In this article, Harshita Punjabi of RGNUL and pursuing CS does a comparative analysis of winding up of a company under the Companies Act, 1956, Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.

INTRODUCTION

The entire procedure for bringing a lawful end to life of company is divided into two stages. These two stages are winding up and dissolution. Winding up of company is defined as a process by which the life of a company is brought to an end and its property administered for benefit of its members and creditors. It is the last stage, putting an end to life of a company. The main purpose of winding up is to realize the assets and make the payments of company’s debts fairly. Thus, winding up is the process by which management of a company’s affairs is taken out of its directors, its assets are realized by a liquidator and its debts are discharged out of proceeds of realization.

Difference between winding up and dissolution

WINDING UP	DISSOLUTION
Winding up is a proceeding by means of which company is dissolved and in course of dissolution, assets are realized, liabilities are paid off and surplus is distributed among members.	The legal existence of company is brought to an end by dissolution
Winding up precedes the dissolution.	It is the final stage where the existence of company is withdrawn by law.
The liquidator can present the company in winding up proceeding.	Once the order of dissolution is made by the Court, liquidator cannot represent the company.
Winding up proceeding can be started without the intervention of the court.	For the dissolution of the company, order of the court is essential.
Any person can proceed against the company which is being wound up.	No proceedings can be started against the company which has been dissolved.

Difference between winding up and insolvency

Winding up	Insolvency
It is a process by which company is dissolved. The assets are collected, liabilities are paid off out of assets or from contributions by members and if surplus left, it is distributed among members	It is inability of a debtor to pay debts as they fall due. A person is said to be insolvent when his liabilities exceeds his assets and against whom Court makes order of adjudication.
A company cannot be adjudged as insolvent	An individual can be adjudged as insolvent
A company can be wound up even if it financially sound.	A person can be adjudged as insolvent when he is unable to pay his liabilities.
During winding up proceeding, the property is vested in the Company.	In insolvency proceedings, the assets of person are vested in Official Receiver.
After completion of proceedings, the Company is dissolved.	After completion of proceedings, the insolvent person is discharged from liabilities.

 

On winding up, the company does not cease to exist as such except when it is dissolved. The administrative machinery of the company gets changed as the administration is transferred in the hands of liquidator. Even after commencement of winding-up, the assets of the company belong to the company until dissolution takes place. The company ceases to exist as a separate entity on dissolution and becomes incapable of keeping its own property, suing and being sued. Thus, the legal status of the company continues to exist between the period of winding-up and dissolution.

In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony[1] the Supreme Court held that winding-up precedes the dissolution. There is no statutory provision vesting the properties of dissolved company in a trustee or having the effect of abrogating. The shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution, its properties, if any, vest in the government.

WINDING UP AS PER COMPANIES ACT, 1956

There were three modes of winding up of the Companies registered under Companies Act, 1956.

Winding up by the Court

Winding up by the court or compulsory winding up is initiated by application by way of petition to appropriate Court for a winding up order. Section 10 of the Companies Act, 1956 deals with the jurisdiction of for entertaining winding up petition.

The High court has jurisdiction in relation to the place at which the registered office of the company is situated, or

The District Court in which jurisdiction has been vested either by the Act or by notification of Central Government.

GTC Industries Ltd v. Parasrampuria Trading[1], it was held that only High Court where the registered office is situated has jurisdiction in winding up, even if there was agreement between parties will be resolved before High Court where registered office is not situated.

CIRCUMSTANCES IN WHICH COMPANY MAY BE WOUND UP BY THE COURT

Section 433 of the Companies Act, 1956 provides for the circumstances in which company can be wound up-

• If the company has resolved that the company be wound up by the Court by passing special resolution; or
• If the company has defaulted in delivering the statutory report to the Registrar or in holding the statutory meeting; or
• If the company does not commence its business within a year from its incorporation, or suspends its business for a whole year; or
• The number of its members in public company is reduced below seven and in private company below two; or
• The company is not able to pay the debts; or
• The Court is of the opinion that company should be wound up on just and equitable grounds; or
• The company has defaulted in filing balance sheet or annual return with the Registrar for any 5 consecutive years; or
• If the act of the company goes against the interests of sovereignty, integrity and security of India, friendly relation with foreign states, public order, decency or morality; or

Inability to pay debts – A company shall be deemed to be unable to pay its debts when the creditor has served on the company a demand in writing for payment of the debt, which is more than Rs. 500 and company has within three weeks thereafter, neglected to pay or secure or compound for it to the reasonable satisfaction of the court.

