PROJECT WORK

A comparative Analysis of winding up of a Company

SUBMITTED TO: SUBMITTED BY:

Mr. Rachit Khatri (L/190)

Assistant Professor Isha Sondhi (L/186)

School of Law School of Law

Raffles University Raffles University

 INDEX

Introduction
Differences
Winding up as per companies act, 1956
Winding up as per companies act, 2013
Powers & Functions of Tribunal
Winding Up under Insolvency & Bankruptcy Code, 2016
Conclusion
Bibliography
Introduction
The entire procedure for bringing a lawful end to life of company is divided into two stages. These
two stages are winding up and dissolution. Winding up of company is defined as a process by
which the life of a company is brought to an end and its property administered for benefit of its
members and creditors. It is the last stage, putting an end to life of a company. The main purpose
of winding up is to realize the assets and make the payments of company’s debts fairly. Thus,
winding up is the process by which management of a company’s affairs is taken out of its directors,
its assets are realized by a liquidator and its debts are discharged out of proceeds of realization.

Difference between winding up and dissolution

WINDING UP
DISSOLUTION

Winding up is a proceeding by means of which

company is dissolved and in course of
dissolution, assets are realized, liabilities are The legal existence of company is brought to an
paid off and surplus is distributed among end by dissolution
members.

It is the final stage where the existence of

Winding up precedes the dissolution.
company is withdrawn by law.

The liquidator can present the company in Once the order of dissolution is made by the
winding up proceeding. Court, liquidator cannot represent the company.

Winding up proceeding can be started without For the dissolution of the company, order of the
the intervention of the court. court is essential.
 No proceedings can be started against the
Any person can proceed against the company
company which has been dissolved.
which is being wound up.

Difference between winding up and insolvency.

Winding up Insolvency

It is a process by which company is dissolved.

The assets are collected, liabilities are paid off It is inability of a debtor to pay debts as they
out of assets or from contributions by fall due. A person is said to be insolvent when
members and if surplus left, it is distributed his liabilities exceeds his assets and against
among members whom Court makes order of adjudication.

A company cannot be adjudged as insolvent An individual can be adjudged as insolvent

A company can be wound up even if it A person can be adjudged as insolvent when

financially sound. he is unable to pay his liabilities.

During winding up proceeding, the property is In insolvency proceedings, the assets of person
vested in the Company. are vested in Official Receiver.

After completion of proceedings, the insolvent

After completion of proceedings, the
person is discharged from liabilities.
Company is dissolved.

On winding up, the company does not cease to exist as such except when it is dissolved. The
administrative machinery of the company gets changed as the administration is transferred in the
hands of liquidator. Even after commencement of winding-up, the assets of the company belong
to the company until dissolution takes place. The company ceases to exist as a separate entity on
dissolution and becomes incapable of keeping its own property, suing and being sued. Thus, the
legal status of the company continues to exist between the period of winding-up and dissolution.
In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony the Supreme Court held that winding-up
precedes the dissolution. There is no statutory provision vesting the properties of dissolved
company in a trustee or having the effect of abrogating. The shareholders or creditors of a dissolved
company cannot be regarded as its heirs and successors. On dissolution, its properties, if any, vest
in the government.

WINDING UP AS PER COMPANIES ACT, 1956

There were three modes of winding up of the Companies registered under Companies Act, 1956.

Winding up by the Court

Winding up by the court or compulsory winding up is initiated by application by way of petition
to appropriate Court for a winding up order. Section 10 of the Companies Act, 1956 deals with the
jurisdiction of for entertaining winding up petition.
The High court has jurisdiction in relation to the place at which the registered office of the
company is situated, or
The District Court in which jurisdiction has been vested either by the Act or by notification of
Central Government.
GTC Industries Ltd v. Parasrampuria Trading it was held that only High Court where the
registered office is situated has jurisdiction in winding up, even if there was agreement between
parties will be resolved before High Court where registered office is not situated.

CIRCUMSTANCES IN WHICH COMPANY MAY BE WOUND UP BY THE COURT

Section 433 of the Companies Act, 1956 provides for the circumstances in which company can be
wound up-

 If the company has resolved that the company be wound up by the Court by passing
special resolution; or
 If the company has defaulted in delivering the statutory report to the Registrar or in
holding the statutory meeting; or
 If the company does not commence its business within a year from its incorporation, or
suspends its business for a whole year; or
 The number of its members in public company is reduced below seven and in private
company below two; or
 The company is not able to pay the debts; or
 The Court is of the opinion that company should be wound up on just and equitable
grounds; or
 The company has defaulted in filing balance sheet or annual return with the Registrar
for any 5 consecutive years; or
 If the act of the company goes against the interests of sovereignty, integrity and security
of India, friendly relation with foreign states, public order, decency or morality; or

Inability to pay debts – A company shall be deemed to be unable to pay its debts when the creditor
has served on the company a demand in writing for payment of the debt, which is more than Rs.
500 and company has within three weeks thereafter, neglected to pay or secure or compound for
it to the reasonable satisfaction of the court.

