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In this article Anjali Sharma, student, Manipal University, Jaipur. Here she discusses the process of winding up of a company.

Meaning of Winding-Up

Winding-up is a process whereby the life of a company is ended & property is administered for the benefit of shareholders & creditors.

Structure of Winding-Up

  • By court ( NCLT)/ Compulsory Winding-up
  • Voluntary Winding-up (provisions related to voluntary winding-up have been repealed and has now been shifted to Insolvency & Bankruptcy code).

Voluntary Winding-Up

In this article, I am only dealing with the provisions of Company Law and so I will not deal with voluntary winding-up. But to give a brief idea, it is a process where the company becomes insolvent and so it decides to wind-up the company before the NCLT does and declares itself to be insolvent. There are two ways by which the company declares voluntary winding-up:

  1. By Ordinary Resolution: A company may wound up voluntarily if the given period or duration of the company has expired. Such period should be mentioned in the articles of the company or if there is any mentioning in the articles, that company shall dissolve on the occurrence of a particular event and if such event occurs then the company, by passing an ordinary resolution can start the process of winding-up.
  2. By Special Resolution: A company may wound up voluntarily after getting 75% majority from its shareholders and board of directors. The process will only start when the special resolution has been passed. After the resolution has passed the same has to be published in the Official Gazette and in leading newspapers of that district/city within 14 days.
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Declaration of Solvency

This declaration is done by the majority of directors at a meeting and the same has to be verified by an affidavit. The following declarations shall be made:

  • They have to declare that a full inquiry in the debts of the company has been made and that they will be able to pay their debts in full by selling the assets or that they have no debts.
  • Such a declaration has to be made within 5 weeks before the date of the resolution and has to be informed to the registrar of the company for registration before that date.
  • It shall also declare that the winding-up of the company is not with the intention to defraud any person.
  • It shall declare the time period within which they will clear their debts (if any).
  • If the debts will be paid off by selling off assets, a valuation report of the assets shall be attached. Valuation of such assets shall be prepared by a registered valuer.
  • If the company fails to pay its debt within the time specified, it will be considered that there was no reasonable ground for making the declaration.
  • The liquidator can then call for a meeting of creditors.

Meeting of Creditors

Creditors of the company are also notified through the post and a meeting is conducted for them where they are handed with a list which consists of the amount due for each creditor. The board of directors will put the statement of affair and the declaration of solvency in front of the creditors. If the majority of the creditors are of the opinion that voluntary winding-up should be followed, the company will then be wound up voluntarily. But, if they are of opinion that it is in the best interest of the company that NCLT/ Tribunal should wind up the company because it will not be able to clear its debt then the process of winding up will be followed by sending an application to tribunal within 14 days and within 10 days the same has to be informed to the registrar of the company. A liquidator is then appointed by the company keeping in mind the rules & regulations laid down by Insolvency & bankruptcy code. The liquidator is then required to evaluate the asset & liabilities of the company and present a final report to NCLT.

Compulsory Ground (By court i.e. NCLT)

1.Inability to pay debts (this has been shifted to Insolvency & Bankruptcy code 2016)

  1. Failure to pay demand: If a company is holding loan of more than 1lakh and creditor sends notice to pay the amount then in such a case, a formal notice has to be given by the creditor. If within 21 days of such notice, the company is not able to pay or doesn’t reply or doesn’t deposit the security, neither it is trying to restructure the debt then it is known as failure to pay demand.
  2. Decreed Debt: Failure to do the execution of the court’s demand. It means the court has given the order to pay and there is a failure of obeying of the court’s order, can also be known as contempt of court/violation of court’s order/ failure of satisfaction of the decree/ company is not able to satisfy the decree of the court.
  3. Commercial Insolvency: Auditors feel that there is increase in liability and, assets are not increasing. Therefore, they feel that the company is becoming detrimental to the interest of the public. The financial structure is such that liability is increasing and assets are not increasing. There is a likelihood of the happening of the event of insolvency. At this point the company is not insolvent but before such event happen company thinks to declare insolvency so that they can pay the shareholder, creditors/ pay their taxes & etc.

2. Special Resolution Resolved: 75% of majority shareholders pass the resolution for winding up of the company but execution takes place by NCLT/discretion of NCLT to govern the winding up.

3.When the company acts against the interest of sovereignty of India & integrity of India, friendly relation with the foreign state, decency, morality, public, security of the state.

