This article is written by Ishita Jha, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.
Table of Contents
Introduction
Winding up petition in layman terms can be understood as a petition to wind up a company i.e. the procedure established by law to close a company. It is a process by which the life of a company is brought to an end. At the time of winding up a company all the assets and liabilities of a company are realised that means all the assets are sold and the debts are cleared. Winding up usually refers to the process of closing a specific line of business. According to Clause (94-A) of Section 2 of the Companies Act, 2013., “Winding Up” means winding up under this act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.[1] Under the Halsbury’s Laws of England, “winding-up is defined as 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 realized: 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.”[2]
It comprises paying or settling all outstanding debts, selling assets and receiving the gains, etc. A person usually known as a liquidator, is appointed, who carries out all these tasks. Once these duties are fulfilled and all the debts are cleared, if surplus is left, it is returned to the partners in a ratio which they have contributed or agreed to. In winding up the company’s registration is not struck out from the register of companies and it continues to be a legal entity only the assets and liabilities are realised. It is a legal process, under which the life of a company is ended.
Once that we have understood what winding up of company means now we will further proceed to-
- Reasons for winding up a company,
- How to file a petition to wind a company.
Chapter 22 (Section 270-365) of the Indian Companies Act, 2013 (further referred to as the Act) talks about the Winding up of a company. This chapter is further subdivided into four (4) parts. Part I (Section 271-303) talks about winding up by the Tribunal Part II (Section 304-323) talks about voluntary winding up of a company, Part III includes the provisions applicable to every mode of winding up (Section 324-365) and Part IV includes Official Liquidators (Section 359-365). So, there are two methods are there to wind up a company as mentioned in Part I and Part II of the Act. A company may be winded by the National Company Law Tribunal (it is further referred to as Tribunal) or voluntary. The Tribunal has been given the power to wind up a company under the Indian Companies Act, 2013 whereas voluntarily winding up is based on the discretionary power of the directors or other members of a company depending upon the circumstances if necessary, to do so. The document of winding up petition shall be in the form of a court document. The Court can only supervise the winding up process.
On 30th March 2017 the central government has notified that section 59 of the insolvency and bankruptcy code, 2016 will provide a procedure to be followed regarding voluntary winding up of a company.[3] According to section 59 of Insolvency and Bankruptcy Code “A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of this Chapter.”[4] The addition of the insolvency and bankruptcy code, 2016 removes the complexities from voluntarily winding up the company therefore providing convenience to the members throughout the whole process.
When is an appeal filed?
A company under Section 271 of the Act is winded up by Tribunal when:
- The company is unable to pay debts.
- If it has been decided by the company to be wounded up by the Tribunal or if ordered by the Tribunal.
- If the company becomes sick (i.e. industrial sickness) and its revival is unlikely.
- If the company has acted against the integrity, sovereignty or security of India.
- If there is a default in documents while filing with the Registrar. If the company has conducted the business in a fraudulent manner.
A company is wound up voluntarily when mutually decided by the directors or when proceeding towards insolvency to avoid bankruptcy as discussed in detail in Part II Chapter XX of this Act.
The winding up petition should explicitly mention the grounds of case and the relief sought. Each detail about debts, creditors, etc shall be individually mentioned and verified. All the relevant data should be attached in the form of annexures and schedules. The petition must include a statement from the witness and all his/her personal details in order to verify the statement.
Winding up by the tribunal
The petition to wind up a company under Section 272 of the Act in the Tribunal can be filed by:
- The company
- Any creditor
- Stakeholder
- The Registrar
- Any person working for the central government
When an appeal is filed by any of the above-mentioned entities, the Tribunal may dismiss the petition, pass an interim order, appoint a provisional liquidator till a judgement is given, give an order for winding up and give any order that the Tribunal thinks suitable. Initially, 21 days is given to the company to reply to the notice issued by the creditors. If the company does not respond then, winding up procedures are initiated. A company cannot be winded up if the petition is filed in bad faith and spurious manner.
If the petition filed is valid and the Tribunal is satisfied then the company will be given 30 days to prepare a statement of its affairs i.e. an overview of its assets and liabilities to assess every minute details about the company. The Tribunal may allow an extension of 30 days in case of any contingencies. At the time of winding up an official or a provisional liquidator, is appointed to conduct the proceeding for winding up the company. The liquidator takes charge of the company. The liquidator performs a series of functions such as he verifies the claims made by the creditors, stakeholders, etc, he takes all the assets of the company into his control to evaluate and prepare a report, to invite settlement claims, etc and to perform any other responsibilities and duties as specified by the Tribunal. In case the appointed liquidator is involved in any misconduct or fraud or is found incompetent or has a conflict of interest or found otherwise then the Tribunal can transfer the duties and responsibilities assigned to him to another liquidator. If found that the liquidator leads to any loss or damage to the company, the liquidator shall have to cover the damages caused as decided by the Tribunal. The Company needs to be informed within 7 days by the Tribunal about the appointment of the liquidator, once the winding order is passed within 3 weeks the liquidator shall send an application to the Tribunal to constitute a winding committee and monitor the liquidation proceedings i.e. to take over the assets, examine the statement of affairs, recover all the profits realised, payment of dividend if any, etc. After 60 days of winding up order is given, the liquidator shall submit a report to the Tribunal containing all the details about the assets and liabilities, the capital structure containing the amount of issued capital, subscribed and paid up capital, the list of stakeholders, legal information, any holding or subsidiary companies etc. After the evaluation and realisation of all the assets and liabilities the debts are cleared partially or completely. If there is any surplus left after clearing of the debts, then it is divided amongst the shareholders or members of the company.
