CORPORATE RESTRUCTURING - WINDING UP

Winding up of accompany is a process of putting an end to the life of a company. It is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is left, it is distributed among the members in accordance with their rights.

In winding up administrator called liquidator is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights.

 

Company cannot be Adjudged Insolvent

The Winding up of a Company is not the same thing as the insolvency of a company, for the general rule in regard to winding up is that if the members of a company desire that the company should be dissolved or if it becomes insolvent or is otherwise unable to pay its debts, of if for any reason it seems desirable that it should cease to exist, it is wound up. Thus it is obvious that a company may be wound up even when it is perfectly solvent.

A company can never be declared bankrupt although it is unable to pay its debts. It can only be wound up.

 

Winding up and Dissolution

The entire procedure for bringing about a lawful end to the life of a company is divided into two stages – ‘winding up’ and ‘dissolution’. Winding up is the first stage in the process whereby assets are released, liabilities are paid off and the surplus, if any distributed among its members. Dissolution is the final stage whereby the existence of the company is withdrawn by the law.

Winding up in all cases does not culminate in dissolution. Even after paying all the creditors there may still be a surplus, company may earn profits during the course of beneficial winding up, there may be a scheme of compromise with creditors while company is in winding up and in all such events the company will in all probability come out of winding up and hand over back to shareholders/ old management. Dissolution is an act which puts an end to the life of the company.

As such winding up is only a process while the dissolution puts an end to the existence of the company.

 

Who may make Petition for Winding Up?

An application to the Tribunal for the winding up of a company shall be by petition presented (Section 439 of Companies Act)

     (a) by the company, or

     (b) by any creditor or creditors, including any contingent or prospective creditor or creditors, or

     (c) by any contributory or contributories, or Section

     (d) by all or any of the parties specified in clauses (a), (b) and (c), whether together or separately, or

     (e) by the Registrar, or

     (f) in a case falling under section 243, by any person authorized by the Central Government in that behalf, or

    (g) in a case falling under clause (h) of section 433, by the Central Government or a State Government.

 

 

Modes of Winding up

1. By the Tribunal i.e. compulsory winding up – Winding up by the Tribunal or compulsory winding up is initiated by an application by way of petition Tribunal for a Winding up order. A winding up petition has to be resorted to only when other means of healing an ailing company are of absolutely no avail. The extreme and irretrievable concerning the management and running of company. The extreme and irretrievable step of winding up must be resorted to only in very compelling circumstances.

 

Circumstances in which company may be wound up by Tribunal

(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal

 (b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting

 (c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year

 (d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two

(e) if the company is unable to pay its debts – Section 434 of Companies Act lays down the specific circumstances when the company shall be unable to pay its debts.

(f) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up

• Where the whole object of the company was fraudulent
• Where subject matter of the company is gone or the object for which it was formed has substantially failed, the existing assets of the company are insufficient to meet the existing liabilities of the company.
• Where the main object of the company for which it was incorporated has been completely achieved.
• Where there is complete deadlock in the management.
• When there is a “bubble” and has no business to carry on
• Where the company is insolvent and its business is being carried on for the benefit of the debenture holders.
• Where there has been Mis - management and misapplication of funds
• Where the petitioner was excluded from all participation in the business of a private company.

 (g) if the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial years

(h) 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

 (i) if the Tribunal is of the opinion that the company should be wound up under the circumstances specified in section 424G i.e. Winding up of sick industrial company

 

2. Voluntary Winding up – In voluntary winding up the company and its creditors are left to settle their affairs without going to Tribunal, although they may apply for directions or orders, as and when necessary. One or more liquidators are to be appointed by the company in general meeting for the purpose of winding up the affairs and distributing the assets of the company.

A company may be wound-up voluntarily – Section 484

     (a) when the period, if any, fixed for the duration of the company by the articles has expired, or the event, if any, has occurred, on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting passes a resolution requiring the company to be wound-up voluntarily,

     (b) if the company passes a special resolution that the company be wound-up voluntarily.

