Article. Winding up of a Company - An Overview. Barsha Dikshit

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1 Winding up of a Company - An Overview Barsha Dikshit barsha@vinodkothari.com Vinod Kothari & Company Corporate Law Services Group corplaw@vinodkothari.com 21 st April, 2016 Check at: for more write ups. Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 Preamble Winding up is a process by means of which the affairs of a company are wound up in a manner to dissolve the company and put an end to the life of a Company. In the process of winding up, the company s assets and properties are administered for the benefit of the members and creditors of the Company. The administrator, called liquidator, realises its assets, pays its debts and finally distributes the surplus, if any, among the members/creditors, in accordance with their right as provided in the article of the Company. In other words, winding up is a legal process to dissolve the business of a company. The term Winding Up and liquidation are used interchangeably. However, there are various means of winding up, i.e., by way of- members voluntary up, creditors winding up, winding up by the tribunal etc. In this article we have dealt with practical aspects in relation to members voluntary winding up. Provisions of Winding up Section 425 to Section 520 of the Companies Act, 1956 (Act, 1956) (corresponds to Section 270 to Section 365 of the Companies Act, 2013) read with Companies Court Rule, 1959 (hereinafter referred to as CCR, 1959), deals with the provisions of winding up. Since the provisions of the Companies Act, 2013 has not yet come into force, the provisions of the Act, 1956 still governs the proceedings of winding up. Modes of Winding Up The Act, 1956 provides for the following three types of winding up: 1. Winding up by the order of the Tribunal or Compulsory winding up; (Sec 433 to Sec 483) 2. Voluntary winding up; (Sec 484 to Sec 520) 3. Subject to the supervision of the Court. Grounds on which winding up may take place In case of Compulsory winding up The winding up of a company by the order of court is called compulsory winding up. Section 433 of the Act, 1956 envisaged the following circumstances under which the affairs of a company wound up by the Tribunal: 1. If the company, of its own, passes a Special Resolution that it should be wound up by the court, and presents a petition to the court for same. 2. If the company makes any default in filing the statutory report with the registrar of companies or in holding the statutory meeting within the prescribed time 3. If the company does not commence business within one year from the date of its incorporation or suspends its business for a whole year

3 4. If the number of members falls below seven in the case of a public company, and below two in the case of a private company. 5. If the company is unable to pay its debts 6. If the court is of the opinion that it is just and equitable that the company be wound up. 7. If the company has made default in filing its Balance sheet and Profit and Loss account or annual return for any five consecutive financial year. 8. If the company has acted against the sovereignty or integrity of India, the security of the state or friendly relation with foreign state etc, 9. If the tribunal is of the opinion that the Company should be wound up under circumstances mentioned under Section 424G (sick company). In case of Voluntary winding up Winding up the affairs of a company either by its members or by its creditors, without any interference of court it is called voluntary winding up of a company. Section 484 of the Act, 1956 lays down the following circumstances under which a Company may wound up voluntarily: 1. By passing Ordinary Resolution: When the period fixed for the duration of the Company by its Article has expired or the event, if any, on the occurrence of which the Article provides that the Company is to be dissolve, the Company may wound up voluntarily by passing a Ordinary resolution in the General Meeting. 2. By passing Special Resolution: The members of the company may, at any time by passing a Special Resolution, wound up the affairs of the Company voluntarily. No reasons need to be given when majority of the members decided to wind up the Company. Difference between Compulsory and Voluntary winding up The following are difference between Compulsory and Voluntary winding up: Compulsory winding Up 1. Compulsory winding up of a company is brought about by an order of the court. 2. In case of Compulsory winding up, the liquidator is appointed by the Court. Voluntary winding Up Voluntary winding up is brought about either by the members or by the creditors of the company without the intervention of the court In case of Voluntary winding up, the liquidator is appointed either by the members or by the members and creditors, both. Appointment of liquidator: Liquidator is an officer appointed by the creditors of the company (in case of Creditor s Voluntary Winding up) or by the members of the Company (in case of Members Voluntary Winding up), when the company goes into winding up or liquidation voluntarily. A company

4 may appoint an insolvency practitioner (CA, CS or Lawyer) to whom it wishes to act as a liquidator for the purpose of voluntary winding up. However, the Official liquidator is appointed by the Central Government as per section 448 of the Act, 1956 who shall be attached to the High Court of the state for the purpose of conducting liquidation proceeding or say winding up proceeding of those companies which are ordered to be wound up by the Tribunal. Functionally the Official Liquidator is under the supervision and control of the High Court but administratively is under the control of the Central Government through the Regional Director. Types of Voluntary winding up A company may wind up its affairs voluntarily in any of the following two manners: 1. Members voluntary winding up: Winding up the affairs of the company voluntarily under the supervision of members whereby declaration of solvency is made by the Board and the same has been filed with the Registrar. 2. Creditors voluntary winding up: Winding up the affairs of the Company when declaration of solvency is not made by the directors and the Creditors of the Company control and supervise the entire process. Process of Members Voluntary Winding Up Pre-condition for members voluntary winding up is the solvency of the company, since cash will be require for disposal of the liabilities, if any, and for the payment of various expenses during the proceeding of the process. The entire process along with estimated timelines of members voluntary winding up is discussed in the table below:- Section Steps under Companies Act, 1956 Required Form Time frame Sec 488 Convene a board meeting (BM) for: 1. Approving voluntary winding up of the Company 2. Approving appointment of liquidator and his remuneration and 3. Fixing date and time for the general meeting. X day