4. Affairs of the company are conducted in a fraudulent manner.

  1. Formed for unlawful purposes.
  2. Management guilty of fraud.

5. Company has failed to file the return with the registrar of the company for 5 consecutive years.

6. When NCLT thinks it’s just and equitable to wind up the company.

  1. Deadlock: when there is a deadlock between partner and it can’t be resolved court will pass the order for compulsory winding up.
  2. Loss of Substratum: It means the substance of the object clause is no more valid. The business that the company wants to do is either banned or the government doesn’t give permission.
  3. Losses & losses
  4. Oppression & Management
  5. Public Interest

Company Liquidator

When a company goes into insolvency or declares insolvency a company liquidator is appointed by the NCLT. He is appointed so that he can understand the current position of the company and take measures to complete the ongoing projects. He also looks into the finances of the company so that all the creditors, shareholders, debenture holders & etc can be paid.  

Powers & Duties of Company Liquidator

  • The company liquidator has the power & duty to carry on the business. He has to complete/effort to complete the subsisting contract.
  • To do all acts and execute all documents, deeds, receipts & other documents.
  • Deal with the movable/ immovable property.
  • Sell the whole undertaking as a going concern. (After the order of winding up is given the board of directors have no role. All the powers are given to liquidator and if after notice of winding up somebody wants to buy the company, the liquidator is in the position/power to sell it without taking further permission.)
  • Prosecution
  • Invite and settle the claims of different creditors.
  • Inspect the records/ financial statements of the company.
  • Negotiable Instrument: cheque, promissory note, bill of exchange. All such negotiable instrument has to be signed by the liquidator (earlier board of director used to do it with the seal of the company) i.e. draw, accept endorse the negotiable instrument.
  • Professional assistance: He can call for the help of an expert if he finds difficulties i.e Lawyers, CA & etc.
  • He can take actions related to signature, execution and verification of any documents, application, bond, petition which are necessary for winding up. He can also take actions related to the distribution of assets and all such actions are done under the control of NCLT. The extent of control of NCLT is different for company liquidator & provisional liquidator. There are some actions for which company liquidator doesn’t require the permission of NCLT (except for selling of undertaking) but provisional liquidator can’t exercise any power & duty without the permission of NCLT.

Preferential Payment

  1. Company has to pay revenue, cess & tax.
  2. Wages, salaries, commissioned works due for 4 months.
  3. All accrued holiday remuneration.
  4. Contribution to ESIF
  5. All sums due to provident fund, gratuity pension & other.
  6. Expenses of investigation.

National Company Law Tribunal (NCLT)

It is a quasi-judicial body formed by the central government of India that adjudicates the matter related to Indian companies. It was constituted on 1st June 2016. All matters related to companies act including arbitration, arrangements, winding up, compromise, and reconstruction is disposed of by the NCLT.

Civil courts have no jurisdiction to entertain any proceeding or suit in respect of any matter which the tribunal or the appellate tribunal is empowered to determine by or under this act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken by the tribunal or appellate tribunal.

NCLT is the adjudicating authority for insolvency resolution process of companies and limited liability partnerships under the insolvency and bankruptcy code, 2016.

Constitution of NCLT

It consists of mainly:

  • President
  • Judicial Members
  • Technical Members

Qualifications of members

  • President: A person who has been a judge of the high court for 5 years.
  • Judicial Members: Judge of the high court (time period not specified)/district judge for five years or an advocate for ten years.
  • Technical Members:
  1. Should have 15 years of practice in Indian Legal Service or has been joint Secretary, or,
  2. 15 years of practice as a CA/CS, or,
  3. Should be a person of high integrity or specialized knowledge for 15 years, or,
  4. President of labour court for 5 years.

National Company Law Appellate Tribunal (NCLAT)

It is an appellate tribunal or higher authority of NCLT which deals with appeals arising out of the decision of NCLT. If any party is not satisfied by the decision of NCLT, they can file an immediate appeal to NCLAT and they correct the errors (if any) made by NCLT & can review the decision of the tribunal and has the power to set aside, modify or confirm it. If a party is not satisfied with the decision of NCLAT then they can approach the apex body i.e. Supreme Court of India within 60days, but, the Supreme Court can only be approached on the question of law.

NCLT & NCLAT have an obligation to discharge the case within 3 months; if not then the reason has to be recorded for such delay within 90 days.

Conclusion

It can be further concluded that NCLT plays an important role in the winding-up of a company. It takes all measures to protect the interest of the creditors, debenture holders and gives a conclusive guideline so that the process of winding-up can be followed smoothly & effectively and at the same time has made an effort to be extremely transparent and easy.

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