 

Kinds of Voluntary Winding

Section 488(5) of the Company divides voluntary winding up into two kinds:

1.Members’ Voluntary Winding up – When company is solvent and is able to pay its liabilities in full, it need not consult the creditors or call their meeting. Its directors, or where they are more than two, the majority of its directors may, at a meeting of the board, make a declaration of solvency verified by an affidavit stating that they have made full enquiry into the affairs of the company and that having done so they have formed an opinion that the Company has no debts or it will be able to pay its debts in full within such period not exceeding three years. Before making any winding up procedure the declaration of solvency of a company need to be declared to Registrar else considered null and void. 

A declaration made as aforesaid shall have no effect for the purposes of this Act, unless it is made within the five weeks immediately preceding the date of the passing of the resolution for winding up the company and is delivered to the Registrar for registration before that date.

Section 484, 490, 491, 493, 494, 496, 497, 507,508 and 509 of Companies Act applies to Members’ Voluntary Winding up.

 

2. Creditors’ Voluntary Winding up - A winding up in the case of which a declaration has been made and delivered in accordance with this Section 488 of Companies Act referred to as "a members' voluntary winding up", and a winding up in the case of which a declaration has not been so made and delivered is referred to as "a creditors' voluntary winding up".

Section 500, 501, 502, 503, 504, 505, 506, 507,508 and 509 of Companies Act applies to Creditors’ Voluntary finding up.

 

Provisions applicable to every type of Voluntary Winding up

The provisions applicable to every type of voluntary winding up are comprehensively stated in Section 511, 512, 513, 514, 515, 516, 517, 518, 519, 520, 521 of Companies Act and these apply to every type of volunatry winding up whether it be a members' or a cerditors winding up.

 

Consequences of Winding up Order-

• Order for winding up to be communicated to Official Liquidator and Registrar
• Where the Tribunal makes an order for the winding up of the company, the Tribunal, shall within a period not exceeding two weeks from the date of passing of the order, cause intimation thereof to be sent to the Official Liquidator and the Registrar.
• On the making of a winding up order, it shall be the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order, within thirty days from the date of the making of the order.
• When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Tribunal and subject to such terms as the Tribunal may impose.
• Where any company is being wound up by the Tribunal any attachment, distress or execution put in force, without leave of the Tribunal against the estate or effects of the company, after the commencement of the winding up or any sale held, without leave of the Tribunal of any of the properties or effects of the company after such commencement, shall be void.
• On a winding up order being made in respect of a company, the Official Liquidator shall, by virtue of his office, become the liquidator of the company
• Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound-up, be deemed a fraudu­lent preference of its creditors and be invalid accordingly.
• Any transfer or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void.
• Where a company is being wound-up, a floating charge on the undertaking or property of the company created within the twelve months immediately preceding the commencement of the winding up, shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, except to the amount of any cash paid to the company at the time of, or subsequently to the creation of, and in consideration for, the charge, together with interest on that amount at the rate of five per cent per annum or such other rate as may for the time being be notified by the Central Government in this behalf in the Official Gazette.

 

Consequences as to Shareholders described as Contributories

The term "contributory" means, every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid up and for the purposes of all proceedings for determining, and all proceedings prior to the final determination of, the persons who are to be deemed contributories, includes any person alleged to be a contributory.

Contributories in case of winding up of a body corporate which is a member

As per Section 432 of the Companies Act if a body corporate which is a contributory is ordered to be wound up, either before or after it has been placed on the list of contributories -

(a) the liquidator of the body corporate shall represent it for all the purposes of the winding up of the company and shall be a contributory accordingly, and may be called on to admit to proof against the assets of the body corporate, or otherwise to allow to be paid out of its assets in due course of law, any money due from the body corporate in respect of its liability to contribute to the assets of the company; and

(b) there may be proved against the assets of the body corporate the estimated value of its liability to future calls as well as calls already made.