5 Sec 488(1) Sec 488(2) Declaration of solvency (DoS) duly verified by an affidavit is to be provided by the directors at the BM of the company. DoS shall be accompanied by * Audited balance sheet and P/L Account * Statement of companies Assets and liabilities Filing of the above declaration along with; i) Audited balance sheet for the period ending practicable date before the date of declaration along with the auditor s report, ii) A statement of assets and liabilities alongwith the auditor s report thereon; Form 149 in GNL-2 On (X) day after X and before (X+5 weeks) with the Registrar of Companies within 5 weeks immediately preceding the date of passing SR in the general meeting Sending of notice of EGM to all the members, directors say (Y) day Sec 490 Holding of EGM and passing SR therein; 1.for winding up and 2. for appointment of liquidator (fixing his remuneration too) Y+35 Sec 493(1) and (2) The Company shall give notice of appointment of liquidator to the registrar (within 10 days of appointment) Form 152 in Form GNL -2 (Y+35+10) Sec 485 Sec 488(2), Rule 127 of CCR, 1959 Publishing of notice of resolution for winding up by advertisement in official gazette and also in the newspaper circulating in the district where the RO of the Company is situated. (within 14 days of passing SR) Company to submit to the liquidator a statement of company's affair duly verified by an affidavit (within 21 days of commencement of winding up) Form 57 along with Form 58 (Y+35+14) (Y+35+21)

6 Sec 485 Filing the Special resolution passed in aforementioned GM with the RoC within 30 days of passing the same. MGT - 14 (Y+35+30) Sec 516 and Rule 315 of the CCR, 1959 Rules 124 to 134 and 312 to 361 of CCR, 1959 The liquidator has to file the notice of his appointment with the ROC in Form 152 and publish the same in the official gazette in Form 151 and also to give notice of his appointment to the IT Officer.(No prescribed format, letter would be sufficient) Liquidator to ensure disposal and realization of assets at fair value and payment of liabilities are made and that share capital is returned to the shareholders Form 151 and Form 152 (Y+35+7) (Y+35+30) Sec 497(1)(a) Sec 497(1)(b) As soon as the affairs of the Company is fully wound up, the liquidator shall prepare accounts of winding up and get the same audited Give advertisement in newspaper specifying date, time and place and object of the final general meeting. Form 156 Form 155 (Y ) (Y ) Sec 497(1) Hold General Meeting for the purpose of laying liquidators accounts and pass SR therein for disposal of books and papers of company Liquidator to attend the meeting and place the accounts prepared after necessary disposal, payments. (Y ) Sec 497(3) Sec 497(5) within one week of the final general meeting, 1.liquidator to file the copies of the accounts with the RoC and the Official Liquidator and also file respective forms applicable Special resolution passed in the Final GM to be filed with the RoC Form 157 for accounts in GNL- 2 MGT - 14 (Y ) (Y ) Sec 497(5) The registrar on receiving the accounts and return shall forthwith register them.

7 Sec 497(6) Sec 497(6B) The official liquidator on receiving the accounts and return shall make a scrutiny of the books and affairs of the Company and make a report to the tribunal that the affairs of the company have not been conducted in a manner prejudicial to the interest of members, then from the date of submission of the report to the tribunal, the company shall be deemed to be dissolved. On receipt of the report of official liquidator, tribunal may make order that the company shall stand dissolved. However, there are differences between member s voluntarily winding up and creditor s voluntarily winding up. Only solvent company can opt for members voluntarily winding up, therefore the process requires filing of Declaration of Solvency by the directors of the company and once the company has appointed liquidator, the power of Board of directors, Managing director and manager shall cease to exist. Whereas, Creditor s voluntary winding up is resorted to by the insolvent companies. It requires the holding of meetings of creditors besides those of the members right from the beginning of the process of voluntary winding up. It is the creditors who get the right to appoint liquidator and hence, the entire process of winding up takes place under the supervision and control of the Creditors of the Company. Thus, the entire winding-up process are greatly affected by the facts and circumstances of a particular case. Foreign capital contribution In case the company has any capital contribution from a foreign entity the same will also have to be refunded at the time of winding up. At the time of distribution of assets to such foreign entity, compliances with RBI need to be ensured. AD Category-1 banks have been allowed to remit winding up proceeds of the Companies in India which are under liquidation, subject to payment of applicable taxes. Liquidation may be subject to any order of winding up issued by the court or the official liquidator in case of voluntary winding up under the provisions of the Act, AD Category I banks shall allow the remittance provided the applicant submits the following documents: i. No objection or Tax clearance certificate from Income Tax Department for the remittance. ii. Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for. iii. Auditor's certificate to the effect that the winding up is in accordance with the provisions of the Companies Act.

8 iv. In case of winding up otherwise than by a court, an auditor's certificate to the effect that there is no legal proceedings pending in any court in India against the applicant or the company under under liquidation and there is no legal impediment in permitting the remittance. Winding up and dissolution Many get confused between winding up, dissolution and insolvency. But the fact is that winding up and insolvency are two different phases. Even a solvent Company can wind up its affairs, with the approval of the members of the Company. Further, there are differences between winding up and dissolution also. Winding up is a process that leads to dissolution. During winding up, the assets and liabilities of the Companies are disposed off by the liquidator so that at the end, the company shall not have any assets or liabilities. Whereas, when the affairs of the company are fully wound up, dissolution takes place. On dissolution, the name of the Company gets struck off the register of the Companies and its legal status as a corporation disappears. To read our other articles click here