Just & Equitable Grounds – Court has complete discretion to decide just & equitable grounds
for winding up of a company. Some of the grounds on which court ordered the winding up of
company under this clause,
  When the object of the company was fraudulent,
 When substratum of the company has disappeared i.e original object become impossible
to attain;
 The object for which the company is formed is illegal or becomes illegal by change in
law;
 The object for which company was incorporated has been completed;
 Deadlock in management due to differences among rival group and disagreement
cannot be resolved in general or board meeting;
 There has been mismanagement and misapplication of funds by directors of private
company.

Who may file petition for winding up

Section 439 of Companies Act, 1956 deals with the persons who can file the petition for winding
up of a company,

 The directors can make a petition in the name of the company with the sanction of
general meeting by way of special resolution.
 The creditors can make a petition if the company is unable to pay the debts. The
creditors include assignee of debt, a decree holder, a secure creditor, a debenture holder
or trustee of debenture holders.
 A contributory can present winding up petition if number of members in case of public
company is reduced below 7 and below 2, in case of private company.
 The Registrar of companies, after obtaining prior sanction of the central government,
can present a petition on winding up of company

VOLUNTARY WINDING UP (Section 488 of Companies Act, 1956)

The company and its creditors may apply to court for directions or orders but usually they are left
to settle their affairs within themselves. There are two kinds of voluntary winding up, Member’s
Voluntary winding up and Creditor’s voluntary winding up.
Resolution for Voluntary winding up
Voluntary winding up can be passed with an Ordinary Resolution (When the time span fixed in
the AoA has expired) else with a Special Resolution (In all other cases).

Members’ Voluntary Winding up

When the company is able to pay its debts, its Board of Directors makes a Declaration of
solvency stating that company would be able to pay debts within three years from the date of
commencement. Any false declaration made by director will be punishable up to 6 months or
fine up to Rs. 50000 or both. In Shri Raja Mohan Manucha v. Lakshminath Saigal[2], it was held
that where the declaration of solvency is not made the resolution for winding up and all
subsequent proceedings will be null and void. Such a declaration msut be made within five
weeks immediately preceding the date of passing of resolution for winding up of company and
be delivered to Registrar before that date. The declaration must be accompanied with auditor’s
report on balance sheet and profit and loss account as at latest practicable date.

Creditors’ Voluntary Winding up

When declaration of solvency is not made and delivered to the Registrar, it is case of creditors’
voluntary winding up.
Date of commencement of winding up-Section 441 of the Companies Act, 1956 lays the provision
for the date of commencement of winding up
Rishabh Agro Industries Ltd. V. PNB Capital it was held that the words “shall be deemed to
have commenced” shows the intention of the legislature that although the winding up of company
does not in fact commence at time of presentation itself, but it shall be presumed to commence
from that stage
Distinction between Members’ voluntary winding up and creditors’ voluntary winding up

Members’ Voluntary Winding up Creditors Voluntary Winding up

Where a company is solvent & declaration of

Where a company is solvent, the declaration of
solvency is made by the directors, it is called
solvency is not made by the directors, it is
members’ voluntary winding up
called as the creditors’ voluntary winding up.

Dominant control remains in the hands of the In creditors’ winding up, dominant control
members of the company. remains in hands of the creditors.

In creditors’ winding up, meetings of creditors

There is no meeting of creditors and the have to be called at the beginning and
liquidator is appointed by the company. subsequently the liquidator is appointed by the
creditors.

The liquidator can do so with the sanction of

The liquidator can exercise some of his powers
the court or the Committee of inspection or of
with the sanction of a special resolution of the
meeting of creditors.
company.

Winding up subject to supervision of the Court (Omitted)

In this winding up process, court can only supervise the procedure. In a general meeting, the
resolution for winding up is passed and court may put some general terms. It must be proved by
petitioner that winding up cannot continue with fairness and then an additional liquidator along
with existing liquidator may be appointed by the Court. A report regarding the progress of
liquidation must be filed every 3 months with the Registrar by the Liquidator. The court has power
to appoint and remove the liquidator. The court also has the power to enforce calls made by
Liquidator as if order for winding up the company has been made by court itself. The Liquidator
can do all such acts as he thinks best in the interest of the company.

WINDING UP UNDER COMPANIES ACT, 2013

There are two modes of winding up under the Companies Act, 2013 provides for the provisions
relating to commencement of winding up.

