Modes of Winding up of a Company

MODES OF WINDING UP OF A COMPANY

INTRODUCTION:

One of the hallmarks of a reliable economy is the time taken for a company to wind up. India has a poor record in this area and is not satisfactory. This was a disadvantage for foreign investors who were looking to wind up the operations within a reasonable amount of time. The insolvency and bankruptcy code was brought into effect for this purpose. This code came into existence in the year 2016 and it brought changes in the way insolvency is dealt with in India.

MEANING:

Winding up is the process of closing down the legal existence of a company or limited liability partnership. During this process, the assets of the company are realized and liabilities and debts are paid off and also the surplus is distributed among the shareholders. After the completion of this process and if the concerned authority is satisfied then the company will be dissolved.

During winding up, the management of the company is in the hands of the liquidator and not the governing body or the board of directors. However, the assets and liabilities belong to the company until it is wound up. After winding up, the company loses its legal existence.
The process of winding up is governed by the provisions of the companies act, 2013 and the Insolvency and Bankruptcy code, 2016.

MODES OF WINDING UP:

1. WINDING UP BY TRIBUNAL

Section 271 of the companies act 213 provides grounds for winding up of a company by National Company law Tribunal. According to this act, a company may be wound up by the tribunal on a petition in the following cases:

  • If the company has by a special resolution resolved that the company be wound up by the tribunal.
  • If on application made by registrar on any other person authorized by the government by notification, the tribunal thinks that the affairs of the company have been conducted by using fraudulent means and was formed for an unlawful purpose.
  • If the company has acted against the values of integrity and sovereignty of India and has operated without decency and morality.
  • If the company has made a mistake while filing the financial statements of the company for the preceding five years.
  • If the tribunal is of the opinion that it is good to wind up the company.
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For the commencement of proceedings under section 271 of the act a petition has to be filed to the tribunal. Section 272 of the act lists out the persons who are eligible to file the petition:

  • The company
  • The contributors
  • Central or state governments
  • A person authorized by the central government on this behalf
  • The registrar
  • The creditors

The petitioned filed by the company shall be accompanied by a statement of affairs in a prescribed format and can only be filed by the registrar with the sanction of the central government.

Under this section, the company may file any of the following orders within 90 days:

  • Make any interim order
  • Dismiss the petition
  • Appoint a liquidator till the making of a winding up order.
  • Make an order for winding up

2. VOLUNTARY WINDING UP

The process for voluntary winding up of a company has been stated in the Insolvency and Bankruptcy Code, 2016. The decision to wind up can be taken after considering the opinion of all the members and the process of liquidation can be initiated. Voluntary winding up is done to discontinue the activities of the company, liquidate the assets and distribute the surplus among the members. The process of winding up is given below:

  • The Board of directors have to declare the insolvency of the company in the form of an affidavit to the registrar.
  • They have to find an insolvency professional who will conduct the process of winding up.
  • Initiate a meeting of the board of directors.
  • The appointed professional sends the resolutions to the registrar of companies and insolvency and bankruptcy board.
  • The professional takes charge of the company and consults a shareholder who is entitled to distribute the proceeds.
  • The liquidator files a report under 45 days of initiation of liquidation and is sent to the company.
  • The liquidator should open a separate bank account for the liquidation process.
  • The process of liquidation has to be completed within 12 months from the date of initiation.
  • The liquidator has to prepare a final report and has to send it to the registrar and insolvency board
  • An application has to be filed before the tribunal to dissolve the company and the winding up process will be completed when the tribunal passes the order for winding up.
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3. FAST TRACK EXIT:

This is another mode of winding up of a company as notified under the companies act, 2013. It is a simple and easy process which saves a lot of time and money and the whole process of winding up is not too lengthy. There is no intervention of the court as well. This is a scheme where the name of the company can be struck down when it has been inoperative. The circumstances under which the name of the company can be denounced are:

  • When a company fails to start its business operations within one year of its incorporation.
  • If the company is inoperative for continuously two preceding years.
    The company can also have its name removed by filing an application to the registrar of companies after paying off all its liabilities and completing other formalities.

CONCLUSION:

The various modes for winding up of companies can be very lengthy and consumes a lot of time and effort. The cost of the proceedings can also be very high. In olden days, the courts found it very difficult to wind up many companies as it was already overburdened with various other cases. Now with the existence of the Insolvency and Bankruptcy board and also with the establishment of the National company law tribunal, the process of winding up of the companies has certainly become easier and the time taken for the process has reduced.

REFERENCES:

https://www.accountingnotes.net/company-management/winding-up/winding-up-of-a-company-3-modes-accounting/12846
http://corporatelawreporter.com/2017/04/25/fast-track-exit-fte-scheme-under-companies-act-2013/
https://www.mondaq.com/india/shareholders/956228/modes-of-closing-a-business-series-iv-voluntary-winding-up
https://www.mca.gov.in/MinistryV2/restructuring+and+liquidation.html

Author: Ronald Philips,
4th year BA LLB

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