- 1 Winding up of Companies Corporate Law Notes
Winding up of Companies Corporate Law Notes
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What do you mean by winding-up of a Company? Explain be difference between winding up and dissolution of a company?
Distinguish between winding up and dissolution. State briefly the various methods of winding up.
What is winding up of a company? Explain the various methods winding up.
State the circumstances under which a company may be compulsorily wound up by the Court/Tribunal.
Ans. Meaning of ‘Winding up’ or Liquidation of a Company : Minding up or liquidation of a company is a process of putting an end to the if of a company. It is a proceeding means of which company is dissolved and in the course of such a dissolution its assets are collected, its lets are paid off out of the assets of the company or from contributions by members, if necessary. If any surplus is left, it is distributed among the embers in accordance with their rights. Winding up of a company proceeds it dissolution. Prior to dissolution and after winding up the legal entity of the company remains and it can be sued in a Tribunal/court of law.
M.C. Kuchhal defines, “The ‘winding up’ or ‘liquidation’ of a company is a process to bring about an end to the life of a company.” In the words of Pennington, “Winding up is a process by which the management of a company’s affairs is taken out of its directors’ hands; its assets are realized by a liquidator and debts are paid out of the proceeds of the realization and any balance remains is returned to its members.”
Conclusion : Thus, the process of winding up involves the realisation of the assets, payment of the liabilities and distribution of urlus, if any, amongst the members of the company.
Meaning of dissolution of a Company : A company is said to be dissolved when it ceases to exist as a corporate entity. On dissolution, the company’s name shall be struck off by the Registrar from the Register of companies and he shall also get this fact published in the Official Gazette. the dissolution, thus puts an end to the existence of the company.
Modes of dissolution: Dissolution of a company may be brought bout in any of the following ways :
(l) Through transfer of a company’s undertaking to another under a scheme of reconstruction or amalgamation. In such a case the transfer or company will be dissolved by an order of the Tribunal without being wound up.
(2) Through the winding up of the company, wherein assets of the company are realized and applied towards the payment of its liabilities. The surplus, if any is distributed to the members of the company, in accordance with their rights.
Difference Between Dissolution and Winding up ( Winding up of Companies Corporate Law Notes )
|l. Winding up is one of the method by which dissolution of a company is brought ht about.||l. Dissolution is the end result of winding up.|
|2. Legal entity of the company continues at the commencement of the winding up.||2. Dissolution brings about an end to the legal entity of the company.|
|3. A company may be allowed to continue its business so far necessary for the beneficial winding up of the company.||3. Company ceases to exist on its dissolution.|
Thus, winding up ultimately leads to the dissolution of the company, In between winding up and dissolution the legal entity of the company remains and it can be sued in a Tribunal/Court of law.
Modes of Winding up of a Company
According to Section 270 of Companies Act, 2013, a company may be wound up in any of the following two ways :
(I) Winding up by the Tribunal/Compulsory Winding up, or
(Il) Voluntary Winding up.
We shall now discuss the modes of winding up, in brief, one by one.
(I) Winding up by Tribunal/Compulsory Winding up A company may be wound up by an order of the Tribunal. This mode of winding up is also known as compulsory Winding up of a company. As per Section 271 (1), Tribunal may order for the winding up of a company on a petition submitted to it on any of the following grounds :
1. Passing of Special Resolution for the Winding Up : When a company has by passing a special resolution resolved to be wound up by the Tribunal, winding up order may be made by the Tribunal. The resolution may be passed for any cause whatsoever. Tribunal may not order for the winding up if it finds it to be opposed to public interest or the interest Ofthe company as a whole.
2. Acting against the National Interest : If the company has against the interests of : (i) the sovereignty and integrity of India, (ii) security of the State, (iii) friendly relations with foreign states, (iv) public order, (Odecency, or (vi) morality, ‘it may be ordered to be wound up.
3. Tribunal’s Order Under Chapter XIX : A Company may be wound up if the Tribunal has ordered the winding up under Chapter XIX which deals with Revival and Rehabilitation of Sick Companies.
4. Company’s Affairs are being conducted in a Fraudulent Manner : The Tribunal may make a winding up order if on an application made by the Registrar or any other person authorised by the Central Government, the Tribunal is of the opinion that :
(i) the affairs of the company have been conducted in a fraudulent manner; or
(ii) the company was formed for fraudulent and unlawful purpose; or (iii) 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.
5. Default in Filing Financial Statements : A’ company may be wound up by the Tribunal if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years.