Just & Equitable Grounds – Court has complete discretion to decide just & equitable grounds for winding up of a company. Some of the grounds on which court ordered the winding up of company under this clause,

• When the object of the company was fraudulent,
• When substratum of the company has disappeared i.e original object become impossible to attain;
• The object for which the company is formed is illegal or becomes illegal by change in law;
• The object for which company was incorporated has been completed;
• Deadlock in management due to differences among rival group and disagreement cannot be resolved in general or board meeting;
• There has been mismanagement and misapplication of funds by directors of private company.

Who may file petition for winding up

Section 439 of Companies Act, 1956 deals with the persons who can file the petition for winding up of a company,

• The directors can make a petition in the name of the company with the sanction of general meeting by way of special resolution.
• The creditors can make a petition if the company is unable to pay the debts. The creditors include assignee of debt, a decree holder, a secure creditor, a debenture holder or trustee of debenture holders.
• A contributory can present winding up petition if number of members in case of public company is reduced below 7 and below 2, in case of private company.
• The Registrar of companies, after obtaining prior sanction of the central government, can present a petition on winding up of company

VOLUNTARY WINDING UP (Section 488 of Companies Act, 1956)

The company and its creditors may apply to court for directions or orders but usually they are left to settle their affairs within themselves. There are two kinds of voluntary winding up, Member’s Voluntary winding up and Creditor’s voluntary winding up.

Resolution for Voluntary winding up

Voluntary winding up can be passed with an Ordinary Resolution (When the time span fixed in the AoA has expired) else with a Special Resolution (In all other cases).

Members’ Voluntary Winding up

When the company is able to pay its debts, its Board of Directors makes a Declaration of solvency stating that company would be able to pay debts within three years from the date of commencement. Any false declaration made by director will be punishable up to 6 months or fine up to Rs. 50000 or both. In Shri Raja Mohan Manucha v. Lakshminath Saigal[2], it was held that where the declaration of solvency is not made the resolution for winding up and all subsequent proceedings will be null and void. Such a declaration msut be made within five weeks immediately preceding the date of passing of resolution for winding up of company and be delivered to Registrar before that date. The declaration must be accompanied with auditor’s report on balance sheet and profit and loss account as at latest practicable date.

Creditors’ Voluntary Winding up

When declaration of solvency is not made and delivered to the Registrar, it is case of creditors’ voluntary winding up.

Date of commencement of winding up-Section 441 of the Companies Act, 1956 lays the provision for the date of commencement of winding up

The winding up of a company by a court is deemed to commence at the time of the presentation of petition for winding up.

Where a resolution has been passed by the company, for voluntary winding up, the winding up shall be deemed to have commenced at the time of passing of the resolution.

 

Rishabh Agro Industries Ltd. V. PNB Capital[3], it was held that the words “shall be deemed to have commenced” shows the intention of the legislature that although the winding up of company does not in fact commence at time of presentation itself, but it shall be presumed to commence from that stage

Distinction between Members’ voluntary winding up and creditors’ voluntary winding up

Members’ Voluntary Winding up	Creditors Voluntary Winding up
Where a company is solvent & declaration of solvency is made by the directors, it is called members’ voluntary winding up	Where a company is solvent, the declaration of solvency is not made by the directors, it is called as the creditors’ voluntary winding up.
Dominant control remains in the hands of the members of the company.	In creditors’ winding up, dominant control remains in hands of the creditors.
There is no meeting of creditors and the liquidator is appointed by the company.	In creditors’ winding up, meetings of creditors have to be called at the beginning and subsequently the liquidator is appointed by the creditors.
The liquidator can exercise some of his powers with the sanction of a special resolution of the company.	The liquidator can do so with the sanction of the court or the Committee of inspection or of meeting of creditors.

