1.OVERVIEW:
A company is an artificial legal person and it ceases to exist only by a way of legal contrivance, therefore, the concept of winding up arises. In corporate law, the concept of winding up is considered as a procedure where the company meets its end and the properties are provided for the interest of creditors and members.[1]
Generally, the procedure of winding up is linked with dissolution and insolvency but these are different concepts. In winding up, the company dissolves and the surplus of the realized assets are paid to creditors and thereafter to members, however, dissolution is the last stage of a company where the existence of the corporate entity comes to an end and if we consider about the insolvency, it is just the inability of the company to repay its debts in full to its creditors.[2]
The concept of winding up of a company may be studied because of several reasons which may include factors such as bankruptcy, misfortune or any unforeseen conditions. The law provides various modes of winding up by the mechanisms of compulsory and voluntarily winding up. Compulsory winding up of a company is incorporated under Section 271-303 of Co. Act, 2013 by the order of Tribunal. The provision defines the grounds for compulsory winding up which are on the basis of special resolution passed by the company. Therefore, a petition is filed before the tribunal by the persons listed in Section 272 of the Companies Act.
However, if the company is not engaged in any default then it may opt for voluntarily winding up under the provisions mentioned under Section 59 of IBC, 2016. Under this, the company is not at any default, so, a declaration is required by the directors to initiate such mode, followed by a special resolution for the appointment of a Liquidator. IBC also provides for the provisions for the liquidation when a corporate debtor fails to pay the debt. In such cases, a corporate insolvency resolution process maybe initiated either by corporate debtor or creditor.[3]
RESEARCH OBJECTIVES:
1. To understand the concept of modes and procedures of winding up under The Co. Act, 2013 and IBC, 2016.
2. To analyze grounds and procedure established under compulsory mode of winding up mentioned under Sec. 271-303 of the Act.
3. To understand the mechanism of voluntary winding up (Section 59 of IBC 2016) and to comprehend the procedure established for it.
4. To analyze the latest developments in the above mentioned modes of winding up through the observations of the courts in the present research
RESEARCH QUESTIONS:
1. What is the meaning and concept of winding up mentioned under the provisions of law?
2. What is the mode, grounds and the procedure required under compulsory winding up under The Co. Act, 2013
3. What is the mode and procedure followed in voluntarily winding up under IBC, 2016 and mechanism required to be fulfilled under it?
4. What are the latest developments and the interpretations given by the court associated with the concept and modes of winding up?
2. ANALYSIS OF WINDING UP UNDER COMPANIES ACT, 2013
2.1 Changes with respect to the laws for Winding up:
It is defined as[1]–
“A proceeding by means of which the dissolution of a Company is brought and in the course, the assets are collected and realized for payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed in accordance with AOA”.
The Act of 1956 provided the concept of winding up through three modes which included compulsory winding up by court or by the supervision of court and of voluntary winding up by members or creditors. Now, it has limited application only through compulsory winding up but under Sec 284 of the 2013 Act read with “Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016” also provides the companies to engage in other modes such as striking its name off for the defunct companies from the register of books either by the ROC on the basis of suo moto or an application filed by the company itself.
- Compulsory Winding Up & Procedure: (Sec. 271 – 303)
2.2.1Circumstances:
Section 271 of the Act of 2013 provides for compulsory winding up by the tribunal in the circumstances where a special resolution has been passed to resolve wind up, for instance where the company filed the petition and its financial position was eroded, the court ordered the company to wind up[2] or if the company has performed acts which are against the domain of, integrity, morality, sovereignty decency and the security of the States or if an application is filed before the Registrar by person authorized by the CG or if it fails to submit the financial statements immediately in the five preceding years before the registrar . If the tribunal feels that the company is engaged in fraudulent activities or has been established for unlawful purposes or the tribunal has the opinion based on just and equitable ground which can be imposed by the tribunal in following circumstances where there is deadlock in the management or there is a loss of substratum where the object failed to materialize or it is incapable to conduct business except for losses[3], for instance, where the director refused to hold meetings to pay dividends, the court directed the company to wind up on the basis of loss of substratum.[4] The other grounds include oppression of minority or the company engages in fraudulent activities or form a quasi partnership firm such as in Yenijde Tobacco Corp. Ltd[5], the company was wound up because of forfeiture of mutual confidence beyond repair on the basis of fraudulent activities. S. 272 of the Act provides a list of persons that can file the petition for the same which includes company, contributories, Registrar or the person authorized by CG, or the Stare or Central Government.[6]
2.2.2. Procedure:
To initiate such proceedings, if the petition is filed by the company, it can only be acknowledged if it is followed by the statement of affairs. And such statements shall be certified by the CA of the company consisting of the updated facts of more than 15 days to the date prior to such making of statement[7]. However, if the petition is filed by any person excluding the company, the tribunal if satisfied, may direct the company to file its objections accompanied by statement of affairs in 30 days of such order and non- fulfillment of such obligation may make the director liable. The tribunal may pass the followings orders in 90 days from presentation of petition-
1. Dismiss or order winding up of with or without costs;
2. Provide for an interim order or appoint a provincial liquidator till the making of such order.
3. At the time of passing such order, it may appoint a liquidator responsible for the conduct to initiate the process of winding up as a provincial liquidator from the insolvency professionals under IBC, 2016.
