for the
acts/omissions of the company which hurt their rights as depositors.
j) Powers to direct the company to reopen its accounts or allow the company to revise its
financial statement but do not permit reopening of accounts. The company can itself also
approach the Tribunal through its director for revision of its financial statement.
k) Power to investigate or for initiating investigation proceedings. An investigation can be
conducted even abroad. Provisions are provided to assist investigation agencies and courts
of other countries with respect to investigation proceedings.
l) Power to investigate into the ownership of the company.
m) Power to freeze assets of the company.
n) Power to impose restriction on any securities of the company.
o) Conversion of public limited company into private limited company.
p) If the company cannot or has not held an Annual General Meeting as required under the
Companies Act or a required Extraordinary General Meeting, then the Tribunal has powers
to call for a General Meetings.
q) Power to alter the financial year of a company registered in India.

ADMINISTRATION OF NCLAT (National Company Law Appellate Tribunal)

 NCLAT was constituted under section 410 of the companies ACT, 2013.
 NCLAT is also appellate tribunal for hearing appeals against the orders passed by NCLT
under section 61 of the Insolvency and Bankruptcy code, 2016 (IBC), with effect from 1st
December, 2016.
 NCLAT is also appellate tribunal for hearing appeals against the orders passed by
Insolvency and Bankruptcy board of Indian under section 202 and section 2011of IBC.
 NCLAT is also appellate tribunal to hear and dispose of appeals agonist any directions
issued or decision made or order passed by the completion commission of India (CCI).
 NCLAT is also appellate tribunal to hear and dispose of appeals agonist the orders of the
National Financial Reporting Authority.
DIFFERENCE BETWEEN NCLT & NCLAT

NCLT NCLAT
NCLT is established a s per Section 408 NCLAT is established a s per Section 410
of Companies Act, 2013. of Companies Act, 2013.
NCLT has 16 benches throughout India. NCLAT has two benches throughout India one
at New Delhi and another at Chennai.
NCLT collects facts and evidences. NCLAT collects facts and evidences.

It holds primary jurisdiction on cases of It holds appellate jurisdictions over the cases
insolvency and bankruptcy. judged by NCLT.
NCLT accepts and analyzes the NCLAT accepts and analyzes the decision
evidence from creditors and debtors. made by NCLT.
Cases can come to NCLT directly. No case can come to NCLAT directly, it
must either come from NCLT,
• under Sec 421 of Companies Act,
2013 or
• any other body given in Sec 410 of
Companies Act, 2013
ADMINISTRATION OF SPECIAL COURT
 Chapter XVIII under the Companies Act, 2013 contains provisions relating to the
Special Courts, specifically Sections 435 to 438 and Section 440.
 The Report of Companies Law Committee chaired by Shri Tappan Ray noted that
the establishment of Special Courts would enable faster prosecution of defaulting
companies.
 The Central Government is empowered to establish Special Courts for the purpose of
providing speedy trial of offences under the Companies Act, 2013.
 The special court shall consist of a single judge holding the office as a sessions judge or
additional session judge for offences with imprisonment of two years or more, such as
fraud including repayment of the debt, or failure to pay dividend knowingly; however, in
other offences, he shall hold office as a Metropolitan Magistrate or Judicial Magistrate
first class.
Powers of the special court

 Under Companies Act, 2013, the judicial magistrate or executive magistrate may
authorize the detention for 15 Days or 7 Days only respectively.
 These magistrates are also empowered to forward the person accused to the Special
Court without unnecessary detention.
 The Special Courts are empowered to take cognizance of the offence without accused
being committed for trial upon perusal of the police report and also to try an offence
under the Code of Criminal Procedure, 1973 with which the accused may be
charged at the same trial.
 The special courts may also try an offence summarily for which the imprisonment is
provide for a team not exceeding three years.
 However, the punishment for conviction in a summary trial is limited to one year.
 The provisions of reversion back to the regular trial and condition there to be also provided
under the Act.
 The person conducting a prosecution before a special court shall be deemed to be a public
prosecutor.

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