A company is an artificial person whose existence comes into force through a legal contrivance. A company cannot die, it comes to an end through the process of winding up which refers to dissolving a company’s business operations and selling off its assets. The National Company Law Tribunal can also be approached to start the process, which may be done voluntarily by the firm or by an outside party, such as a creditor or members of the company by passing a Special Resolution. The regulations pertaining to the winding up of a corporation under the Companies Act 2013 are critically examined in this article, with an emphasis on the functions of the tribunal during this procedure.
Winding up is the first stage in the process whereby the assets are realized, liabilities are paid off and the surplus if any is distributed among the members which they have contributed to the company in accordance with Memorandum of Association ( MOA) & Article of Association (AOA) of the company. During the process of Winding up, the company still exists and has corporate powers until dissolution.
Perpetual succession, is a legal seal of a company which denotes that the company’s longevity is unrelated to the financial status of its members and is a distinguishing feature of a corporation. Even if all of the members of the corporation file for bankruptcy or pass away, the corporation will not dissolve on its own until it is forced to do so for the reasons mentioned in the respective act.
The Supreme Court of the United States held in Pierce Leslie & Co. Ltd. v. Violet Ouchterlony, 1969 SCR (3) 203, that winding up comes before dissolution of the company. There is no statutory provision that would give a trustee control over a dissolved company’s assets or that would effectively repeal the escheat statute. A disbanded company’s owners or creditors cannot be regarded as its heirs or successors. If a firm is dissolved, any remaining assets go to the government.
The dissolution of businesses has been the focus of numerous judicial cases in India over the years. Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Pvt. Ltd. is one such instance which addressed the question whether a business will shut down if it couldn’t pay its debts. The court decided that the inability of a firm to pay its debts qualified as a legal basis for winding up under the Companies Act.
Official Liquidator v. Dayanand & Sons is another significant decision that addressed the question of whether or not a company’s assets might be auctioned off before it was wound up. The court held that as long as the sale is done in the company’s and its creditors’ best interests, a liquidator may dispose of a company’s assets prior to the firm being wound up.
The court held in Seth Mohan Lal v. Grain Chamber Ltd. that the goal of winding up a business is to make sure that its assets are fairly distributed among its creditors and members, and that the liquidator has a responsibility to make sure this is done in an efficient and orderly manner.
A COMPANY MAY BE WOUND UP IN FOLLOWING SITUATIONS :
- If the company decides to wind up voluntarily,
- If a company fails to start operating within a year after incorporation,
- If the corporate veil lifts.
- Suspends activities for a period of time equal to or greater than a year,
- If it is unable to pay its debts, or
- If the court determines that winding up the business is just and equitable.
The following are some noteworthy case laws in this area:
Madhu Woollen Industries Pvt. Ltd. v. Madhusudan Gordhandas & Co.: In this instance, the Supreme Court held that creditors of a firm have a remedy known as winding up when the company is unable to pay its debts. The court also held that a firm should not necessarily be wound up just because it has been unable to pay its debts.
In re Raghunath Prasad Jhunjhunwala, Hind Overseas Pvt. The Supreme held ruled in this case that the winding up of a corporation is a harsh measure that should only be used to defend the interests of the creditors or the firm itself. The court held that a company’s inability to pay its debts alone is insufficient cause for winding up, and that the court must weigh all the relevant factors before issuing a winding-up order.
Regarding the case of ICICI Bank Ltd. v. Sasan Power Ltd. The National Company Law Tribunal held in this instance that a company’s winding up should only be ordered as a last resort after all other options have been exhausted. The court held that a company’s inability to pay its debts alone is insufficient cause for winding up, and that the court must weigh all the relevant factors before issuing a winding-up order.
Modes Of Winding Up
- Voluntary Winding Up (Section 304)
- Compulsory Winding Up (Section 272)
A corporation can be wound up voluntarily when its directors or shareholders elect to do so for a variety of reasons, such as loss of profitability or an inability to pay obligations. On the other hand, compulsory winding up is started by an outside party, such a creditor, and is often done through a tribunal.
The Company may be dissolved at any time by the Company’s shareholders. Regardless of whether there are employees, secured or unsecured creditors, or both and all unpaid bills must be settled. After obligations are settled, all business bank accounts must be closed. The GST registration must be canceled as well if the Company is dissolved.
