A company may be unable to pay its debts but it can’t be adjudicated insolvent as the law of insolvency does not apply to companies. Only individuals can be declared insolvent, not a body corporate. In such a case, a company can only be only wound up. The winding up is the process oi putting an end to the life of the company. During this process the company ceases to carry on its normal business, the assets sf the company are sold and the proceeds are utilized in paying off the debts and liabilities. If any surplus is left, it is paid back to the members in proportion to their contribution to the capital of the company. Am administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and distributes the surplus, if any, among the members. The process of winding up begins only after the court passes the order for winding up and till such an order is passed there is no winding up.
Section 270 of the Companies Act, 2013 provides for two modes of winding up, i.e.
- Winding up by Tribunal (i.e., compulsory winding up); or
- Voluntary winding up.
An application for the winding up of a company has to be made by way of petition to the Court. A petition may be presented under Section 272 by any of the following persons:
Who may file petition?
- the company; or
- any creditor or creditors;
- any contributory or contributories;
- all or any of the parties specified above
- the Registrar;
- any person authorized by the Central Government in that behalf;
- by the Central Government or State Government in case of company acting against the interest of the sovereignty and integrity of India
Winding up by Tribunal (Compulsory Winding Up):
In compulsory winding up a petition is filled before the Tribunal either by the company, or by any creditor(s), or by contributory, or by registrar, or any person authorised by the Central Government on that behalf (Sec. 272).
Steps in Compulsory Winding Up:
- Petition in Tribunal
- Appointment of liquidator
- Hearing of petition by the Tribunal
- Winding up order
Grounds for Compulsory Winding Up:
Section 271 of the Companies Act, 2013 provides various grounds on the basis of which a petition can be filled in the Tribunal for the winding up of the company:
Inability to pay debts:
Sub-section (2) of section 271 provides that the inability to pay debts primarily arise under three circumstances:
- Where the company fails to clear the debt of the creditor within three weeks immediately preceding the date of demand for payment being made;
- Where execution or other process issued on a decree or order of any court in favour of the company is returned unsatisfied in whole or part; and
- Where it is proved to the satisfaction of the court that the company is unable to pay its debts.
A petition for winding up on the ground of inability to pay debts must contain all the relevant information about the debt. The petition must disclose the assets of the company and whether they are sufficient to meet the liabilities including contingent and prospective liabilities. Further, the petition must also disclose the position of fixed assets as well as valuation of plant and machinery of the company.
Once there is an admission on part of the respondent company of liability of dues payable, then a petition under Section 273 cannot be dismissed on technical grounds. Company courts can exercise their discretionary powers of dismissing the petition even before issuing a show cause notice regarding admission.
Despite of repeated demands if a company neglects to pay its debts, it will be considered as an inability of the company to pay its debts and an order of winding up can be passed by the court. By non-payment of the undisputed debt within the period of statutory demand, the company is deemed unable to pay its debts and where the company is unable to pay its debts, winding up ought generally to follow in public interest.
Special Resolution:
The Company may by special resolution resolve that it be wound up by the Tribunal. The resolution may be passed for any cause whatsoever. However, the Tribunal must see that the winding up is not opposed to public interest or the interest of the company as a whole.
In New Kerala Chits & Traders (P.) Ltd. vs. Official Liquidator [1981], it has been observed in this matter that the Tribunal has discretion in the matter and is under no obligation to order winding-up merely because the company has so resolved.
Against National interest:
If the company has acted against the interest of sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.
Failure of Scheme:
If the scheme of revival and rehabilitation is not approved by the creditors, then the company administrator shall submit a report to the Tribunal within 15 days and the Tribunal shall order for the winding up of the sick company. The Tribunal, on passing the order of winding up, shall conduct the proceedings for winding up in accordance with the provisions of Chapter XX [Sec. 271(1) (d)].
