The main modes of winding up may be discussed under the following three heads, namely:-
1. Compulsory winding up by the court.
2. Voluntary winding up without the intervention of the court.
3. Voluntary winding up with the intervention of the court i.e., under the supervision of the court.
Mode # 1. Compulsory Winding Up by the Court:
Winding up of a Company by an order of the court is called the compulsory winding up. Section 433 of the Companies Act lays down the circumstances under which a Company may be compulsorily wound up. They are:
(a) If the Company has by special resolution, resolved that the Company may be wound up by the court.
(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 it 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.
(f) If the court is of the opinion that it is just and equitable that the company should be wound up.
Persons Entitled to Apply for Liquidation:
The Petition for winding up of a Company may be presented by any of the following persons (Sec. 439):
(1) The Company.
(2) The creditors which include contingent creditors, prospective creditors, secured creditors, debenture holders, or a trustee for debenture holders.
(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and 428).
(4) The Registrar.
(5) Any person authorised by the Central Government on the-basis of report of inspectors.
Mode # 2. Voluntary Winding Up:
A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.
This mode of winding up takes place on:
(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution to wind up voluntarily; or
(b) The passing of a special resolution by the Company to wind up voluntarily.
Mode # 3. Winding Up Subject to Supervision of the Court:
Windings up with the intervention of the court are ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court. A court may approve a resolution passed by the Company for voluntary winding up but the winding up should continue under the supervision of the court.
The court will issue such an order only under the following circumstances:
(a) If the resolution for winding up was obtained by fraud by the company; or
(b) If the rules pertaining to winding up are not being properly adhered to; or
The Court may exercise the same powers as it has in the case of compulsory winding up under the order of the court.
Key Takeaways:
As per new Companies Act 2013, a company can be wound up by a tribunal in the below mentioned circumstances:
1. When the company is unable to pay its debts.
2. If the company has by special resolution resolved that the company be wound up by the tribunal.
3. If the company has acted against the interest of the integrity or morality of India, security of the state, or has spoiled any kind of friendly relations with foreign or neighboring countries.
4. If the company has not filled its financial statements or annual returns for preceding 5 consecutive financial years.
5. If the tribunal by any means finds that it is just & equitable that the company should be wound up.
6. If the company in any way is indulged in fraudulent activities or any other unlawful business, or any person or management connected with the formation of company is found guilty of fraud, or any kind of misconduct.
Filling up winding up petition: Section 272 provides that a winding up petition is to be filed in the prescribed form no 1, 2 or 3 whichever is applicable and it is to be submitted in 3 sets. The petition for compulsory winding up can be presented by the following persons:
a) The company,
b) The creditors; or
c) Any contributory or contributories,
d) By the central or state govt.
e) By the registrar of any person authorized by central govt. for that purpose.
Final Order and its Contents: The tribunal after hearing the petition has the power to dismiss it or to make an interim order as it think appropriate or it can appoint the provisional liquidator of the company till the passing of winding up order. An order for winding up is given in form 11.
A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.
This mode of winding up takes place on:
(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution to wind up voluntarily; or
(b) The passing of a special resolution by the Company to wind up voluntarily.
Section 488 provides for two types of voluntary winding up;
(a) Member’s Voluntary Winding Up:
This type of winding up occurs only when the Company is solvent. It requires a declaration of the Company’s solvency at the meeting of Board of Directors. The declaration must specify the director’s opinion that the Company has no debt or it will be able to pay its debts in full within three years of the commencement of the winding up.
The company in general meeting must then appoint a liquidator and fix his remuneration. With his appointment, all the powers of the Board and the managing director or manager cease unless the company in general meeting sanctions otherwise.
The liquidator must annually call a general meeting to lay before it an account of his dealings and the conduct of the winding up.
When the company’s affairs are fully wound up, he must:
(b) Creditor’s Voluntary Winding Up:
It occurs in the absence of declaration of solvency i.e., when the company is insolvent. Hence, the Act empowers the creditors of dominate over the members in this mode of winding up so as to effectively protect their interest. It requires the company to hold the creditors’ meeting wherein the Board must make a full statement of the company’s affairs together with a detailed list of creditors including their estimated claims.