6. Inability to Pay Debts : A company may be ordered to be wound up, if it is unable to pay its debts or honour its monetary commitments. According to Section 271 (2), a company is deemed to be unable to pay its debts in the following three cases :
(i) Failure to Pay on demand : Where the company fails to pay the sum or otherwise satisfy the creditor to whom it owes a sum exceeding Rs. 1 lakh, within 21 days of the demand for payment made by its -creditor or his agent or legal adviser.
(ii) Unsatisfied Decreed Debt : Where the company fails to satisfy a decree of any or tribunal in favour of a creditor-either in whole or in part. note that there is no condition of any amount in this case. Unsatisfied execution of a decree for- anv amount howsoever small will constitute anability to pay.
(iii) Proving Inability to Pay Debts or Commercial Insolvency : A company shall also be deemed to be unable to pay its debts if it is proved to she satisfaction of the Tribunal that the company is unable to pay its debts. an determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the company. If a company cannot prove that its assets are sufficient to meet its iabilities within a reasonable time, the company may be considered as commercially insolvent company.
(7) Just and Equitable Reason for Winding up : The Tribunal may ISO order the winding up of a company, if the Tribunal is of opinion that it is just and equitable that the company should be wound up.
The discretionary powers the Tribunal under this clause are very wide. The Tribunal may order winding up of a company whenever it appears to it just and equitable. What is just and equitable is a question of fact and decided upon the circumstances of each case. But generally while passing an order under this clause, the Tribunal takes into consideration the interest of the company, its employees, creditors, shareholders and the society in general.
Petition For Winding up Section 272] ( Winding up of Companies Corporate Law Notes )
The Tribunal does not choose to wind up a company of its own motion. It has to be petitioned. Section 272 of the Companies Act 2013 enumerates the persons who can file a petition to the Tribunal for the winding up of a company.
The following persons can file a petition:
l. The company. 2. Any creditor or creditors including any contingent or prospective creditor or creditors.
3. Any contributory or contributories.
4. All or any of the aforesaid parties, together or separately. 5. The Registrar.
6. Any person authorized by the central government under section 245.
7. By the Central or State Government. Consequences of the Winding up Order by the Tribunal: In case the Tribunal issues a winding up order against the company, the following consequences will follow :
(l) The Tribunal shall appoint an Official Liquidator or a liquidator from the panel maintained by the Central Government as Company Liquidator. [Section 275(1)]
(2) The order for winding up shall operate in favour of all the it hoc on the joint petition of creditors and contributories. [Section 278]
(3) The winding up order shall be deemed to be notice of discharge to the officers and employees of the company except when the business of the company is continued. [Section 277(3)]
(4) The powers of the board of directors will terminate and they will now vest in the Official Liquidator, who shall by virtue of his office become the liquidator of the company.
(5) No suit or other legal proceedings shall be commenced, or if pending at the ‘date of the winding up order, shall be proceeded with or against the company, except by leave of the Tribunal and subject to such terms as the Tribunal may impose. [Section 279(1)]
(Il) Voluntary Winding Up
Where a company is wound up by the members and creditors without any interference by the Tribunal, it is called voluntary winding UP’
In voluntary winding up, the company and its creditors are left free to settle affairs without going to the Tribunal. Although the Company their Liquidator or any contributory or creditor may apply to the Tribunal for directions or orders, as and when necessary, for determination of any question arising in the course of the winding up. [Section 322(1)]
It may be mentioned that under the previous Companies Act, 1956 Voluntary Winding Up was of two types . (l) Members’ Voluntary Winding Up; and (2) Creditors’ voluntary Winding Up. ‘Members’ voluntary Winding Up’ was resor to buy solvent companies when directors filed a ‘declaration of solvency’ with the Registrar. On the other hand, Creditors’ Voluntary Winding Up’ was resorted to by insolvent companies when a ‘declaration or solvency’ was not made by directors. The companies Act, 2013 has abolished the above distinction. Under the 2013 Act, if ‘declaration of Solvency’ is not made, there can be no voluntary winding up at all.
Grounds for Voluntary Winding Up : According to Section 304, a company may be wound up voluntarily under any of the following two circumstances :
(l) By Passing an Ordinary Resolution : A company may resolve by an ordinary resolution to be wound up voluntarily :
(a) When the period fixed for the duration of the company as mentioned in its articles, has expired, or
(b) When the event on the happening of which, the articles provide that the company, is to be dissolved, has occurred; or
(2) By Passing a Special Resolution : A company may, at any time, without assigning any reasons, resolve by a special resolution to be wound up voluntarily.
