STUDY ON WINDING UP OF A COMPANY
Author: Nishi Yadav, III Year of BBA.,LL.B(Hons.) From University of Petroleum and Energy Studies.
A company is a corporate entity that can be created and dissolved only in the manner provided by law. The company will continue to be in existence unless it is dissolved in the manner provided by law. The Companies Act, 2013 provides the manner of winding up and dissolution of companies. Winding up was a time-consuming affair under the Companies Act, 1956.1
Winding up in simple language means the cremation of a company or when the life of the company comes to an end. According to Halsburry's Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about and in the course of which its assets are collected and realized; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with Articles of the Company.”2
As per section 2(94A) of the Companies Act, 2013, “winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.3 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 of law.4
MODES OF WINDING UP
The Act5, 1956 provides for the following three types of winding up:
Winding up by the order of the Tribunal or Compulsory winding up; (Sec 433 to Sec 483)
Voluntary winding up; (Sec 484 to Sec 520)
Subject to the supervision of the Court. Also, a company may be dissolved in the process of amalgamation or reconstruction under section 394 of the Companies Act.6
But, according to The Companies Act of 2013, the winding up of companies is provided in Chapter XX, Section 270 to 365 of The Act,7 and the provisions of voluntary winding up under the Companies Act, 2013 have moved under the Insolvency and Bankruptcy Code, 2016.8
“270. Modes of winding up.— (1) The winding up of a company may be either—
by the Tribunal; or
Notwithstanding anything contained in any other Act, the provisions of this Act with respect to winding up shall apply to the winding up of a company in any of the modes specified under sub-section (1)”9
WINDING UP BY THE TRIBUNAL
Winding up by tribunal in simple words means when the tribunal i.e., National Company Law Tribunal (NCLT) orders a company to wind up its business. It can be ordered in circumstances mentioned in Section 271 of The Act10. Section 271, provides the following grounds for winding up a company:
If the company has, by special resolution, resolved that the company be wound up by the Tribunal
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.
If in the opinion of the Tribunal, any fraud is involved in the formation, operation, management, or purpose of the company.
Company makes default in filing annual returns or annual accounts for immediately preceding five consecutive years.11
VOLUNTARY WINDING UP (INSOLVENCY AND BANKRUPTCY CODE, 2016)
Section- 304 of the Act12 talks about the circumstances in which a company can do voluntary winding up. This Section states the following two reasons which could lead to the voluntary winding up of a company:
a.) If the company in a general meeting passes a resolution requiring the company to be wound up voluntarily as a result of the expiry of the period for its duration (which is stated in the Article)
b.) if the company passes a special resolution that the company is wound up voluntarily.
This type of winding up occurs when the company is solvent. The company needs to declare its solvency at the Board of Directors meeting. This declaration must satisfy the directors’ opinion that the company has no loans or debts or it will pay the whole debts within three years of winding up. A general meeting is conducted wherein a liquidator is appointed and remuneration is fixed. When a liquidator is appointed, all the powers of the board, Managing Director, or Manager cease to exist, until and unless a General Meeting gives permission. The liquidator must annually call a general meeting to lay the procedure for winding up and to lay the accounts of his dealings.
Shree Radhe Tea Plantation Private Limited and Another Versus Registrar of Companies, West Bengal and Others13
In this case, the petitioners, in this case, contended that ROC cannot initiate multiple proceedings under Section 206(4) of the Act14 and the inquiry report initiated under this section could only have been made under Section 208 of the Act after completion of the inspection and inquiry. The petitioners further contended that they came to know of the inquiry report dated 13-04-2021 only after winding up proceedings were instituted against the company.
The respondents contended that it was necessary to initiate separate proceedings under Section 206(4) upon the discovery of additional financial irregularities in the business of the petitioners.
The Court observed that the required action taken by the ROC was to be done before submitting the report in writing to the Central Government for further investigation into the business of the petitioners. The Court stated that:
“The stage of filing a report comes only after inspection of books of accounts or conducting inquiry under sections 206 and 207 of the Act. Section 210 is the culmination of this batch of provisions relating to inspection, inquiry and investigation into the affairs of the company where the Central Government may investigate into the affairs of a company if it is of the opinion that it is necessary to do so and on fulfillment of the conditions under section 210(1)(a)-(c). To the extent of the steps taken by the respondents including the order under section 206(4) dated 4th July, 2022, the summons issued thereafter, the hearing given to the petitioners and the acceptance of the petitioners’ response, there is little doubt that the respondents must follow the step- wise compliance of sections 206-210 of the Act.”
The Court gave the judgment on 18.11.2022 and refused to interfere with the inquiry report based on S. 273 of the Act since the winding up proceedings has already commenced.
The Code and Regulations provide a favorable framework for companies and limited liability partnerships. Though the process remains almost similar to the previous regime, a major change has taken place in the initiation of the winding up process.
Earlier, the company or any of its creditors could file a voluntary winding-up petition but now the company, directors, designated partners, or persons responsible for exercising its corporate powers can initiate the winding-up process. Moreover, the approval of creditors representing two-thirds of corporate debt is mandatory under the Code for initiating voluntary winding-up proceedings. To sum it up, now every company that proposes to wind up is required to follow the Insolvency and Bankruptcy Code, of 2016.
The Code is quite comprehensive and wider than the Companies Act, 1956. It is expected that Code would help in overcoming delays and complexities involved in the process due to the presence of four adjudicating authorities, the High Court, the Company Law Board, the Board for Industrial and Financial Reconstruction, and the Debt Recovery Tribunal. It would also lessen the burden on courts as all the litigation will be filed under the Code.15
The procedure for winding up is a time taking process as it includes many complexities and technicalities. Earlier only the Companies Act provided the rules and regulations for winding up but now the Insolvency and Bankruptcy Code, 2016, also has an important role in the process of winding up.
1 Prachi Manekar Wazalwar, National Company Law Tribunal and National Company Law Appellate Tribunal Law, Practice & Procedure (7th edn, BloomsBurry 2021) 17.5
2 S Keerthana and M Kannappan, 'A Study on Winding Up under Companies Act'  119(17) International Journal of Pure and Applied Mathematics 783-797
3 S. 2(94a) of The Companies Act, 2013
4 Taxmann, 'Winding Up of Companies' (Sample chapter 14 for
webpdf, 2014) <https://www.taxmann.com/bookstore/bookshop/bookfiles/sample%20chapter%2014%20for%20
web.pdf> accessed 4 February 2023
5 The Act means the Companies Act, 1956.
6 Rama Kant, 'An Analytical Study of Winding Up of a Company'  04(03) International Journal of Research
7 Supra note, 4.
8 Supra note, 5.
9 The Companies Act, 2013
11 Supra note, 1
12 Supra note, 8
13 Shree Radhe Tea Plantation Private Limited and Another Versus Registrar of Companies, West Bengal and Others 2022 SCC OnLine Cal 3620
14 Supra note, 9.
15 S Keerthana and M Kannappan, 'A Study on Winding Up under Companies Act'  119(17) International Journal of Pure and Applied Mathematics 783-797