Winding up by Tribunal

 National Company Law Tribunal can be initiated by an application by way of petition

for winding up order.
 It should be resorted to only when other means of healing an ailing company are of
absolutely no avail.
 Remedies are provided by the statute on matters concerning the management and
running of the company.
 It is primarily the NCLT which has jurisdiction to wind up companies under the
Companies Act, 2013.
 There must be strong reasons to order winding up as it is a last resort to be adopted.

Grounds on which a Company may be wound up by the Tribunal

Under Section 271 a company may be wound up by the tribunal if-

 Company is unable to pay the debts;

 If the company has, by special resolution, resolved that the company be wound up by
the Tribunal;
 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;
 If the Tribunal has ordered the winding up of the company under Chapter XIX;
 If on an application made by the Registrar or any other person authorized by the Central
Government by notification under this Act, the tribunal is of opinion that affairs of the
company have been conducted in a fraudulent manner or the company was formed for
fraudulent or unlawful purpose or the persons concerned in formation misfeasance or
misconduct in connection therewith and that it is proper that company be wound up;
 If the company has made default in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years;
  If the tribunal is of the opinion that it is just and equitable that the company should be
wound up.

Inability to pay debts – A company is deemed to be unable to pay the debts under Section 271
(2) of the Companies Act, 2013 if a creditor to whom company has to pay an amount exceeding
Rs. 1 lakh has served a notice at the registered office of the company by registered post or
otherwise, which requires the company to pay the due amount and the company has failed to pay
the sum within 21 days or If any execution or other process issued by decree of court or order in
creditor’s favour is returned unsatisfied in whole or in part or if the tribunal is satisfied that the
company is unable to pay its debts and the Tribunal shall take into account the contingent and
prospective liabilities of the company while determining whether the company is unable to pay its
debts.

Who may file petition for winding up

A petition for winding up may be presented by any of the following persons under Section 272 of
The Companies Act, 2013-

 The company; or
 Any creditor or creditors, including any contingent or prospective creditor or creditors;
or
 Any contributory; or
 All or any of the above three specified parties; or
 The Registrar; or
 Any person authorised by Central Government in this behalf;
 By the Central Government or State Government in case of Company acting aginst the
interest of sovereignty and integrity of India.

As per Section 272 of the Companies Act, 2013, within the meaning of creditor comes a secured
creditor, holder of debentures, trustee for holder of debentures.
A contributory can present the petition of winding up of company even if he may be holder of fully
paid up shares or that company may have no assets or no surplus to distribute among shareholders
after the satisfaction of its liabilities and some shares were originally allotted to him or have been
held by him and registered in his name for 6 months during immediately preceding 18 months
before commencement of winding up.
A petition for winding up shall be admitted by the Tribunal only if it is accompanied by statement
of affairs in such form and in such manner as may be prescribed.
Under this section, a copy of the petition shall also be filed with the Registrar who shall submit his
views to the Tribunal within 60 days of receipt of petition.

Powers & Functions of the Tribunal

As per Section 274 of the Companies Act, 2013 on the filing of petition for winding up by any
person other than the company, if the tribunal is satisfied, it shall direct the company by an order
to file objections along with statement of affairs within 30 days, which could get extended by
another 30 days in special circumstances.

As per Section 275 of the Companies Act, 2013 an official liquidator or a liquidator from panel
shall be appointed by the Tribunal at the time of passing of winding up order. A panel consisting
of CS/CS/Advocates and other notified professionals with at least 10 years experience in company
matters is maintained by the Central Government.

As per Section 281 of the Companies Act, 2013, a report shall be submitted by Liquidator within
60 days to the Tribunal, containing details such as-

Nature and details of assets of company with their location and value; amount of capital issued,
subscribed & paid up; the existing and contingent liabilities of the company including names and
other details; the debts due to company and names, address; list of contributories with amount
details; details of trademark, intellectual properties, if owned by company; details of contracts,
joint ventures and collaborations, if any; details of holding and subsidiary company, if any; details
of legal cases filed by or against the company; any information which the tribunal may direct or
liquidator may consider necessary.

On consideration of the report of Liquidator, Tribunal shall fix the time limit within which entire
proceedings shall be completed and company be dissolved. The Tribunal may also order a sale of
Company as a going concern or its assets or part thereoto. After passing of winding up order by
the Tribunal, the Tribunal shall settle list of contributories, cause rectification of register of
members in all cases where required and shall cause assets of the company to be applied to
discharge its liability.