Winding up voluntarily
When a company decides to voluntarily wind up their functions, meetings shall be held with the board, creditors, stakeholders, etc. A liquidator is appointed by the central government for the purpose of winding up affairs. The moment the liquidator is appointed, all the power of the board of directors’ cease. The liquidator shall submit a report to the Tribunal on progress of winding up. A statement needs to be released in an official gazette and 2 local newspapers about the winding up within 14 days of passing any such order.
Essential clauses/provisions in winding up petition
- Title clause
This clause shall include all the details about the petitioner and the company that is to be winded up. Petitioner’s personal details shall also be specifically mentioned. The registration number, registered office address, name of partners along with their personal details, their capital structure (i.e. the amount authorised capital, issued capital, subscribed capital) and other relevant information pertaining to the company shall clearly be mentioned in this clause. The advocates of the company and their details shall be clearly specified. The stock exchange or exchanges where the company is listed must be specified.
- Reason for establishment of the company
The main object as to why the company was established shall be clearly mentioned as to what was stated in the Memorandum of Association. The copies of Memorandum of Association and Articles of Association should be annexed in the Annexures.
- Grounds of the winding up petition
The petition must contain detailed and accurate information as to why the company needs to be dissolved. The grounds to wind up a company need to clearly set out.
The petition can be rejected on the basis of any error or missing information in the petition filed. If the petition is being filed under Section 272 the total amount of debt of the company shall be mentioned along with any interest if specified in the contract amongst the company and the creditor. The Petitioner shall also specify the duration and dates clarity.
- Claim
The amount due from the company to the creditor shall be clearly mentioned. The date from when the money has been invested, the rate of return, the date from when the money has been due along with the interest rate shall be specified. The amount must be specified. The relevant documents shall be annexed.
If the Petitioner has information about other default payments by the company as well, they can also be specified.
- Intimation to company
the Petitioner shall inform the company about any default in payment of interest or repayment. The notice conveying this information shall be annexed.
The Petitioner shall specify if any action is taken by the company or not. The Petitioner shall also specify the response is received and the action taken with respect to that response. The copy of any such reply shall be annexed.
The Petitioner shall in good faith believe that the company is not capable of repaying the outstanding dues, therefore it is good in public interest and for creditors for the company to wind up. The balance sheet and annual return of the company shall be annexed.
Section 434 of the Indian Companies Act, 1956 states that once it has been proved that the company is indebted to several creditors and the sun is exceeding Rs. 1,00,000/- and a notice has been served and an enquiry has been demanded about the amount due and the company has not responded for 3 weeks or has neglected the repayment, the company shall be deemed to unable to pay its debts and therefore liable to be wound up.
- Jurisdiction
The jurisdiction shall be based on the pecuniary value (on the basis of monetary value of the suit) or territorial jurisdiction as mentioned in the deed.
The Petitioner shall file this petition in good faith. The claim is not barred by the law of limitation, all the necessary steps and requisite court fee shall be paid.
- Prayer
- The Petitioner prays that the company registered under the Indian Companies Act, 1956 shall be wound up by the order and direction of the Honourable Court.
- The Liquidator shall be appointed by the Court and the statement of affairs shall be provided to the liquidator.
- Any interim relief shall be provided.
- And any other relief which the Honourable Court may deem fit.
- Affidavits
There should be a written statement claiming that all the statements made in the petition are true and are verified. The affidavit can be made by the petitioner or by the director, or any other individual authorised to do so.
- Annexures and schedules
Any relevant contract or receipt or document or communication that supports the winding up shall be attached to the petition.
Conclusion
The winding up of the company is a complex process. Section 270-365 of the Indian Companies act, 2013 includes all the information pertaining to winding up of a company in detail. The company’s functions cease through the process of winding up which further ends by dissolution. Winding up of a company only ends the functions the legal existence of a company does not cease. There are various processes containing different course actions to realise the assets and liabilities. All these functions are taken over by a liquidator who acts in accordance with law. The winding up can be initiated by the tribunal or voluntarily by the board of directors and chairman. The winding up of a company ultimately ends in dissolution of that company.
References
[1] Clause (94-A) inserted by the Insolvency and Bankruptcy Code, 2016 vide Schedule Eleventh of the Code
[2] Halsbury Laws of England
[3] Section 59 of the Insolvency and Bankruptcy, 2017
[4] Section 59 of the Insolvency and Bankruptcy, 2017
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