The official liquidator under Sec.275 has right to file declaration within 7 days in the matters of conflict related to his appointment. However, the he can be removed, if he engages in any misconduct, fraud or any professional incompetence. The registrar shall notify about the company being wound up in the Official Gazette and the liquidator may file an application within three weeks of the constitution of the Winding up Committee to submit the monthly and final reports after the dissolution under Sec. 277. Such order discharges the employees and officers from their duties and acts in the favor of all contributories.
There can be no suits and legal proceedings against the company after winding up. However, in certain circumstances, the authorities such as the Income Tax Officer can commence proceedings without the leave of the court.[8] Last but not least, the liquidator has to give final report in 60 days of winding up and thereafter, the company can realize and sell all its assets to the creditors.
Thus, the Companies Act, 2013 provides with an elaborative mechanism for compulsory winding up.
3.WINDING UP UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016
3.1 Emergence of Voluntarily Winding Up under IBC, 2016:
Till the emergence of the IBC, 2016, an extensive Code was introduced which included all partnership firms, individuals and companies. The plan was to introduce the Code in 1992 but it was until 2016, the plan was introduced to accompany the Companies Act, 2013. The primary goal was to integrate and resurrect the insolvency resolution process into a fast track process for the corporate entities. Currently, the Code of 2016 incorporates the concept of insolvency proceedings by a corporate debtor turning to be insolvent but now it also contains the provisions for those Companies who want to renounce their business and their right to carry the operations of the business.[9]
The Central Government issued a notification in the year 2017 and notified changes under Section 59 of the Code. Prior to such notification, the concept was governed under the ambit of the Companies Act, 1956 with respect to voluntarily winding up by the members or the creditors of the company which now have been repealed. The basic difference between them was that the former concept included a declaration of solvency made by the directors while in the latter the declaration was made by the directors and the creditors having dominant control in it. Voluntary winding up is the process by which the companies impose to wind up and dissolve itself by the shareholders’ approval. The earlier provisions under the Act of 1956 contained 38 sections for voluntarily winding up, whereas the 2013 Act had 20 sections for the same but now Chapter V, Part II of the Code has incorporated only one section, i.e, Sec. 59 of the Code.[10]
- Section 59 of IBC, 2016:
The company who has not engaged in any default of debt. The other condition required under the Code is that there shall be no intention to defraud someone. Therefore, it should be reasonable as per the provisions of the law. However, after the said notification released on 1st April, 2017, all the proceedings associated with voluntary winding up are now placed before the jurisdiction of the High Courts to the NCLT but the cases already lying before the HC shall be continued to be entertained by them.[11]
- Procedure:
3.3.1 In case when there is no default in payment:
A declaration is required by the majority of directors with an affidavit that it has no borrowings or will may make payment of such debs out of the proceeds of liquidation and has no intention to defraud any person accompanied by the reports of valuation of assets and the financial statements of the previous 2 years or at the time of incorporation, whichever is later. Within four weeks of such declaration, a special resolution shall be passed in the general meeting for such voluntarily winding up and also for appointment of insolvency professional or a resolution maybe passed based on the expiry of the duration fixed by the articles of association. However, if the company owes any debt, in such case the resolution shall be approved by the two- third creditors of the value of debt within 7 days of such resolution.
The company must intimate the ROC and the Board within seven days of such resolution. Last but not least, where the company has wound up, the liquidator must make an application before the adjudicating authority for the dissolution and such authority shall pass the order with respect to the corporate person being dissolved and the copy of it shall be forwarded to the authority within 14 days o to the authority in which, the company is incorprated.[12]
3.3.1. In case where there is default in payment:
The voluntary winding up may also result when the company is in default of payments of debt amounting to one lakh or more but not more than one crore as prescribed by the CG. A creditor or the corporate debtor may file for Corporate Insolvency Resolution under Sec. 7 of the Code which shall be completed in 180 days of such admission of application. However, it maybe extended to 90 days. If initially the extension was of thirty days and subsequently, it was increased to 60 days, such extension was allowed by the Tribunal.[13]
The adjudicating authority may pass a moratorium, cause public announcement for CIRP or appoint Interim Resolution Professional to take care of the affairs of the company. Such profession shall submit its resolution plan to the Tribunal to pass a suitable order.