Fraudulent and unlawful affairs:
If on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purposes or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound-up; then in such a situation, the Tribunal may, on a petition filed by any authorised person, pass an order for the winding up of the company [Sec. 271(1) (e)].
Default in filling financial statements:
If the company has made a default in filling with the Registrar its financial statements or annual return for immediately preceding five consecutive financial years [Sec. 271(1) (f)].
Just and Equitable:
When the Tribunal is of the opinion that it is just and equitable that the company should be wound up; then the Tribunal may order the winding up of a company. The circumstances in which the courts have in the past dissolved companies on this ground are as follows:
- Deadlock in the management of a company
- Loss of Substratum
- Losses
- Oppression of Minority
- Fraudulent Purpose
- Public Interest
y when the company is in a position to pay its debts. Creditors voluntary winding up takes place in case when the company is not in a position to pay its debts.
Consequences of Winding Up Order in Case of Compulsory Winding Up:
- The Tribunal must, as soon as the winding up order is made, cause intimation thereof to be sent to the Official Liquidator and the Registrar within a period not exceeding seven days from the date of passing of the order. [Sec. 277]
- The petitioner and the company must also file with the Registrar a certified copy of the order. If default is made, then every person responsible for default shall be liable to punishment with fine up to Rs. 1000 for every day.
- The order of winding up is deemed to be notice of discharge to the officers employees and workmen of the company except when the business of the company is continued for the beneficial winding up of the company [Sec. 277(3)].
- All actions and suits against the company are stayed, unless the Tribunal gives leave to continue or commence proceedings. Further, any suit or proceeding pending in any other Court shall be transferred to the Tribunal in which the winding up of the company is proceeding [Sec. 279].
- The order operates in the interests of all the creditors and all the contributories, no matter who in fact asked for it [Sec. 278].
- The Official Liquidator, by virtue of his office, becomes the Liquidator of the company and takes possession and control of the assets of the company [Sec. 275].
- All the powers of the Board of directors cease and the same are then exercisable by the Liquidator.
- On the commencement of winding up, the limitation remains suspended in favour of the company till one year after the winding up order is made [Sec. 358].
- Any disposition of the property of the company, and any transfer of shares in the company or alteration in the status of members made after the commencement of the winding-up shall be void [Sec. 334].
- Any attachment, distress or execution put in force, without leave of the Tribunal, against the estate or effects of the company after the commencement of the winding up shall be void [Sec. 335(1) (a)]; but not for the recovery of any tax or impost or any dues payable to Government [Sec. 335(2)].
- Any sale held, without leave of the Tribunal, of any of the properties or effects of the company after the commencement of winding up shall be void [sec. 335(1) (b)].
- Any floating charge created within 12 months immediately preceding the commencement of winding up is void unless it is proved that the company after the creation of the charge was solvent. [Sec. 332].
Voluntary Winding Up:
In voluntary winding up the company passes the special resolution for winding up in its meeting; or it passes a general resolution in case of expiry of the period of its duration (Sec. 304).
Steps in Voluntary Winding Up:
- Resolution passed by the company
- Declaration of solvency
- Notice to Registrar
- Appointment of Liquidator
- Final meeting
- Dissolution
Types of Voluntary Winding up:
There are two types of voluntary winding up:
- Members voluntary winding up; and
- Creditors voluntary winding up.
Members voluntary winding up takes place onl
Consequences of Voluntary winding up:
- Effect on status of company [Sec. 309]: The company shall cease to carry on its business except if it is required to secure a beneficial winding up.
- Board’s power to cease [Sec. 313]: On the appointment of the Liquidator, all the powers of the Board of directors cease and went into the hands of the Liquidator.
- Avoidance of transfers [Sec. 334]: All transfer of shares and alterations in the status of members, made after the commencement of winding up, are void unless sanctioned by the Liquidator or the transfer is made to the Liquidator.
- Discharge of employees [Sec. 334]: A resolution to wind up voluntarily operates as notice of discharge to the employees of the company.