The resolution for voluntary winding up when passed, must be advertised within 14 days of the passing of the resolution in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company. (Section 3071
Winding up of Companies Corporate Law Notes
Q. 25. What is meant by ‘Voluntary Winding up of a company’? What are the grounds for voluntary winding up of a company? What are the consequences of voluntary winding up? Discuss.
Discuss briefly the Statutory provisions regarding voluntary winding up.
Ans. Meaning and Grounds of Voluntary regarding up: See page 100 and 101 of Q 24.
Consequences of Voluntary Winding Up
The consequences of voluntary winding up are as follows :
(l) A voluntary winding up shall be deemed to commence from the date of the passing of the resolution to that effect. (Section 308) (2) From the commencement of voluntary winding up, the company ceases to carry on its business, except so far as may be required for the beneficial winding up thereof. (Section 309)
(3) The possession of the assets of the company vests in the company Liquidator for realisation and distribution among the creditors. The corporate state and powers of the company shall, however, continue until it
is dissolved. (Section 283 and 309) (4) A resolution to wind up voluntarily operates as notice of discharge to the employees of the company, except. when the business is continued by the Company Liquidator for the beneficial winding up of the company, or when the liquidation is only with a view to ‘Reconstruction’,
(5) On the appointment of a Company Liquidator, all the powers of the Board of Directors, Managing Director or Manager, shall come to an end except for the purpose of giving notice to the Registrar of such appointment of the Company Liquidator. (Section 313) (6) The company’s creditors cannot file suits or continue any pending suits against the company. They are required to lodge their claims and prove their debts to the Company Liquidator. In the case of disputed claims, however, a voluntary winding up does not operate as a stay of any existing proceedings or prevent the institution of new proceedings.
(7) All transfers of shares or alterations in the status of the members, made after the commencement of the winding up of the company, shall be void except when it is made with the permission of the Company Liquidator (Section 334)
Statutory Provisions Applicable to Voluntary Winding Up
The provisions regarding voluntary winding up are summarised below:
(1) Declaration of Solvency (Section 305): The ‘Declaration of solvency’ has to be made by a majority of the directors (or all of them if there are only two directors) at a meeting of the Board and verified by an affidavit. They have to declare that the company has no debts or that it will be able to pay its debts in full.
The declaration of solvency shall be effective when.
(i) It is made within five weeks immediately preceding the date of the passing of the winding up resolution by the’ members.
(ii) It is delivered to the Registrar for filing before the said date.
(iii) It contains a declaration that the company is not being wound up to defraud any person or persons.
(iv) It is accompanied by a copy of the report of the auditors of the company on ,the profit and loss account prepared since the date of the last account and balance sheet of the company made out as on the last mentioned date and also embodies a statement of the company’s assets and liabilities as at that date. (v) Where there are ‘assets of the company, it is accompanied by a report of the valuation of the assets of the company prepared by a registered valuer. Directors making a false ‘declaration of solvency’ are punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 5 years or with fine which shall not be less than 50,000 but which may extend to Rs. 3 Lakh, or with both.
(2) Meeting of Members and Creditors: The Board of Directors will convene two separate meetings-one of members and the other of creditors, for passing the resolution for voluntary winding up of the company separately at both the meetings. The meetings shall be held either on the same day, one after the other or on the two consecutive days. The notice of both the meetings shall be simultaneously sent by registeréd post. (Section 306 (1)
(3) Statement of affairs to be presented before Creditors’ Meeting: The Board o/ Directors of the company shall lay before the meeting of the creditors a full statement of the position of the company’s affairs together with a list of the creditors of the company and the estimated amount of their claims; and appoint one of the directors to preside over the creditors’ meeting. (Section 306(2)
(4) Passing of Resolution by Creditors: Where two thirds in value of creditors of the company pass a resolution that:
(a) It is in the interest of all parties that the company be wound up voluntarily, the company shall be wound up voluntarily; or
(b) the company may not be able to pay its debts in full and therefore the company-should be wound up by the Tribunal. In such a case the company shall within 14 days thereafter file an application before the Tribunal. (Section. 306(3)
(5) Filing of a copy of the Resolution with the Registrar: A Copy of any resolution passed at the aforestated creditors’ meeting, must be filed with the Registrar within ten days of the passing thereof. (Section. 306(4)
(6) Publication of Resolution (Section 307): 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. Every officer responsible for default in publishing the resolution shall be Punishable with fine extending up to Rs. 5000 for every day of the default.
