This article has been written by Ms. Sheereen Iqbal, student of South Calcutta University, Calcutta
INTRODUCTION
Liquidating a business is the process of winding up. In the process of winding up, a business stops operating normally. Its sole objective is to liquidate the company’s stock, settle any debts, and transfer any residual funds to partners or shareholders. The process of turning assets into cash is known as liquidation, and the two terms are interchangeable. There are two types of winding up compulsory winding up and voluntary winding up.
Compulsory winding up happens when the company is ordered and compelled to dissolve or wind up the business. The company is further ordered to appoint a liquidator (a liquidator is a person chosen to close out the business of a firm or company) to oversee the sale of assets and the distribution of the money to creditors. The lawsuit filed by the company’s creditors frequently results in the court order. They frequently discover a company’s insolvency before anyone else because their bills have gone unpaid. In other instances, the winding-up is the ultimate stage of a bankruptcy procedure, during which creditors may attempt to recover money that the corporation owes them. A voluntarily winding up of a business may be initiated by the shareholders or partners, typically through the adoption of a resolution. In order to prevent bankruptcy and, in some situations, personal culpability for the business’s obligations, the shareholders may start a winding-up procedure if the firm becomes insolvent.
INTRODUCTION OF WINDING UP RULE 2020
The Companies (Winding Up) Rules, 2020 (Rules) have been made public by the Ministry of Corporate Affairs (MCA) in a notification dated January 24, 2020. Companies that enter winding up for the circumstances indicated under section 271 of Companies Act,2013 or Summary procedure for liquidation under section 361 of the Companies Act 2013 are subject to the Rules. The new winding up rule took effect from April 1st 2020 and it contains 191 rules and 95 forms. The announcement enables a specific type of corporations to shut down without having to go through the National Company Law Tribunal by submitting a winding up application to the central government. This clause is predicated on the idea that since shareholders are legal entities, they possess the necessary judgement to determine whether or not the corporation should cease operations. Additionally, as previously said, a firm has the option to request its own winding up, and its directors typically exercise this option. However, without the express consent of the entire body of shareholders in the form of a special resolution, the directors are not permitted to pursue such winding up. When requesting a winding-up order, a firm is not limited to citing the passage of a special resolution for winding up, but may also cite other reasons listed in Section 271. It is necessary to establish this in the conventional manner, hence it is insufficient to demonstrate that a mere majority of members support winding up. There is nothing to stop the company from making it difficult to pass a resolution for the purpose of voluntarily winding up the business, even if the articles cannot change the statutory majority required for special resolutions. Therefore, it is perfectly within the authority of a firm to need a bigger quorum on such instances. Similar to that, such extraordinary resolutions might call for a large majority. In the case of Ramakrishna Industries (P) Ltd. v. P.R. Ramakrishnan, the company’s bylaws stated that every member shall vote in favour of the resolution for winding up when such conditions exist. In the case of United Investments Company, to decrease the assets available for distribution to preference shareholders upon winding up, the company filed an application for voluntary winding up by special resolution.
The amount stockholders would receive in that situation varied depending on whether the shares were preference shares or common shares, as stated in the company’s articles. It is also crucial to remember that the ability of the Tribunal to order winding up is normally seen as discretionary, and the Tribunal may not exercise it in cases where winding up would be deemed to be against the interests of the general public or the firm itself. Unless there are such exceptional circumstances, the Tribunal will often grant the petition and issue an order for the corporation to be wound up. In the case of United Fuel Investments Ltd., the court declined to intervene in a special resolution for compulsory winding up because there was no evidence that the majority’s action was fraudulent or otherwise improper.
WINDING UP RULE 2020 AND ITS RULE
This new rule explains mainly about, winding up by the tribunal, summary procedures by liquidator, winding up by order. It also has special rules about liquidator, settlement of list of contributors, advisory committee, proxies in relation to meetings of creditors and contributors, banking account of company liquidator’s account, debts and claims against company, collection and distribution of assets in winding up by tribunal, calls in winding up by tribunal and other important rules as well. We will now discuss some of the important rules specified in the new winding up rules. Part II of Gazette of India deals with Rule 3-Petition for winding up which specifies that as per section 272 (1) of Companies Act,2013, for winding up a company, a petition should be presented in Form WIN 1 and FORM WIN 2. Further it specifies that every petition should be verified by an affidavit by the petitioner in the Form WIN 3.