Voluntary Winding up
In voluntary winding up, Company and its creditors settle their affairs without going to Court. One
or more liquidators are appointed by company in general meeting for purpose of winding up. A
voluntary winding up commences from date of passing of resolution for voluntary winding up, a
petition is presented for winding up by the Court. Section 304deals with the circumstances in which
a company may be wound up voluntarily-

CHANGES IN WINDING UP AFTER THE INSOLVENCY AND BANKRUPTCY CODE,

2016
The Insolvency & Bankruptcy Code, 2016 consolidate and amend the laws relating to insolvency
of companies, partnership firms, limited liability partnership into a single legislation. It aims to
provide time bound resolution and empowered the creditors to initiate the insolvency resolution
process if default occurs.
After the MCA wide notification no. S.O. 3453 E of November 15th, 2016, section 255 of
Insolvency & Bankruptcy Code, 2016 amended following sections of the Companies Act, 2013.
In the definition of Winding up, new insertion was made which makes it as winding up means
winding up under this Act or liquidation under the Insolvency & Bankruptcy Code, 2016 as
applicable.
Section 270 of the Companies Act, 2013 regarding the Modes of winding up, has been deleted
after the enforcement of this Code. It has been substituted by Winding up by Tribunal
Section 271, companies Act, 2013 which deals with Circumstances in which company may be
wound up by Tribunal has been substituted namely- A company may be wound up by the Tribunal,
on petition under Section 272, if the company has resolved by special resolution that company be
wound up by the Tribunal; if the company has acted against sovereignty, integrity, security of India
friendly relations with foreign states, public order, decency, morality; if the tribunal is of opinion
that acts of the company are fraudulent or the object for which it was formed was fraudulent or
unlawful or persons concerned in formation and management have been held guilty of fraud,
misconduct and it would be proper for it to be wound up; if the company defaulted in filing
financial statement for the immediately preceding last financial years with the Registrar; if
Tribunal is of opinion that company should be wound up on just and equitable grounds.
The sub-section has been substituted in Section 275 of the Companies Act, 2013 as Section 275(2)
which deals with Company Liquidators and their appointment as per which Tribunal shall appoint
the provisional or the Company Liquidator from amongst the insolvency professionals registered
under the Insolvency & Bankruptcy Code, 2016.

Section 304 of the Companies Act, 2013 that deals with the circumstances in which company may
be wound up voluntarily has been omitted by the Insolvency & Bankruptcy Code, 2016 along with
other sections relating to voluntarily winding up under the Act

PROCEDURE FOR WINDING UP UNDER NEW REGULATIONS

STEP 1: One has to submit a declaration to Registrar of Companies, stating that company will
pay its dues and liquidation is not to defraud any person;

STEP 2: Within 4 weeks of such declaration, special resolution has to be passed for approval of
proposal of voluntary liquidation and appointment of liquidator;

STEP 3: Within 5 days of such approval, public announcement in newspaper and website of
company has to be made for inviting claims of stakeholders;

STEP 4: Within 7 days of such approval, intimation should be given to ROC and Board;

STEP 5: Submission of preliminary report containing capital structure, estimates of assets and
liabilities, proposed plan of action within 45 days to a corporate person;

STEP 6: Verification of claims within 30 days and preparation of list of stakeholders within 45
days from the last date of receipt of claims;
STEP 7: For receipt of money due to corporate person, bank account needs to be open in name of
corporate person having words ‘in voluntary liquidation’ after its name.

STEP 8: Sale of assets and recovery of due money, uncalled capital is realised;

STEP 9: The proceeds from realization to be distributed within 6 months from receipt of amount
to the stakeholders;

STEP 10: The final report by the liquidator has to be submitted to corporate person, ROC, the
Board and application to NCLT.

STEP 11: The order of NCLT regarding dissolution to be submitted within 14 days of receipt of
order.
Conclusion
In the year 1999, as per Justice Eradi Committee Report, 473 winding up cases were pending for
more than 25 years and in 2015, there were 1479 winding up cases pending for more than 20 years,
as per data furnished by the Department of Financial Services. The Insolvency and Bankruptcy
Code, 2016 was passed to ensure time bound settlement of insolvency which would in turn help in
solving India’s bad debt problem.
To expedite the process of voluntary winding up, Government had introduced New Regulations as
the procedure of voluntary winding up under Companies Act, 1956 was time consuming and there
was no prescribed qualification for liquidator. The Code mandates that insolvency professionals
are to be appointed as Liquidators, such a move is welcome by corporates and professionals.

The Code and Regulations provide a favourable framework for companies and limited liability
partnerships. Though the process remains almost similar to previous regime, but the major change
has taken place in initiation of winding up process. Earlier, company or any of its creditors could
file a voluntary winding up petition but now company, directors, designated partners or persons
responsible for exercising its corporate powers can initiate the winding up process. Moreover,
approval of creditors representing two thirds of corporate debt is mandatory under the Code for
initiating voluntary winding up proceeding.
Bibliography

 https://www.taxmann.com/blogpost/2000000260/winding-up-of-a-company.aspx
 https://www.indiafilings.com/learn/winding-company/
 https://blog.ipleaders.in/comparative-analysis-winding-company-companies-act-1956-
companies-act-2013-insolvency-bankruptcy-code-2016/