Winding up subject to supervision of the Court (Omitted)

In this winding up process, court can only supervise the procedure. In a general meeting, the resolution for winding up is passed and court may put some general terms. It must be proved by petitioner that winding up cannot continue with fairness and then an additional liquidator along with existing liquidator may be appointed by the Court. A report regarding the progress of liquidation must be filed every 3 months with the Registrar by the Liquidator. The court has power to appoint and remove the liquidator. The court also has the power to enforce calls made by Liquidator as if order for winding up the company has been made by court itself. The Liquidator can do all such acts as he thinks best in the interest of the company.

WINDING UP UNDER COMPANIES ACT, 2013

There are two modes of winding up under the Companies Act, 2013 provides for the provisions relating to commencement of winding up.

Winding up by Tribunal

• National Company Law Tribunal can be initiated by an application by way of petition for winding up order.
• It should be resorted to only when other means of healing an ailing company are of absolutely no avail.
• Remedies are provided by the statute on matters concerning the management and running of the company.
• It is primarily the NCLT which has jurisdiction to wind up companies under the Companies Act, 2013.
• There must be strong reasons to order winding up as it is a last resort to be adopted.

Grounds on which a Company may be wound up by the Tribunal

Under Section 271[1], a company may be wound up by the tribunal if-

• Company is unable to pay the debts;
• If the company has, by special resolution, resolved that the company be wound up by the Tribunal;
• If the company has acted against the interests of sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order;
• If the Tribunal has ordered the winding up of the company under Chapter XIX;
• If on an application made by the Registrar or any other person authorized by the Central Government by notification under this Act, the tribunal is of opinion that affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent or unlawful purpose or the persons concerned in formation misfeasance or misconduct in connection therewith and that it is proper that company be wound up;
• If the company has made default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years;
• If the tribunal is of the opinion that it is just and equitable that the company should be wound up.

Inability to pay debts – A company is deemed to be unable to pay the debts under Section 271 (2) of the Companies Act, 2013 if a creditor to whom company has to pay an amount exceeding Rs. 1 lakh has served a notice at the registered office of the company by registered post or otherwise, which requires the company to pay the due amount and the company has failed to pay the sum within 21 days or If any execution or other process issued by decree of court or order in creditor’s favour is returned unsatisfied in whole or in part or if the tribunal is satisfied that the company is unable to pay its debts and the Tribunal shall take into account the contingent and prospective liabilities of the company while determining whether the company is unable to pay its debts.

Who may file petition for winding up

A petition for winding up may be presented by any of the following persons under Section 272 of The Companies Act, 2013-

• The company; or
• Any creditor or creditors, including any contingent or prospective creditor or creditors; or
• Any contributory; or
• All or any of the above three specified parties; or
• The Registrar; or
• Any person authorised by Central Government in this behalf;
• By the Central Government or State Government in case of Company acting aginst the interest of sovereignty and integrity of India.

As per Section 272 of the Companies Act, 2013, within the meaning of creditor comes a secured creditor, holder of debentures, trustee for holder of debentures.

A contributory can present the petition of winding up of company even if he may be holder of fully paid up shares or that company may have no assets or no surplus to distribute among shareholders after the satisfaction of its liabilities and some shares were originally allotted to him or have been held by him and registered in his name for 6 months during immediately preceding 18 months before commencement of winding up.

A petition for winding up shall be admitted by the Tribunal only if it is accompanied by statement of affairs in such form and in such manner as may be prescribed.

Under this section, a copy of the petition shall also be filed with the Registrar who shall submit his views to the Tribunal within 60 days of receipt of petition.

Powers & Functions of the Tribunal

As per Section 274 of the Companies Act, 2013 on the filing of petition for winding up by any person other than the company, if the tribunal is satisfied, it shall direct the company by an order to file objections along with statement of affairs within 30 days, which could get extended by another 30 days in special circumstances.

As per Section 275 of the Companies Act, 2013 an official liquidator or a liquidator from panel shall be appointed by the Tribunal at the time of passing of winding up order. A panel consisting of CS/CS/Advocates and other notified professionals with at least 10 years experience in company matters is maintained by the Central Government.

