This article is written by Dhruv Bhardwaj, a student of Amity Law School, Delhi. In this article, he will discuss how the operations of a company are wound up as per the guidelines laid out in the Companies Act, 2013.
Winding Up of a Company means to bring an end to the life of the company. A distinct feature of a company is Perpetual Succession which means that the longevity of the company does not depend on its members or their financial status. Even if all the members of the company go bankrupt or all of them die, the company will not dissolve on its own unless it is made to dissolve on grounds which are laid out in the act. This article will go over how the operations of a Company are shut according to the provisions of the Companies Act.
Types of Winding Up
According to Section 425 of the Companies Act, 2013, there are 2 kinds of Winding Up. They are:
- Compulsory Winding Up under the order of the Court
- Voluntary Winding Up, which itself is of two kinds:
- Members’ Voluntary Winding Up
- Creditor’s Voluntary Winding Up
Winding Up by Court
A company may be wound up at an order of the Court. This is also called Compulsory Winding Up. The cases in which a company may be wound up are given in Section 433. They are as follows:
In the event that the organization has, by unique goals, settled that it be ended up by the court. The court is, be that as it may, not bound to request Winding Up essentially in light of the fact that the organization has so settled. The power is optional and may not be practised where twisting up would be against the general population or the organization’s advantages.
Default in Holding Statutory Meeting
On the off chance that an organization has made a default in conveying the statutory report to the Registrar or in holding the statutory gathering, it might be requested to be Wound Up.
Failure to Commence Business or Suspension of Business
In the event that an organization does not initiate its business within a year from its joining or has suspended its business for an entire year, it might be requested to be twisted up. Here again, the power is optional and will be practised just when there is a reasonable sign that there is no aim to carry on business. In the event that the suspension is acceptably represented and has all the earmarks of being because of brief causes, the request might be declined.
Reduction in Membership
On the off chance that the quantity of individuals is decreased, on account of an open organization, underneath seven, and on account of a privately owned business, beneath two, the organization might be requested to be twisted up.
Inability to Pay Debts
An organization might be requested to be twisted up on the off chance that it is unfit to pay its obligations. Failure to pay obligations is clarified in Section 434. As indicated by this area, an organization will be esteemed to be unfit to pay its obligations in the accompanying three cases:
- Statutory Notice
- Decreed Debt
- Commercial Insolvency
Just and equitable
The final ground on which the court can arrange the ending up of an organization is the point at which “the court is of the assessment that the organization ought to be twisted up.” This gives the court a wide optional capacity to request twisting up at whatever point it seems, by all accounts, to be attractive. The court may give due weight to the enthusiasm of the organization, its representatives, loan bosses and investors and overall population ought to likewise be considered. The conditions wherein the courts have in the past broken down organizations on this ground can be settled into general classifications as pursues:
Firstly, when there is a deadlock in the management of the company, it is just and equitable to order winding up. The well-known illustration is Yenidje Tobacco Co Ltd. The facts of the case are laid out as follows:
W and R who exchanged independently as cigarette makers consented to amalgamate their business and shaped a private limited organization of which they were investors and the main chiefs. They had an equivalent casting of ballot rights and, in this manner, the articles gave that any contest would be settled by discretion, however, one of them disagreed from the honour. Both at that point turned out to be hostile to the point that neither of them would address the other aside from through the secretary.
Therefore there was a finished stop and thus the organization was requested to be twisted up in spite of the fact that its business was thriving. It must be noticed that the ‘Fair and Equitable’ statement ought not to be conjured in situations where the main trouble is the distinction of view between the greater part directorate and those speaking to the minority.
Loss of Substratum
Also, it is simply and evenhanded to wrap up an organization when its fundamental article has neglected to appear or it has lost its substratum. A decent delineation is German Date Coffee Co. The realities of the case are spread out as pursues:
An organization was shaped to make espresso from dates under a patent which was to be conceded by the Government of Germany and furthermore for working different licenses of comparable kind. The German patent was never allowed and the organization set out upon different licenses. Yet, on the request of an investor, it was held that “the substratum of the organization had fizzled, and it was difficult to do the items for which it was framed; and, subsequently, it was simple and fair that the organization ought to be twisted up.
Thirdly, it is viewed as just and fair to wrap up an organization when it can’t carry on business with the exception of at misfortunes. It will be unnecessary, in reality, for an organization to carry on business when there is no desire for accomplishing the object of exchanging at a benefit. Yet, simple anxiety with respect to certain investors that the benefits of the organization will be squandered and that misfortune rather than increase will result has been held to be no ground.
