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WINDING UP
PRIMER
Winding up of a company is the
stage, where by the company takes its last breath. It is a process by which
business of the company is wound up, and the company ceases to exist anymore.
All the assets of the company are sold, and the proceedings collected are
used to discharge the liabilities on a priority basis. There are three ways, in which a company may be wound up. They are: A. Winding up by
the court. B. Voluntary
winding up:
C. Winding up
subject to supervision of the court A.
WINDING UP BY THE COURT: A company may be wound up
by the court in following situations. Here, the court means "High
Court". i. If the company itself, has passed a
special resolution in the general meeting to wound up its affairs. Special
resolution means, resolution passed by three-fourth (3/4") of the
members present. ii. If there
is a default, in holding the statutory meeting or in delivering the statutory
report to the Registrar. A company which is limited by
shares, and a company limited by guarantee having share capital, is required
to hold a " Statutory meeting" of its members, within six months,
and after one month, from the date of commencement of it's business. A
statutory report of the meeting so held shall also be forwarded to the
registrar. [Sec 165 (1) & (5)] iii. If
the company fails to commence its business within one year from the date of
it's incorporation, or suspends its business for a whole year. A company limited by shares, has
to obtain a "certificate of commencement" of business from the
registrar. Unless it obtains such certificate, it cannot carry on its
business operation. iv. If
the number of members, in a public company is reduced to less than seven, and
in case of private company less than two. The statutory requirement of
minimum number of members in a public company is seven, and in case of
private company, it is two (sec 12) v.
If the company is unable to pay its debits; where the financial
position of the company is, such, that it has more liabilities than assets,
and after disposing off the assets, it is still unable to extinguish it's liabilities, it means that company is unable to pay
it's debts. vi. If
the court, itself is of the opinion that the company should be wound up. The court may form such an
opinion, if it comes to the knowledge of court that, the company is
mismanaged, or financially unsound, or carrying an illegal operations etc. RELEVANT POINTS: A. WHO CAN APPLY TO COURT, FOR
WINDING UP PETITION? (SEC 439) Following persons can apply to
the court, for petition for winding up: o
The company itself o
The creditor o
Any Contributory o
Registrar O Any person authorised by central
govt, in case of oppression or mismanagement (397) B. WHAT ORDERS, THE COURT MAY
PASS? (SEC 443) The court may pass any one of
the following orders on hearing the winding up petition. i. Dismiss it,
with or without costs ii. Make
any interim order, as it thinks fit, or iii. Pass
an order for winding up of the company with or without costs. Consequences of court passing an
order for winding up: If the court is satisfied, that
sufficient reasons exist in the petition for winding up, then it will pass a
winding up order. Once the winding up order is passed, following consequences
follow: i. Court will send notice
to an official liquidator, to take change of the company. He shall carry out
the process of winding up, ( sec. 444) ii. The
winding up order, shall be applicable on all the creditors and
contributories, whether they have filed the winding up petition or not. iii. The
official liquidator is appointed by central Government ( sec. 448) iv. The
company shall relevant particulars, relating to, assets,
cash in hand, bank balance, liabilities, particulars of creditors etc, to the
official liquidator. ( sec. 454) v. The
official liquidator shall within six months, from the date of winding up
order, submit a preliminary report to the court regarding : o
Particulars of
Capital o
Cash and negotiable
securities o
Liabilities o
Movable and
immovable properties o
Unpaid calls, and o
An opinion, whether
further inquiry is required or not ( 455) The Central Govt. shall keep a
cognizance over the functioning of official liquidator, and may require him
to answer any inquiry. (463) C. STAY ORDER: Where, the court has passed a
winding up order, it may stay the proceedings of winding up
, on an application filed by official liquidator, or creditor or any
contributory. (466) D. DISSOLUTION OF COMPANY
(481) Finally the court will order for
dissolution of the company, when: o
the affairs of the
company are completely wound up, or o
the official
liquidator is unable to carry on the winding up procedure for want of funds. E. APPEAL: 483 An appeal from the decision of
court will lie before that court, before whom, appeals lie from any order or
decision of the former court in cases within its ordinary jurisdiction. B. VOLUNTARY WINDING UP A company may, voluntary wind up
its affairs, if it is unable to carry on its business, or if it was formed
only for a limited purpose, or if it is unable to meet its financial
obligation, and etc. A company may voluntary wind up itself, under any of the
two modes: i. Members voluntarily
winding up ii. Creditors
voluntarily winding up A company may voluntarily wind
up itself, either by passing: 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 Both types of resolution shall e
passed in the general meeting of the company. (484) Once the resolution of
voluntarily winding up is passed, and then the company may be wound up,
either through: O Members voluntarily winding up, or o Creditors voluntarily winding up
The only difference between the
abate two, is that in case of members voluntarily winding up, Board of
Directors have to make a declaration to the effect, that company has no
debts. (488)
i.