 

Liability as contributories of present and past members

In the event of a company being wound up, every present and past member shall be liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities and the costs, charges and expenses of the winding up, and for the adjustment of the rights of the contributories among themselves, subject to the provisions of section 427 and subject also to the following qualifications

a) a past member shall not be liable to contribute if he has ceased to be a member for one year or upwards before the commencement of the winding up;

(b) a past member shall not be liable to contribute in respect of any debt or liability of the company contracted after he ceased to be a member;

(c) no past member shall be liable to contribute unless it appears to the Tribunal that the present members are unable to satisfy the contributions required to be made by them in pursuance of this Act;

(d) in the case of a company limited by shares, no contribution shall be required from any past or present member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as such member;

(e) in the case of a company limited by guarantee, no contribution shall, subject to the provisions of sub-section (2), be required from any past or present member exceeding the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up;

(f) nothing in this Act shall invalidate any provision contained in any policy of insurance or other contract whereby the liability of individual members on the policy or contract is restricted, or whereby the funds of the company are alone made liable in respect of the policy or contract;

 (g) a sum due to any past or present member of the company in his character as such, by way of dividends, profits or otherwise, shall not be deemed to be a debt of the company payable to that member, in a case of competition between himself and any creditor claiming otherwise than in the character of a past or present member of the company but any such sum shall be taken into account for the purpose of the final adjustment of the rights of the contributors among themselves.

(2) In the winding up of a company limited by guarantee which has a share capital, every member of the company shall be liable, in addition to the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up, to contribute to the extent of any sums unpaid on any shares held by him as if the company were a company limited by shares.

 

Provisions of Overriding preferential payments

Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company,

     (a) workmen's dues; and

     (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other debts.

(2) The debts payable under clause (a) and clause (b) above shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

Section 530 of the Companies Act provides for list of debts to be paid in priority to all other debts that in winding up subject to provisions of Overriding preferential payments as discussed above.

 

Provisions of Liability for fraudulent conduct of business in the course of the winding up of a company – Section 542

If in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator or any creditor or contributory may, if it thinks fit, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.

On the hearing of an application, the Official Liquidator or the liquidator, as the case may be, may himself give evidence or call witnesses.

Where any business of a company is carried on with such intent or for such purpose as is mentioned above, every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both

 

Disposal of books and papers of company – Section 550

When the affairs of a company have been completely wound-up and it is about to be dissolved, its books and papers and those of the liquidator may be disposed of as follows, that is to say:

 (a) in the case of winding up by the Tribunal, in such manner as the Tribunal directs;

(b) in the case of a members' voluntary winding up, in such manner as the company by special resolution directs; and

(c) in the case of a creditors' voluntary winding up, in such manner as the committee of inspection or, if there is no such committee, as the creditors of the company may direct.

 

Information as to pending liquidations – Section 551

If the winding up of a company is not concluded within one year after its commencement, the liquidator shall, unless he is exempted from so doing either wholly or in part by the Central Government within two months of the expiry of such year and thereafter until the winding up is concluded, at intervals of not more than one year or at such shorter intervals, file a statement in the prescribed form and containing the prescribed particulars duly audited, by a person qualified to act as auditor of the company, with respect to the proceedings in, and position of, the liquidation -

     (a) in the case of a winding up by the Tribunal, in Tribunal; and]

     (b) in the case of a voluntary winding up, with the Registrar:

Provided that no such audit as is referred to in this sub-section shall be necessary where the provisions of section 462 apply.

When the statement is filed in Tribunal, a copy shall simultaneously be filed with the Registrar and shall be kept by him along with the other records of the company.

 

Meetings to ascertain wishes of creditors or contributories

 In all matters relating to the winding up of a company, the Tribunal] may-

     (a) have regard to the wishes of creditors or contributories of the company, as proved to it by any sufficient evidence

     (b) if it thinks fit for the purpose of ascertaining those wishes, direct meetings of the creditors or contributories to be called, held and conducted in such manner as the 2[Tribunal] directs and

    (c) appoint a person to act as chairman of any such meeting and to report the result thereof to the Tribunal.

(2) When ascertaining the wishes of creditors, regard shall be had to the value of each creditor's debt.

(3) When ascertaining the wishes of contributories, regard shall be had to the number of votes which may be cast by each contributory.