(7) Commencement of Winding up (Section 308): A voluntary winding up shall be. deemed to commence on the date of passing of the resolution for voluntary winding up by the members of the company.
(8) Appointment of Company Liquidator (Section 310); The members and the creditors at their respective meetings while passing the resolution for voluntary winding up shall also appoint a company liquidator from the panel prepared by the Central Government, for the purpose winding up the affairs and the assets of the company and recommend the fee-to be paid to the company liquidator. The appointment of company liquidator shall be effective only after it is approved by the majority of creditors in value of the company. Where such creditors do not approve the appointment of such company liquidator, creditors shall appoint another company liquidator and shall also fix his fee, who shall be the company’ liquidator. On appointment as Company Liquidator, such liquidator shall file a declaration in the prescribed form within seven days of the date of appointment.
(9) Notice of appointment of company liquidator to be given to the Registrar: The Company has to give notice to the Registrar relating to the appointment of the Company Liquidator along with his name and other particulars, well as about any change that might take place because of casual vacancy, within 10 days of the appointment or the occurrence of such vacancy. In case of default, the company and every officer of company (including liquidator) who is in default Shall be punishable with fine which may extend to 500 for every day during which the default continues.
(10) Appointment of Committees : Where there are no creditors of the company, such company in its general meeting, and where there are creditors, in a meeting of such creditors, the company and creditors may appoint such committees as considered appropriate to supervise the voluntary’ liquidation and assist the Company Liquidator in discharging his functions. (Section 315)
(11) Company Liquidator to submit Report on Progress of Winding up (Section 316) : The Company Liquidator shall report quarterly on the progress of winding up to the members and creditors and shall also call a meeting of the members and creditors as and when necessary. At least one meeting. each of members and creditors in every quarter must be held to apprise them of the progress of the winding up of the company.
(12) Final Meeting and Dissolution of Company (Section 318) : As soon as the affairs of the company are fully wound up, the Company Liquidator shall prepare a report of the winding up showing that the assets of the company have been disposed of and its debts are fully discharged or discharged to the satisfaction of the creditors and thereafter call a general meeting of the company for the purpose of laying the final winding up accounts before it. If the majority of the members of the company are satisfied with the report of the Company Liquidator, they may pass a resolution for its dissolution. Within 2 weeks after the meeting, the Company Liquidator shall file an application along with his report before the Tribunal for passing an order of dissolution of the company.
If the Tribunal is satisfied, it shall pass an order dissolving the company. The Company Liquidator shall file a copy of the order with the Registrar within 30 days. The Registrar on receiving a copy of the order passed by the Tribunal, shall forthwith publish a notice in the Official Gazette that the company is dissolved.
Winding up of Companies Corporate Law Notes
Short Answer Questions
Q. 1. Who can apply to the Tribunal for Compulsory winding up of a Company?
Ans. Under Section 272 : A petition for compulsory winding up of a company may be filed in the Tribunal by any of the following persons :
(1) Petition by the Company itself : A company may present a petition for its winding up, if the share holders have passed a special resolution to this effect. Also note that a petition presented by the company for winding up shall be admitted only if accompanied by a ‘Statement of affairs’ in the prescribed form.
(2) Creditor’s Petition: A petition may be filed by any creditor or creditors on the ground that the company is unable to pay its debts. Even a prospective creditor can file a petition, provided he could obtain the prior permission of the Tribunal.
(3) Petition by the Contributories : The members and the past members (who ceased to be the members within one year preceding the commencement of winding up), who are liable to contribute to the assets of the company in winding up, are referred to as contributories. Any contributory or contributories may present a petition for winding .up notwithstanding that he or they may be the holder of fully paid-up shares or that the company may have no assets at all or may have no surplus assets left for distribution amongst them after the satisfaction of its liabilities (Section 272 (3). Any provision in the articles which deprives members of their right to petition for winding up is void.
(4) Petition by the Registrar: With the previous sanction of the Central Government, the Registrar of Companies is also entitled to present a petition for winding up a company, only on the following grounds :
(i) when default is made in filing the financial statements;
(ii) when the company is working against the national interests;
(iii) when company’s affairs are being conducted in a fraudulent manner;
(iv) when the company is unable to pay its debts (Section 272(4). It is to be noted that the Central Government before according its sanction, must afford an opportunity to the company for making its representation, if any.
(5) Petition by any person authorised by the Central Government to present a petition for winding up of the company.
