In this blogpost, Pavitra, Student of University College of Law, Osmania University and  Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, what is a company , what is striking off and winding up and the procedure for winding up of a company. 

What is a company

A company may be defined as an association of persons which has been registered under section 3(20) of the Companies Act, 2013(“The Act”) or any other previous act in force and has the characteristics of a separate legal entity, perpetual succession, limited liability ,share capital, common seal, transferability of shares and a distinction between ownership and management.

A company may be formed for the purpose of carrying on business to earn profits or can be formed even for non-business purposes. Thus irrespective of the object or business every company shall come into existence only after incorporation under the Act and on completion of registration, the Registrar shall issue the Certificate of Incorporation and the Companies name shall enter into the Register of Companies.

Once a Company is incorporated, it shall continue to exist and shall operate on going concern basis until it is wound up or declared defunct by the Registrar according to the provisions of the Act. This is because the company has come into existence by the process of law, law alone can dissolve it. The various modes in which a company can cease to be in existence are:

• Members voluntary winding up
• Voluntary winding up
• Winding up by the Court
• Striking off on application made by the Company
• Striking off by the Registrar
• Creditors voluntary winding up
• Winding up subject to supervision of the Court

Striking off and winding up

The process of striking off and winding up may either be done voluntarily by a company or can be initiated under the process of law, without any application by the company. Since the  Act, has not yet notified the provisions relating to striking off or winding up, the same shall be governed by the provisions of the Companies Act ,1956, which prescribes the rules and procedures for the same.

Striking off as a method is followed in case of defunct companies as an alternative to winding up. Here a defunct company means a company which has never commenced any business nor carrying on any operation. Striking off can be done in two ways:

1. Striking off by the Registrar :

Where a company had not been carrying on any business, the Registrar is given the power to remove the name from the Register provided he sends notices to the company which includes the Letter of Enquiry, Notice threating striking off and a final notice of removal. The notice shall be published in the Official Gazette unless a sufficient reason has been shown to him within the expiry of three months the Registrar shall strike off the name of the Register, and thus, the company shall be dissolved by law.

2. Striking off on application made by the Company:

 This method is initiated by the company where the company:

• Has got no adequate realizable assets or has such assets as shall not be sufficient to meet the costs of liquidation.
• Does not maintain any bank account as on date.
• Does not have any assets and liabilities as on date.
• The Company has been inoperative from the date of its incorporation / The company commenced business/operations/commercial activity after incorporation but has been inoperative in the previous year(s) due to reasons as specified
• As on date, the Company does not have any statutory dues towards Income Tax / Sales Tax / Central Excise/ Banks and Financial Institutions; any other Central or State Government Departments/Authorities or any Local Authorities.
• There is no litigation pending against or involving the company.

Liability after striking off

The creditors shall not be affected by the striking off of the company because

• The creditors can claim their dues from the Directors, Secretary and Treasurers because in the case of voluntary striking off if they gave a personal guarantee to indemnify any loss caused.
• The creditor can also apply to the court for the winding-up of the Company even though its name has been struck off.
• The creditors can apply to the court at any time within twenty years from the date of publication of notice that the name has been struck off.

Procedure for winding up of a company

According to Halsbury’s Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about and 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.”

Though the Act has got provisions for winding up under Sec 270 since it has not been notified the procedure followed is still being governed by Sec 484 of the Companies Act 1956. Under the old Act the powers are conferred to the High Court whereas under the New Act National Company Law Tribunal is being constituted with the powers of Company Law Board, Official Liquidator Office, Company Court in High Court and BIFR.Thus as a result of NCLT a lot of time can be saved.

Modes of winding up of a company

1. Voluntary winding up:

A company may voluntarily wind up its affairs if it is unable to meet its financial obligations due to difficulties faced in carrying on its business operations or if it was formed only for a limited purpose. A company may voluntarily wind up itself either by passing:

(i)An Ordinary Resolution, where the purpose for which the company was formed has completed or the time limit for which the company was formed has expired or by way of Special Resolution by obtaining the consent of at least  3/4^th shareholders. The special or ordinary resolution must approve (i) the winding up of the company,

(ii) the appointment of a liquidator to wind up the company and

(iii) fix the liquidator’s remuneration.

2. Winding up by tribunal:

A Company may be wound up by the Tribunal if it is

• unable to pay its debts or
• If the minimum number of shareholders as prescribed in the below 7 in the case of public company and 2 in the case of private company.
• by a Special Resolution resolved that the company is wound up by the Tribunal or
• If the Tribunal has ordered the winding up of the Company.

For the purpose of Winding up of the Company by the Tribunal, it shall at the time of the order of winding up appoint an Official Liquidator from the panel as the Company Liquidator.

The expenses of the Liquidator shall be borne by the Company and shall be paid off after the assets are being disposed of and he shall be placed after the Creditors in the order of repayment.

Comparing striking off with winding up

A striking similarity between these two is that the company legally ceases to exist. But when compared to striking off, winding up is a more elaborate process which is necessarily implemented when the company has assets and liabilities. Striking off is preferred by those companies which have relatively no or less outside liabilities and is a much easier process. Another difference between striking off and winding up is that when a company is wound up, a liquidator is appointed by the court in charge of the winding up the process and manage the affairs of the wound up company. The liquidator takes full control of the Company and is responsible to collect and realize all assets of the

company, settle all the creditors’ claims and distribute the surplus asset (if any) to the

Company’s shareholders according to their entitlements. On the other hand, the striking off process entitles the Registrar to exercise his power under the Act to strike, the name of a defunct company, of the register if he is satisfied that the company is dormant in accordance with the requirements of the Act. Further, unlike winding up, the creditors of the company cannot apply to the Registrar or Court to strike off the name of a company of the Register. Further striking off is preferable because of the huge expenses which shall be incurred due to liquidation because all the expenses such as fees of the Liquidator, Court fees and other formalities shall be at the cost of the company and should be distributed from the assets when realised. Winding up is also a tedious and a time-consuming process as it almost takes a year or two to finish all the formalities of liquidation. As the previous act has been implemented, new types of Companies such as One Person Company, Nidhi Companies have come into existence. The procedure for incorporation of these companies has also become quite easy. But in the case of winding up of these companies to the same procedure shall be required to be followed.

Thus, the new legislation should make the procedure easy and depending upon the size of the company and the amount involved respective procedures should be adopted.

References

• Companies Act 2013/1956
• Ministry of Corporate Affairs Website
• ICAI Publications
• ICSI Web Modules