MEMBERS VOLUNTARILY WINDING UP Directors of the company shall
call for a Board of Directors Meeting, and make a declaration of winding up, accompanied by an Affidavit,
stating that; o
The company has no
debts to pay, or o
The company will
repay it's debts; if any, within 3 years from the commencement of winding up,
as specified in declaration (488) WHO SHALL CARRY OUT THE WINDING
UP PROCEDURE?
& WHAT SHALL BE THE PROCEDURE? · The Company shall appoint one
or more liquidators, in a general meeting, who shall look after the affair of
winding up procedure, and distribution of assets. [490 (1)] · The liquidator so appointed,
shall be paid remuneration for his services, which shall also be fixed in
general meeting [490 (2)] · The Company shall also
give notice of appointment of liquidator to the registrar within ten days of
appointment (493) · Once the company has appointed
liquidator, the powers of Board of Directors, Managing Director, and Manager,
shall cease to exist. (491) · The liquidator is generally
given a free hand, to carry out the winding up procedure, in such a manner,
as he thinks best in the interest of creditors, and company. · In case, the winding up
procedure, takes more than one year, then liquidator will have to call a
general meeting, at the end of each year, and he shall present, a complete
account of the procedure, and position of liquidator (496) WHEN AFFAIRS OF THE COMPANY ARE
FULLY WOUND UP The liquidator shall take the
following steps, when affairs of the company are fully wound up : (497) i. Call a general
meeting of the members of the company, a lay before it, complete picture of
accounts, wining up procedure and how the properties of company are disposed
of. ii. The
meeting shall be called by advertisement, specifying the time, place and
object of the meeting. iii. The liquidator shall send to, the Registrar
and official Liquidator copy of account, within one week of the meeting. iv.
If from the report, official liquidator comes to the conclusion, that affairs
of the company are not being carried in manner prejudicial to the interest of
it's members, or public, then the company shall be deemed to be dissolved
from the date of report to the court. v. However,
if official liquidator comes to a finding, that affair have been carried in a
manner prejudicial to interest of member or public, then court may direct the
liquidator to investigate furthers. ii.
CREDITORS VOLUNTARILY WINDING UP · Where the resolution for
winding up has been passed, but the Board of Directors are not in a position
to give a declaration on the liability of company, they may call a meeting of
creditors, for the purpose of winding up. (500) · It is the duty of Board of
Directors, to present a full statement of company’s affairs, and list of creditors alongwith their dues, before the meeting of
creditors. [500 (3)] · Whatever resolution, the
company passes in creditor's meeting, shall be given to the Registrar within
ten days of its passing. (501) WHO SHALL CARRY OUT THE WINDING
UP PROCEDURE ? & WHAT SHALL BE THE
PROCEDURE? · Company in the general meeting
[in which resolution for winding up is passed], and the creditors in their
meeting, appoint liquidator. They may either agree on one liquidator, or if
two names are suggested, then liquidator appointed by creditor shall act.
(502) · Any director, member or
creditor may approach the court, for direction that: o
Liquidator
appointed in general meeting shall act, or o
He shall act
jointly with liquidator appointed by creditor, or o
Appointing official
liquidator, or o
Some other person
to be appointed as liquidator. [502 (2)] · The remuneration of liquidator
shall be fixed by the creditors, or by the court. (504) · On appointment of liquidator,
all the power of Board of Directors shall cease. (505) · In case, the winding up
procedure, takes more than one year, then he will have to call a general
meeting, and meeting of creditors, at the end of each year, and he shall
present, a complete account of the procedure, and the status / position of
liquidation (505). WHEN AFFAIRS OF THE COMPANY ARE
FULLY WOUND UP ( 509) The liquidator shall take the
following steps, when affair of the company are fully wound up: I.
Call a general meeting, and meeting of creditors, and lay before it, complete
picture of accounts, winding up procedure and how the properties of company
are disposed of. II.
The meeting shall be called by advertisement, specifying the time, place and
object of the meeting. III.
The liquidator shall send to the Registrar and official liquidator copy of
account, within one week after the meeting. IV.
If from the report, official liquidator comes to the conclusion, that affairs
of the company are not being carried in manner prejudicial to the interest of
it’s members or public, then the company shall be deemed to be dissolved,
from the date of report to the court.