Voluntarily Winding Up of Company (Section 304) :
A company may choose to be dissolved voluntarily by its shareholders for a number of reasons, such as the company’s life expectancy having run its course, its inability to continue operating, or the achievement of its goals. The Companies Act, 1956 (since repealed by the Companies Act, 2013) governs the voluntary winding-up procedure.
There are two ways by which the company declares voluntary winding-up:
- By Ordinary Resolution: When the designated time limit or duration of the firm has passed, it may be voluntarily wound up. The time should be specified in the company’s articles of incorporation, or if there is no mention of it there, the company shall dissolve upon the occurrence of a specific event. If the specified event occurs, the company may begin the winding-up process by passing an ordinary resolution.
- By Special Resolution (271 (b)) : A corporation may voluntarily dissolve itself after receiving a 75% majority vote from its shareholders and board of directors. Only after the special resolution has been approved will the procedure begin. Within 14 days after the resolution’s passage, it must be published in the district’s or city’s top newspapers as well as the Official Gazette.
Declaration of Solvency
The declaration should state the following mentioned points by the members:-
- They must attest that they have thoroughly investigated the business’s commitments and that they will be able to pay off all of their debts by liquidating their assets; or that they are debt-free.
- Such a declaration must be made and registered no later than five weeks prior to the resolution date.
- Additionally, it must state that there are no plans to deceive anyone in the company’s winding up process.
- The declaration must also specify the date of payment of any outstanding debts.
- A registered liquidator is required to prepare the valuation report of the assets of the company, if they are used to pay off the debt assumed that there was no justification subsequently, a meeting of the creditors will be called by the liquidator.
The declaration of solvency is made at a meeting of the Directors of the company which is to be accompanied by an affidavit as well.
Compulsory Winding Up Or Winding Up By Tribunal :
The National Corporation Law Tribunal (NCLT) may dissolve a corporation on its own motion and the procedure is known as Winding up by the Tribunal or forceful winding up. The procedure is initiated when a business is unable to pay its debts or, when doing so is right and equitable. Section 271 of the 2013 Companies Act specifies the circumstances under which a company may be shut down by the Tribunal. They consist of the following:
- If the firm has decided through a special resolution that the Tribunal should wind it up.
- If the statutory meeting or the statutory report are not required or are delivered to the Registrar by mistake.
- If the business is either suspended for a full year or does not start operating within a year of formation.
- Should the business become unable to pay its debts.
- If the Tribunal determines that winding up the corporation would be just and equitable.
- The tribunal may look at the rehabilitation and revival of sick units. The tribunal may order its winding up if a rebirth is unlikely.
- If the business missed five consecutive deadlines for filing its annual report, profit and loss statement, or balance sheet with the Registrar.
- If the company’s actions have violated Indian sovereignty and integrity, state security, cordial relations with other nations, public order, morality, or decency.
The following parties may file a winding-up petition with the Tribunal:
- The business, in the event that a special resolution for winding up is passed.
- A creditor, in the event that a business is unable to pay its debts.
- A contributory or contributories, in the event that a required meeting is not held, a required report is not filed, or the number of members fall below the required minimum.
- The Registrar, on any justification, provided that the Central Government has given its prior consent.
- When the inspector’s report indicates that the company’s affairs have been conducted with the intent to cheat its creditors, members, or anyone else, that individual must be authorised by the Central Government.
- If the corporation breached India’s sovereignty, integrity, or security, or acted unethically in relation to morality, public order, or decency, the Central or State Government may be held liable.
In Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami, (1965) 35 Company Cases 456 (SC), this Court held that “It is well-settled that a winding up petition is not a legitimate means of seeking to enforce payment of the debt which is bona fide disputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the court.”
A firm is wound up when it is dissolved and its assets are distributed. A company can be dissolved either voluntarily or compulsorily. Voluntary winding up is started by the company itself. Compulsory winding up is frequently done through a tribunal and is started by an outside party, such as a creditor.
The process of dissolving a company is complex in which numerous legal conditions must be fulfilled, therefore, it should be done with good care and careful application of mind and law.
This article is written and submitted by Ansara Bano during her course of internship at B&B Associates LLP. Ansara is a LLB final year student at UILS Chandigarh University.