This article has been written by Ms. Anlyn E S, a student of Government Law College, Thrissur.
Winding Up of the Companies
Winding up is a process whereby the life of the company is ended and its property administered for the benefit of its creditors and members. By applying this process, the management of a company’s affairs are taken out of its director’s hands, its assets are liquidator, and its debts are paid out of the proceeds of realization and any balance remaining id returned to its members. At the end of the winding up, the company will have no assets or liabilities, and will, therefore be a formal step for it to be dissolved, that is for its legal personality as a corporation to be brought to an end.
However, the company is not dissolved immediately at the commencement of winding up. Its corporate status and powers continue. Thus, winding up precedes dissolution. Winding up of company differs from insolvency of an individual of as much as a company cannot be made insolvent under the insolvency law. Besides, even a solvent company may be wound up.
Winding Up by Tribunal (Section 271)
A company may be wound up at an order of the Tribunal. This is also called as compulsory winding up. The case in which a company may be wound up are given in Section 271. They are as follows: –
- Special Resolution
If the company has special resolutions resolved that it would be wound up by the Tribunal. The Tribunal is not bound to order winding up simply because the company has so resolved.
- Acts against sovereignty
If the company has acted against the interests of sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality.
- Fraudulent conduct of affairs
The Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for unlawful purpose etc. That it is proper that the company be wound up.
- Default in filing financial statements
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
- Just and equitable
The last ground on which the tribunal can order the winding up of a company is when “it is of opinion that it is just and equitable that the company should wound up”. This gives the tribunal a very wide discretionary power to order winding up whenever it appears to be desirable.
Liquidator
For the purposes of the act for winding up by Tribunal, the central government has to appoint Official Liquidators, Joint Deputy or assistant official liquidators. The number of such appointments depends upon the requirements of the situation. They are to be the whole-time officers of the Central Government. Their salary has to be paid by the Central Government. This is stated in the section 359 of the 2013 of the Companies Act.
Powers and functions of Official Liquidator (Section 360)
The official liquidator has to exercise powers and to perform such duties as the Central Government prescribes. Those functions may include those of the company liquidators under the act and conduct of inquiries and investigations in matters arising out of winding up proceedings
Order of dissolution of the company
The official liquidator, on being satisfied that the affairs of the company have been finally wound up, submits his final report to the Government. If there was a reference to the tribunal, the report has to be submitted to the Central Government and the Tribunal. The central government or the Tribunal is then to order that the company be dissolved. The Registrar has then to strike off the name of the company from the Register and publish a notification to that effect.
Procedure for liquidation
Where a company is to be wound up under the act, has assets of book value not exceeding one crore rupees and belongs to a class or classes as maybe prescribed, the Central Government may order it to be wound by the summary procedure. Where any such order is made, the Central Government has to appoint the Official Liquidator as the Liquidator of the company. He has to take into his custody or control all the assets, effects and actionable claims to which the company is or appears to be entitled. Within 30 days of his appointment, he has to submit a report to the central government in such manner and form as may be prescribed including a report as to whether in his opinion whether any fraud has been committed in the promotion or formation or management of affairs of the company. In case the report is positive, the Central Government may direct further investigation into the affairs of the company asking the report to be submitted within specified time. The central government has then to order whether there will be full procedure winding up or summary procedure.
Voluntary Liquidation of the company
Chapter V of the Insolvency and Bankruptcy Code, 2016 deals with voluntary liquidation of companies. Section 59(1) of the Insolvency and the Bankruptcy Code, 2016 states that a corporate person who intends to liquidate itself voluntarily and meets the conditions and procedural requirements as prescribed by the Insolvency and Bankruptcy Board of India may initiate voluntary liquidation procedure under the provisions of Chapter V.
Reasons for new rules and impact on NCLAT
Before, the winding up rules, according to Section 361 of 2013 Companies Act, only the following class of companies would be wound up:
- Companies whose book value of assets is not more than one crore
- Some class of companies which has been mentioned by the central government.
- The central government will be appointing the liquidator of the company and he will be taking all the assets and actionable claims of the company into his custody and within thirty days he will submit the report to central government including the statements showing that no fraud has been committed either in its Promotion or Formation and management of the affairs of the company. When the central government is satisfied with the report, it can issue the order of winding up of the company.
By the introduction of the Companies (winding up) Rules, 2020, the following classes of Companies can directly file a petition to the central government for the wound up. The following classes of companies are exempt from filing an application with NCLT for winding up.
- Companies whose total turnover is up to INR 50 Crore
- Companies which have total outstanding loans and including secured loan up to INR 50 lakhs
- Companies which have paid up capital up to INR 1 Crore
- Companies which accept deposits and have total outstanding deposits up to INR 25 lakhs
The Ministry of Corporate Affairs issued the Companies (winding up) rules 2020, to reduce he procedures for winding up of the companies. Through this it gets easy for the National Company Law Tribunal, as it was a long process of winding down enterprises that are large. In order to dissolve, these companies must first receive consent from the Central Government not from NLCAT. In July 2020, there were approximately 20,000 cases pending before the National Law Company Tribunal. Thus, to reduce the burden of the NCLAT, the government permitted, summary liquidation processes to be filed with the federal government rather than the NCLAT.
Reference
- https://aishwaryasandeep.com/2022/10/25/companies-winding-up-rules-2020-and-its-impact-on-nclat-2/
- https://aishwaryasandeep.com/2022/10/21/companies-winding-up-rules2020-and-its-impact-on-nclat/
- Elements of Company Law, N.D. Kapoor
- Company Law, Avatar Singh
- Company Law, N.C. Jain
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