As per Section 281 of the Companies Act, 2013, a report shall be submitted by Liquidator within 60 days to the Tribunal, containing details such as-

Nature and details of assets of company with their location and value; amount of capital issued, subscribed & paid up; the existing and contingent liabilities of the company including names and other details; the debts due to company and names, address; list of contributories with amount details; details of trademark, intellectual properties, if owned by company; details of contracts, joint ventures and collaborations, if any; details of holding and subsidiary company, if any; details of legal cases filed by or against the company; any information which the tribunal may direct or liquidator may consider necessary.

On consideration of the report of Liquidator, Tribunal shall fix the time limit within which entire proceedings shall be completed and company be dissolved. The Tribunal may also order a sale of Company as a going concern or its assets or part thereof[2]. After passing of winding up order by the Tribunal, the Tribunal shall settle list of contributories, cause rectification of register of members in all cases where required and shall cause assets of the company to be applied to discharge its liability[3].

Voluntary Winding up

In voluntary winding up, Company and its creditors settle their affairs without going to Court. One or more liquidators are appointed by company in general meeting for purpose of winding up. A voluntary winding up commences from date of passing of resolution for voluntary winding up, a petition is presented for winding up by the Court. Section 304[4] deals with the circumstances in which a company may be wound up voluntarily-

CHANGES IN WINDING UP AFTER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

The Insolvency & Bankruptcy Code, 2016 consolidate and amend the laws relating to insolvency of companies, partnership firms, limited liability partnership into a single legislation. It aims to provide time bound resolution and empowered the creditors to initiate the insolvency resolution process if default occurs.

After the MCA wide notification no. S.O. 3453 E of November 15^th, 2016, section 255 of Insolvency & Bankruptcy Code, 2016 amended following sections of the Companies Act, 2013

In the definition of Winding up, new insertion was made which makes it as winding up means winding up under this Act or liquidation under the Insolvency & Bankruptcy Code, 2016 as applicable.

Section 270 of the Companies Act, 2013 regarding the Modes of winding up, has been deleted after the enforcement of this Code. It has been substituted by Winding up by Tribunal

Section 271, companies Act, 2013 which deals with Circumstances in which company may be wound up by Tribunal has been substituted namely- A company may be wound up by the Tribunal, on petition under Section 272, if the company has resolved by special resolution that company be wound up by the Tribunal; if the company has acted against sovereignty, integrity, security of India friendly relations with foreign states, public order, decency, morality; if the tribunal is of opinion that acts of the company are fraudulent or the object for which it was formed was fraudulent or unlawful or persons concerned in formation and management have been held guilty of fraud, misconduct and it would be proper for it to be wound up; if the company defaulted in filing financial statement for the immediately preceding last financial years with the Registrar; if Tribunal is of opinion that company should be wound up on just and equitable grounds.

The sub-section has been substituted in Section 275 of the Companies Act, 2013 as Section 275(2) which deals with Company Liquidators and their appointment as per which Tribunal shall appoint the provisional or the Company Liquidator from amongst the insolvency professionals registered under the Insolvency & Bankruptcy Code, 2016.

Section 304 of the Companies Act, 2013 that deals with the circumstances in which company may be wound up voluntarily has been omitted by the Insolvency & Bankruptcy Code, 2016 along with other sections relating to voluntarily winding up under the Act

Transfer of proceedings – On December 7^th, 2016, the MCA issued Companies (Transfer of Pending Proceedings) Rules, 2016 for transfer of pending legal proceedings from High Court to National Company Law Tribunal bench

Subject Matter	Transferred to NCLT	Retained with High Court
Winding up under supervision of court	No	Yes
Voluntary Winding up	New cases to be filed with NCLT w.e.f 1st April, 2017 Provisions relating to voluntary winding up under Companies Act, 2013 has been omitted.	For cases filed up to 31st March, 2017
Winding up for inability to pay	Where petition has not been served, it has to be treated as an application under IBC.	Where petition has been served on the Respondent.
Winding up by the Court	Only those cases where petition has not been served on Respondent	Where petition has been served on Respondent.

On March 31^st, 2017the Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. The voluntary winding up of companies was governed by Companies Act, 1956 as the mentioned provisions in Companies Act, 2013 had never been notified. Now the Voluntary Liquidation in both the Companies Act 1956 and Companies Act, 2013 has been repealed by Government.