Both the members and creditors at their respective meeting nominate a liquidator and on their disagreement, the creditor’s nominee is appointed as the liquidator. All the powers of the Board then cease unless the creditor’s meeting sanctions otherwise the liquidator must annually call here not only the members’ meeting but also the creditors’ meeting to lay an account of his dealings and the conduct of the winding up. So also, he must call a final general meeting of the members and creditors for the company’s dissolution as in the case of member’s winding up.
A liquidator or an official receiver manages the entire liquidation process. He or she is appointed when a company goes into liquidation or is wound up by the Court in a compulsory liquidation process, which is brought about by a disgruntled creditor.
What Powers Does a Liquidator Have?
The liquidator has a wide range of powers that enable him or her to realise or sell the company’s assets and use the proceeds to settle debts. The liquidator takes control of the business, meets deadlines for paperwork, keeps the authorities informed, settles all claims against the company, interviews the directors and reports on the reasons for the liquidation. He or she will also dissolve the company in other words remove the company from the public register at Companies House.
What Happens When a Liquidator is Appointed?
A liquidator can be appointed in one of a number of insolvency procedures, such as a Creditors’ Voluntary Liquidation (CVL), which occurs when the decision to liquidate the company is taken voluntarily by directors faced with an insolvent company that is unable to pay its creditors in full. The directors take the decision to close down the business and start afresh. In this scenario, the process is initiated by the directors and not the company’s creditors.
The CVL process involves calling meetings of shareholders and creditors to pass the appropriate resolutions and to appoint a liquidator who is a licensed Insolvency Practitioner (IP). The liquidator is appointed to close the company in a professional manner, making sure a fair distribution of the company’s assets takes place amongst creditors. Neither the Court nor the official receiver is involved in a CVL procedure.
Liquidators are also appointed in Members Voluntary Liquidation (MVL). This is where the company is solvent and is able to pay all of its creditors in full. Directors frequently take the decision to go down the MVL route for tax purposes or to restructure the company. In this scenario, the appropriate resolutions must be passed at a general meeting to wind up the company and appoint a liquidator.
Who Appoints Official Receiver (Liquidator)?
In contrast, an official receiver is typically appointed when a company is forced into liquidation by irate creditors and a winding up order is issued by the Court. His or her role in this situation is to investigate the reasons behind the company’s failure and to deal with its assets and liabilities.
What are the Rights and Duties of the Liquidator?
The liquidator has a host of powers, depending on the type of liquidation that he or she is administering. Their main responsibility is to convert any remaining assets or property of the company into cash to repay as many creditors as possible. In addition to a wide range of admin tasks, such as paperwork, he or she will have to investigate director conduct and schedule meetings with creditors and directors. The specific duties of the liquidator will also include the following:
What are their Fees and how do they get Paid?
Following the official hierarchy of repayment, which is laid down by the Insolvency Act 1986, the liquidator’s fees and expenses are always first to be paid. These are followed by payments to secured creditors with a fixed charge, such as a bank, preferential creditors and unsecured creditors and, finally, shareholders. When a company becomes insolvent and begins a formal insolvency procedure, each class of creditors is paid in full before funds are allocated to the next tier or to an inferior debt.
When does a Liquidator Vacate Office?
Once the company’s affairs are fully wound up, the liquidator will give notice to the company’s directors, creditors, and the Court. At this time, creditors have the right to request further information from the liquidator, challenge his or her fees and expenses or even object to his or her release from office. However, this must be done in writing up to eight weeks after the liquidator has given notice, according to protocol.
If everything is fully wound up and in order, the liquidator, once he or she has delivered the final statement of account to Companies House and given notice to the Court, stating that no creditor has objected to his or her release, will be released and vacate office.
Key Takeaways:
a) A liquidator or an official receiver manages the entire liquidation process.
b) The liquidator has a wide range of powers that enable him or her to realise or sell the company’s assets and use the proceeds to settle debts.
References:
a) ‘Company Law’ by Brenda Hannigan.
b) ‘Elements of Company’ Law by N. D. Kapoor.
