This article is written by B Bhanukesh, pursuing a Diploma in Companies Act, Corporate Governance, and SEBI Regulations from LawSikho.com.
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Winding up essentially is a process of liquidating the assets of a corporation, firm, or other legal entity which is followed by subsequent payment to its creditors and distribution and issuance of assets to its partners or shareholders upon dissolution. Generally, winding up is done when it is ordered by the tribunal or when it is decided by the creditors or members. There are many reasons for winding up by a company or business i.e., insolvency or bankruptcy, death of promoters, or mutual agreement among stakeholders. According to Halsbury’s Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about & in the course of which its assets are collected and realised; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with Articles of the Company.” Winding up is a legal process. Therefore, dissolution is taken forward when the workings and affairs of the company have been wound up. It is the Company Liquidator who shall make the application for dissolution to the Tribunal. The Tribunal as per the application or when it believes that it is just and reasonable, it passes the order for dissolution. This article focuses on what are the main differences between the winding up and dissolution of a company under the Companies Act, 2013.
What is winding up?
Winding up is a process in which the company is dissolved by clearing all the debts or liabilities, dissolution of its assets is collected, and other important items are returned to the creditors and if any contributions are made by the members, they are also returned. Therefore, winding up we can say is a process of putting an end to the life of a company. If the company has any surplus left then, it is distributed among the members in accordance with their rights. It is also called liquidation. “According to Section 2(94A) of the Companies Act, 2013 or Insolvency and Bankruptcy Code, 2016, “Winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.” Chapter XX Sections 270–378 of the Companies Act, 2013 deals with winding up and other aspects of it.
Differentiating between the process of winding up and dissolution
The terms winding up and dissolution differ in many ways. The whole strategy for achieving a legal finish to the existence of an organisation is partitioned into two phases-
- Winding up, and
Winding up is the first stage in the process where the assets are realised, liabilities are paid off and the surplus is distributed among the members. Dissolution is the final stage whereby the existence of the company is withdrawn by the law. The liquidator appointed by the company or court carries out the winding-up proceedings but the order for dissolution is passed by the court only. Winding up in all cases doesn’t finish in dissolution, even after paying all the creditors there may, in any case, be a surplus, the company may acquire benefits or profits during the course of winding up, there may be a scheme of compromise with the creditors and at last, the company can go back to the shareholders or old management of the company. A dissolution is an act of putting the end to the life of a company lawfully.
Dissolution of an organisation in two ways:
- First in which the organisation is moved to another organisation under the plan of recreation or combination. In such a case, the exchange of organisation will be broken down by a request for Tribunal without it being twisted up.
- In the second situation, the organisation will go through a wrapping-up measure where the resources of the organisation will be acknowledged and they will continue utilising it to pay its liabilities. When the obligations have been settled, the leftover sum, assuming any, will be circulated among the partners and the Tribunal will pass the request for the disintegration of the organisation and strike its name off the register of Registrar of the Companies.
The dissolution of an organisation is decided by the Tribunal and the technique for ending up of an organisation in India which is absolutely a legal capacity. There is an outlet that carts away and controls the wrapping-up measure. Subsequent to ending up, the disintegration cycle happens. The disintegration of an organisation is recorded by the enlistment centre of organisations. This is a simple regulatory capacity and doesn’t include any job for the vendor. Disintegration is a fundamental advance after the ending up of an organisation. Since April 2016, the arrangements identifying with the mandatory ending up under the Companies Act 2013 have been supplanted with Insolvency and Bankruptcy Code, 2016. From that point forward there have been different alterations in the law with the late one being IIBBI (Insolvency Professionals) (Amendment) Regulations, 2018.
Analysing the modes of winding up
A company comes into existence when it gets registered by the Registrar of companies (ROC) and obtains the certificate of incorporation by the ROC. It will come into existence even if an appointment is made in the form of a receiver or manager by the court or debenture holder, or the approval of a scheme of arrangement by the court. The existence of a company is lost when the company completes two stages; the first being winding up and the second being Dissolution. There are only 2 major types or modes of winding up which are:
- Compulsory winding up
- Voluntary winding up
Compulsory winding up
Compulsory winding up takes place when a company becomes insolvent or bankrupt. When the company is ordered to be wound up by the Court or Tribunal, it is referred to as compulsory winding up of a company. If the company goes into liquidation, the court of law appoints a liquidator to complete the process of liquidation. Section 270 of the Companies Act, 2013 deals with winding up by the Tribunal.
- A wilful wrapping-up happens without the mediation of the court or council. This mode for the most part happens:
- When the organisation terminates its prefixed length or, because of the event of specific occasions whereby the organisation must be disintegrated, and if the organisation embraces and passes a normal goal for twisting up.
- If the company passes a special resolution to wind up the company.
Voluntary winding up
Voluntary winding up is divided into two parts:
- Members’ voluntary winding up
- Creditors’ voluntary winding up
Members’ voluntary winding up
This type of winding up occurs when the company is solvent. The company needs to declare its solvency at the Board of Directors meeting. This declaration must satisfy the directors’ opinion that the company has no loans or debts or it will pay the whole debts within three years of winding up.
A general meeting is conducted wherein a liquidation is appointed and remuneration is fixed thereby. With his appointment, all the powers of the board, Managing Director, or Manager ceases to exist, until and unless a General Meeting sanctions it otherwise. The liquidator must annually call a general meeting to lay the procedure for winding up and to lay the accounts of his dealings.
Creditors’ voluntary winding up
This type of winding up occurs when there is a declaration of solvency by the company i.e. when the company is insolvent. Hence, it empowers the creditors of the company to dominate over the members so that they don’t protest against them. It requires the company to hold a meeting with the creditors and the board and make a full statement of the company’s affairs with a detailed list of creditors including their estimated claims.
Both the creditors and members at their respective meetings appoint a liquidator, if at all there is a disagreement, then the creditors will appoint the liquidator at their discretion. The liquidator holds a meeting not only with the members but also with the creditors to lay the procedure for winding up and to lay the accounts of his dealings. The liquidator at last calls for a general meeting where he winds up the company.
The procedure for winding up is not that simple and a very lengthy and time taking process. It includes within its ambit many complexities and technicalities. The Ministry of Corporate Affairs through amendments made the process of formation of companies easy and fast through its online platform. The same ministry shall bring changes and add new formats for winding up so that it will be easy for the companies to wind up. Earlier only the Companies Act represented this but with the Insolvency and Bankruptcy Code, 2016, it has gotten more difficult to apply these rules and provisions simultaneously with choosing the priority.
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