V. However,
if official liquidator comes to a finding, that affairs have been carried in
a manner prejudicial to intent of members or public, and then court may
direct the liquidator to investigate further. DISTRIBUTION OF PROPERTY OF
COMPANY ON VOLUNTARILY WINDING UP [BOTH MEMBERS AND CREDITORS VOLUNTARILY
WINDING UP] Once the company is fully wound
up, and assets of the company sold or distributed, the proceedings collected
are utilised to pay off the liabilities. The
proceedings so collected shall be utilised to pay
off the creditors in equal proportion. Thereafter any money or property left
may be distributed among members according to their rights and interests in
the company. C. WINDING UP
SUBJECT TO SUPERVISION OF COURT. Winding up subject to
supervision of court, is different from "Winding up by court." Here the court only supervises
the winding up procedure. Resolution for winding up is passed by members in
the general meeting. It is only for some specific reasons, that court may
supervise the winding up proceedings. The court may put up some special terms
and conditions also. However, liberty is granted to
creditors, contributories or other to apply to court for some relief. (522) · The court may also appoint
liquidators, in addition to already appointed, or remove any such liquidator.
The court may also appoint the official liquidator, as a liquidator to fill
up the vacancy. · Liquidator is entitled to do
all such things and acts, as he thinks best in the interest of company. He
shall enjoy the same powers, as if the company is being wound-up voluntarily. · The court also may exercise
powers to enforce calls made by the liquidators, and such other powers, as if
an order has been made for winding up the company altogether by court. ( 526) PRIORITY IN DISPOSING
LIABILITIES [529 A & 530] When the company is wound up, by
any mode, the liabilities shall be discharged in following priority. 1.
Workman's dues. 2.
Debts due to secured creditors, in case of insolvency. 3.
All ---------, taxes, cesses and rates due from the
company to the central government or a state govt. 4.
All wages and salary of any employee due within four months. 5.
All -------- holiday remuneration becoming payable to any employee. · All such debts shall be paid
in full. If assets are insufficient to meet them, they shall abate in equal
proportions. MONEY RECEIVED BY LIQUIDATOR:
(553) Apart from an official
liquidator, every liquidator appointed by company or court to carry on the
winding up procedure, shall deposit the money is received by him in a
scheduled bank, to the credit of a special banking
account opened by him. Apart from a normal company,
registered under the companies Act, 1956 there are other companies as well
winding up procedure for these companies are bit different from a company
registered under companies Act. These companies are: 1.
UNREGISTERED COMPANIES : (583) In simple words, an unregistered
company is a company which is not registered or covered under provisions of
companies Act. 1956 (582) · An unregistered company cannot
be wound up voluntarily, or, subject to super vision of court. · However, the circumstances, in
which unregistered company may be wound up, are as follows: o
If the company, is dissolved, or has ceased to carry on business, or
is carrying on business only for the purposes of winding up, it's affairs, o
If the company is unable to pay it's debt o
If the court is of opinion, that it is just and equitable, that the
company should be wound up. · A creditor, contributory, or
company itself by filing a petition, or any person authorised by central
government may institute winding up proceedings. · In respect to other aspects,
the same provisions and procedure shall follow, as in winding up of
registered company. · A foreign company, carrying on
business in India, which has been dissolved, may be wound up, as unregistered
company. 1. FOREIGN
COMPANY ( 584) A foreign company is a company
which is incorporated outside India, and having a place of business in India. Winding up of such companies is
only limited to the extent of it's assets in India. In respect of assets and
business carried outside India, Indian courts have no jurisdiction. · Winding up of a foreign
company can only be made through court. · Even if the company had been
dissolved or ceased to exist in the country of its incorporation, winding up
order in this country can be made. · Even if a foreign company has
been wound up according to foreign law, the courts in India still protect the
Indian Creditors. The surplus assets, after paying the creditors, should be
distributed among the share holders equally in the same proportion, as the
assets ---- to the total issued and paid up capital. · Pendency of a foreign
liquidation does not affect the jurisdiction to make winding up order. The
Assets can be of any nature and do not take to be in the ownership of the
company and can come from any Source. · As, for persons claiming to be
creditors, their presence, itself is sufficient. It is not required to be
shown, that company carried on business operations from any place of business
in India. 2. GOVERNMENT
COMPANY A Govt. company, means a
company, in which 51% or more of, shares are held by a govt. company Winding up procedure for a
government company registered under the companies Act, 1956, is nearly
similar to normal winding up procedure. However, courts, take interest
of public into consideration, and priority is given to them, as a govt.
company is main function is to provide services to public. |