Oppression of Minority
It is simple and even-handed to wrap up an organization where the vital investors have embraced a forceful or onerous or pressing approach towards the minority. The choice of the Madras High Court in R. Sabapathi Rao v Sabapathi Press Ltd, is a representation in point. The court saw that where the executives of an organization had the option to practice an overwhelming effect on the administration of the organization and the overseeing chief had the option to outvote the minority of the investors and hold the benefits of the business between individuals from the family and there were a few objections that the investors did not get a duplicate of the asset report, nor was the inspector’s report perused at the general gathering, profits were not consistently paid and the rate was lessening, that established adequate ground for twisting up.
It is simple and fair to wrap up an organization on the off chance that it has been imagined and delivered in misrepresentation or for an illicit reason.
Incorporated or Quasi Partnership
It has been seen that there is little in like manner between the goliath organization and the family or the one individual organization. To apply the equivalent legitimate prerequisites to such various associations is profitable of bother and bad form. So as to maintain a strategic distance from such “burden and unfairness” the Act treats them distinctively in a few regards. In any case, even in issues in which the Act treats them alike, the courts have needed to recognize them.
Voluntary Winding Up
A company may be wound up voluntarily in the following two ways, as discussed below:
By Ordinary Resolution
An organization might be twisted up willfully by passing an ordinary resolution when the period, assuming any, fixed for the span of the organization by the articles, has lapsed. Also, when the occasion, assuming any, has happened, on the event of which the articles give that the organization is to be broken down, the organization may, by passing a normal goal with that impact, start its willful twisting up.
By Special Resolution
A company may at any time pass a special resolution providing that the company be wound up voluntarily. Winding Up commences at the time when the resolution is passed. Within fourteen days of the passing of the resolution, the company shall give notice of the resolution by advertisement in the Official Gazette and also in some newspaper circulating in the district of the registered office of the company. The corporate state and powers of the company shall continue until the company is dissolved, but it shall stop its business, except so far as may be necessary for beneficial winding up.
As discussed earlier in the article, Voluntary Winding Up is of two kinds:
- Members’ Voluntary Winding Up;
- Creditor’s Voluntary Winding Up
If a Declaration of Solvency is made in accordance with the provisions of the Act, it will be a Members’ Voluntary Winding Up and if it is not made, it becomes the Creditors’ Voluntary Winding Up. The declaration has to be made by a majority of the directors at the meeting of the board and verified by an affidavit. They have to declare that they have made a full inquiry into the affairs of the company and have formed the opinion that the company has no debts or that it will be able to pay its debts in full within a certain period, not exceeding three years, from the commencement of winding up.
The declaration, to be effective, must be made within the five weeks immediately before the date of the resolution and should be delivered to the Registrar for registration before that date. It should also be accompanied by a copy of the report of the auditors on the profit and loss account and the balance sheet of the company prepared up to the date of the declaration and should embody a statement of the company’s assets and liabilities as at that date.
There is a penalty for making the declarations without having reasonable grounds for the opinion that the company will be able to pay its debts within the specified period. If the company fails to pay the debts within that period, it will be presumed that reasonable grounds for making the declaration did not exist. The liquidator should forthwith call a meeting of the creditors because the winding up has then to proceed as if it were Creditors’ Winding Up.
Final Meeting and Dissolution
When the affairs of the company are fully wound up, the liquidator makes an account of the winding up showing how the winding up has been conducted and the property of the company disposed of. He then calls a general meeting of the company for the purpose of laying before it the accounts of winding up. The meeting is to be called by advertisement in the Official Gazette and a local newspaper specifying the time, place and object of the meeting. Within a week after the meeting, the liquidator sends a copy of the accounts and a return of the meeting to the Registrar and the Official Liquidator.
If no quorum was present at the meeting, he makes a return stating the fact. The Registrar, on receipt of the accounts and the return, registers the documents. The Official Liquidator, to whom also a copy of the accounts and return is sent, is required to make a scrutiny of the books and papers of the company. The liquidator of the company and it’s past and present officers are under a duty to give the Official Liquidator all reasonable facility for the purpose.
The Official Liquidator reports to the Tribunal, the result of his scrutiny. If the report shows that the affairs of the company were not conducted in a manner prejudicial to the interest of its members or to the public interest, then from the date of the submission of the report to the Tribunal, the company shall be deemed to be dissolved. If the report reveals that the affairs were conducted in a manner prejudicial to the interests of the members or to the public interest, the court shall direct the Official Liquidator to make further investigations into the affairs of the company. The court may invest him with such powers as may be necessary for the purpose. When the court receives the report on further investigation, it may declare that the company stands dissolved or make such order as the circumstances discovered by the report may warrant.
A company can be wound up for a lot of reasons but Winding Up of a Company is not as simple as closing the shutters of its headquarters or not turning up to work. Winding Up is an even more cumbersome process than the Incorporation itself.
- Company Law by Avatar Singh.