Rule 4 specifies that the statement of affairs as required to be filed under 272(4) or 274(1) of Companies Act,2013 should be in Form WIN 4 and should have all the information up to date within thirty days before filing the petition. Rule 7 says that within fourteen days prior to the hearing date, the petition must be promoted using the WIN 6 form. Both an English newspaper and a local language must be used for the advertisement. Rule 8 specifies application for leave to withdraw petition. It specifies that a petition for winding up should not be withdrawn after presentation without the leave of the tribunal.
Further it directs that an application for leave to withdraw a petition for winding up that is already advertised as said in Rule 7, is said not to be heard before the date fixed in the advertisement for hearing. Rule 14 deals with appointment of liquidator, according to rule 18 after the admission of a petition for winding up of a company, the tribunal upon some terms and conditions may appoint a provisional liquidator. According to clause (c) of sub-section (1) of section 273 and in cases where the company is not the applicant, notice of the application for the appointment of a provisional liquidator must be given to the company in Form WIN 7. The company must be given a reasonable opportunity to make a representation before the Tribunal dispensing with notice for reasons to be recorded in writing. The order appointing the provisional liquidator shall be in Form WIN 8, with such modifications as may be appropriate. The order for appointment of provisional liquidator as stated in clause (c) of sub-section (1) of section 273 also says that every person who is in possession of property, books or papers, cash or any other assets, should surrender such property or assets to the provisional liquidator.
(4) Where an order for the appointment of a provisional liquidator or company liquidator, as applicable, has been made, the Registrar shall, in accordance with subsection (1) of section 277, send notice to the Company Liquidator or provisional liquidator in Form WIN 9 by registered mail, by speed post, by courier service, or by electronic means within a period not to exceed seven days from the date of the order together with a copy of the petition and any supporting affidavit, if any, shall be given to the Registrar of Companies along with a copy of the order for the appointment of provisional liquidator or Company Liquidator, as the case may be. According to rule 17, the form of the order to be issued to the liquidator.
For the purposes of subsection (1) of section 277, the order for winding up shall be in Form WIN 11 with such modifications as may be necessary. The order for winding-up shall be sent by the Registrar after it is signed and sealed within seven days of the date of receipt of the order by the Registrar to the Company Liquidator and the Registrar of Companies in Form WIN 12 and Form WIN 13, with a copy of the order sent to the Company Liquidator. Further under rule 18 it contains the essentials and contents of winding up order.
IMPACT OF WINDING UP RULE ON NCLAT
An overview of the steps for winding up corporations that fulfil the required threshold restrictions was supplied when the Ministry of Corporate Affairs introduced the Companies (winding up) Rules, 2020.It lessens NCLT’s workload in winding up enterprises that satisfy the predetermined threshold restrictions, which has a substantial favourable impact on NCLT. In order to close their businesses, those corporations must first receive consent from the Central Government rather than the NCLT.
CONCLUSION
The Companies Act of 1956 was the first piece of legislation to include winding-up measures, and the Companies Act of 2013 kept such provisions in place. As discussed earlier, a ccording to the Companies Act of 1956, there were three ways to wind up a company:court-ordered or mandated winding up; voluntary winding up; and Under the Court’s supervision, winding up.However, the third provision was removed and the word “Court” was changed to “Tribunal” by the Companies (Second Amendment) Act, 2002.The new rules have brought a significant change in the corporate sectors,as discussed earlier it has also made some significant changes in NCLAT.
SOURCES
- https://www.mondaq.com/india/corporate-and-company-law/938456/winding-up-of-company-a-statutory-glance-part-1
- MOHIT AGARWAL’S YOUTUBE CHANNEL
- https://blog.ipleaders.in/companies-winding-up-rules-2020-and-its-impact-on-the-national-company-law-tribunal/
- The Gazette of India
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