Chapter V of Part II of the Insolvency and Bankruptcy Code contains Section 59 that deals with voluntary liquidation. Moreover, the distinction between members’ voluntary winding up and creditors’ voluntary winding up has been eliminated.

As per Section 59 of the Code, the voluntary liquidation process can only be initiated by a corporate person, which has not committed any default. Default here includes those debts that are not repaid and has become due and payable. The compliances of some requirements are necessary.

• Declaration by directors that winding up is not to defraud any person;
• Liquidator can be insolvency professional who fulfils criteria under the regulations;
• Registers to be maintained and preserved in prescribed manner;
• Liquidators to receive claims of stakeholders only in specified forms;
• Within twelve months from commencement of voluntary winding up, the affairs of corporate person to be wound up;
• Reports by Liquidator to be submitted to corporate person, Registrar of Companies and Insolvency and Bankruptcy Board of India.
• The time period to comply the requirements has also been reduced to expedite the process.

PROCEDURE FOR WINDING UP UNDER NEW REGULATIONS

STEP 1: One has to submit a declaration to Registrar of Companies, stating that company will pay its dues and liquidation is not to defraud any person;

STEP 2: Within 4 weeks of such declaration, special resolution has to be passed for approval of proposal of voluntary liquidation and appointment of liquidator;

STEP 3: Within 5 days of such approval, public announcement in newspaper and website of company has to be made for inviting claims of stakeholders;

STEP 4: Within 7 days of such approval, intimation should be given to ROC and Board;

STEP 5: Submission of preliminary report containing capital structure, estimates of assets and liabilities, proposed plan of action within 45 days to a corporate person;

STEP 6: Verification of claims within 30 days and preparation of list of stakeholders within 45 days from the last date of receipt of claims;

STEP 7: For receipt of money due to corporate person, bank account needs to be open in name of corporate person having words ‘in voluntary liquidation’ after its name.

STEP 8: Sale of assets and recovery of due money, uncalled capital is realised;

STEP 9: The proceeds from realization to be distributed within 6 months from receipt of amount to the stakeholders;

STEP 10: The final report by the liquidator has to be submitted to corporate person, ROC, the Board and application to NCLT.

STEP 11: The order of NCLT regarding dissolution to be submitted within 14 days of receipt of order.

Conclusion

In the year 1999, as per Justice Eradi Committee Report, 473 winding up cases were pending for more than 25 years and in 2015, there were 1479 winding up cases pending for more than 20 years, as per data furnished by the Department of Financial Services. The Insolvency and Bankruptcy Code, 2016 was passed to ensure time bound settlement of insolvency which would in turn help in solving India’s bad debt problem.

To expedite the process of voluntary winding up, Government had introduced New Regulations as the procedure of voluntary winding up under Companies Act, 1956 was time consuming and there was no prescribed qualification for liquidator. The Code mandates that insolvency professionals are to be appointed as Liquidators, such a move is welcome by corporates and professionals.

The Code and Regulations provide a favourable framework for companies and limited liability partnerships. Though the process remains almost similar to previous regime, but the major change has taken place in initiation of winding up process. Earlier, company or any of its creditors could file a voluntary winding up petition but now company, directors, designated partners or persons responsible for exercising its corporate powers can initiate the winding up process. Moreover, approval of creditors representing two thirds of corporate debt is mandatory under the Code for initiating voluntary winding up proceeding.

To sum it up, now every company who proposes to wind up is required to follow Insolvency and Bankruptcy Code, 2016. The Code is quite comprehensive and wider as against Companies Act, 1956. It is expected that Code would help in overcoming delays and complexities involved in the process due to presence of four adjudicating authorities, High Court, Company Law Board, Board for Industrial and Financial Reconstruction and Debt Recovery Tribunal. It would also lessen the burden on courts as all the litigation will be filed under the Code.

 

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[1] Sec. 271(1), the Companies Act, 2013

[2] Section 282, the Companies Act, 2013

[3] Section 285, the Companies Act, 2013

[4] Section 304 (1), the Companies Act, 2013

[5] (1999) 34 CLA 380 (ALL HC)

[6] (1963) 33 Comp. Cas 719

[7] (2000) AIR SCW 1753

[8] 1969 SCR (3) 203