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UNIT V

Winding Up

Q1) What are the main modes of winding up of a company?

A1) 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.

Q2) Explain compulsory winding up by the Court.

A2) 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.

(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.

Q3) Explain Voluntary winding up.

A3) 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.

Q4) Explain winding up subject to supervision of the Court.

A4) 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.

Q5) Under what circumstances the Tribunal may wind up a company?

A5) 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.

Q6) What is Member’s Voluntary winding up?

A6) 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:

Prepare an Account – Liquidator’s Final Statement of Account – to show the disposition and disbursement of the company’s property;

Call a final meeting of the company of laying the final account before it, and

Send a copy of the account and a return of the meeting to the Registrar of Companies. The company thereafter dissolves.

Q7) What is Creditor’s Voluntary winding up?

A7) 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.

Q8) Who is a Liquidator?

A8) 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.

Q9) What Powers Does a Liquidator Have?

A9) 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.

Q10) Who Appoints Official Receiver (Liquidator)?

A10) 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.

Q11) What are the Rights and Duties of the Liquidator?

A11) 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:

To assess all debts and decide which should be repaid in full or in part. In some cases, claims can be rejected

Bring to an end any outstanding contracts or legal disputes

Seek valuations for company assets to maximise returns for creditors

Closely inspect the restoration of property that may have been sold at undervalue

Keep creditors informed and involved in the decision-making process where appropriate.

Communicate how creditor claims are progressing, the reasons why the company failed as well as details about the redistribution of assets

Distribute funds to creditors fairly, taking into account the repayment structure which begins with the fees and expenses of the liquidation process itself

Interview and report on the factors that led to the company’s demise and liquidation. Report to the Secretary of State if he or she identifies director misconduct or fraud

Dissolve the company.

Q12) When does a Liquidator Vacate Office?

A12) 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.

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