(6) Petition by Central or State Government : If the company has acted against the sovereignty, integrity or security of India or the State, or against public order, decency or morality, the Central Government or the State Government can petition to the Tribunal for the winding up of the company.
Winding up of Companies Corporate Law Notes
Q. 2. Discuss briefly the circumstances under which a company may be compulsorily wound up by the Tribunal.
Ans. As per Section 271(1), a company may be compulsory wound up by the Tribunal on any of the following grounds :
1. If the company is unable to pay its debts.
2. If the company has passed a special resolution for its winding up by the Tribunal. However, the Tribunal is not bound to order of winding up only because the company has so resolved. The Tribunal shall consider the interest of the company as well as of public before making such an order.
3. If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.
4. If the Tribunal has ordered the winding up of the company (under Chapter XIX of the Act) because it is a sick company.
5. If an application has bee made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal may order for winding up of a company. The Tribunal shall make such an order in any of the following cases :
(a) If the affairs of the company have been conducted in a fraudulent manner. (b) If the company was formed for fraudulent and unlawful purpose.
(c) If the persons concerned in the formation or management of affairs of the company have been found guilty of fraud, misfeasance or misconduct in connection therewith.
(6) If the company has made a default in filing with the Registrar its financial statements or, annual returns for immediately preceding 5 consecutive financial years.
7, If the Tribunal is of the opinion that it is just and equitable that the company should be wound up. [Section 271(1).
It may be noted that the power of the Tribunal is discretionary’ Hence, it may or may not exercise its powers.
Q. 3. When would it be just and equitable for Tribunal to wind up a company?
Ans. A company may also be ordered to be would up, if the Tribunal is of opinion that it is just and equitable that the company should be wound up. Tribunal enjoys very wide discretionary power under this clause. Tribunal, before passing such an order, will take into account the interest of the shareholders, creditors, employees and also the general public. Tribunal may also refuse to grant and order for the compulsory winding up of the company if it is of the opinion that some other remedy is available to the petitioner to redress his grievances and that the demand for the winding up of the company is unreasonable. What is a ‘Just and Equitable’ cause depends upon the facts of each particular case. A few of the exampleS of ‘Just and Equitable’ grounds -on the basis of which the Tribunal may order for the winding up of the company are as follows
(i) Oppression of Minority : Where the majority shareholders have adopted an aggressive or oppressive policy towards the minority ;
(ii) Deadlock in Management : When there is a complete deadlock in the management of the company owing to the directors not being on speaking terms or being bitterly hostile to each other or for any other reason;
(iii) Loss of Substratum : Where the objects for which a company was constituted have either failed or become substantially impossible to be carried out, i.e., ‘Substratum of the company’ is lost;
(iv) Losses : When the business of the company cannot be carried on except at losses;
(v) Fraudulent Object : If the business or the objects of the company are fraudulent or illegal, or have become illegal with the changes in the law;
(vi) Bubble Company : When a company is a bubble company i.e., it does not carry on any business in reality or does not own any property.
Winding up of Companies Corporate Law Notes
Q. 4. When a company shall be deemed to be unable to pay its debts?
Ans. See Point No. (6) Inability to pay debts Page No 99
Q. 5. What is meant by ‘Declaration of Solvency’ in relation to voluntary winding up of a company?
Ans. Declaration of Solvency (Section 305)
In Case of voluntary winding up, its director or directors or in case the company has more than two directors, the majority of its directors are required to make a declaration at a meeting of the Board verified by an affidavit to the effect that they have made a full inquiry into the affairs of the company and they have formed an opinion that the company has no debt Or Whether it will be able to pay its debts in full from the proceeds of assets sold lin voluntary winding up.
‘The declaration of solvency shall be effective when-
(i) It is made within five weeks immediately preceding the date of the Passing Of the resolution for the winding up of the company and delivered to the Registrar before that date.
(ii) It embodies a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration.
(iii) It is accompanied by a copy of the report of the auditors of the company on the profit and loss account and balance sheet of the company prepared up to the date of declaration.
(iv) It is accompanied by a report of valuation of the assets of the company prepared by a registered valuer.
(v) It contains a declaration that the company is not, being wound up to defraud any person/persons.
Directors of a company making a declaration of solvency of the company without having reasonable grounds for the opinion that the company will be able to pay its debts in full from the assets sold involuntary winding up shall be punishable with imprisonment tor a term which not less than 3 years but may extend up to 5 years, or with fine which may extend to 50,000 which can be extended up to 3 Lakhs or with both.
Winding up of Companies Corporate Law Notes