Thus, the IBC, 2016 provides a superlative mechanism for voluntarily winding up by the companies.
4. JUDICIAL INTERPRETATION
- Winding Up and Other Procedures:
The SC in 1969 held that winding up is considered as a strategy to dissolve the business entity which precedes dissolution.[14] However, in comparison to latest procedures, the basic difference between striking off and winding up is that, in the former the indisposed properties are not appropriated towards the liabilities.[15]
- Compulsory Winding up:
In Reliance Infocomm Ltd v. Sheetal Refineries Private Ltd[16] , the AP High Court held that, “inability to pay debts” means a company is insolvent where its liabilities are more than its assets. Winding up cannot be imposed in the circumstances where there is difference of view in majority and those representing minority[17] and a huge weightage must be given to the present condition of employees, to impose such grounds[18] when there is a deadlock in management.
The SC in the landmark judgment of National Textile Workers also entitled the employees the locus standi in winding up where the employees suffered huge losses when the resources of the companies were blocked.[19]
The petition for winding up shall not include a claim for the recovery of interest due or any claim for debts, the only matter which shall be decided is whether the company is insolvent or not[20]. The process of winding up does not commence from the day of the order passed by the tribunal but from the time of the petition.[21] . If on the date of order, a proceeding is lying towards the company, the Kerala HC held that the suit cannot be proceeded until there is a leave granted by the tribunal.[22]
4.3: Voluntary Winding UP under IBC, 2016:
One can only initiate the proceeding for voluntary winding up for the existing debts which are due and not the defaults which were in the past and had been paid off under the ambit of Sec. 59 of IBC, 2016.[23] The SC held that that if the existence debt is bona fide disputed and the defense for the same is substantial in nature, the company will not engage in winding up[24].
In case when there s a default in payment, if the resolution is admitted and the professional is appointed for liquidation, a company cannot appeal further through its suspended BOD.[25] If there is no resolution plan submitted by the professional, then the same shall be rejected and the company may wound up based on the plan submitted by another liquidator. [26]
Thus, there are various case laws which provide judicial interpretation on present research.
5. CONCLUSION AND RECOMMENDATION
The Co. Act, 2013 and IBC, 2016 has provided a favorable framework for the modes and procedure for winding up. The concept of winding up is an essential requirement for the companies who have suffered from insolvency or any misfortunes. Therefore, it’s better for such companies to wind up and end their business. For example, the motorbike manufacturer, Harley and Davidson Inc. decided to either wind up in India due to poor sales of less than 2500 unit in 2020 or develop a follow up action plan.[27]
After a comprehensible study from the present research, it can be concluded that the provisions associated with winding up under the IBC, 2016 and the Companies Act, 1956 and 2013 may be same in terms of similar process but there has been major changes which can be seen from the present research such as earlier, the companies and the creditors could file for voluntary winding up but now the scope of voluntary winding up has been enhanced by incorporating corporate entities such as partnership firms, companies, person responsible for for the affairs of the company, etc.
If we compare the modes of winding up, it can be said that voluntary winding up of the corporate entities is much more preferred. IBC, 2016 is quite comprehensive and wider than other legislations which reduces the delays and complexities before High Courts, Tribunals, Company Boards, etc. However, striking off method is seen to be more prevalent than the other modes, though it is different from winding up, it provides a friendly and a cheaper mechanism with limited liabilities[28] where the assets are not being appropriated, however, such option is not for the insolvent companies.
From the present research, it can be recommended that the concept of winding up has evolved through many changes under several legislations; it has resulted in complexities to ascertain the modes and procedure for winding up. Moreover, it would be appreciative on the part of legislation to come up with a unified provisions for winding up and its other alternatives in a single statute, so that, it is easier for the readers to interpret it. In cases of winding up or non- compliance of the provisions and default, it is seen that the tribunal in some cases has given exception for the companies not to wind up and therefore, such exception and the circumstances should be clearly mentioned in the Act and the Code.
[1] Supra at note 6.
[2] Bombay Metropolitian Transport Corp. v. Employees,(1991) 71 Comp. Cas 47 Bom.
[3] Seth Mohan Lal v. Grain Chambers Ltd., AIR 1968 SC 772.
[4] In Loch v. John Backwwod,1924 AC783.
[5] Yenijde Tobacco Corp. Ltd, (1916) 2Ch. 426.
[6] The Companies Act, 2013, Sec. 272.
[7] Draft Companies (Winding up) Rules, 2013, Rule 5.
[8] SV Kandeaker v. VM Deshpande, (1972) SCC 1 438.
[9] S. Patwari, Voluntary Winding Up- Comparative Analysis, (April 18, 2021, 8:12 AM), file:///C:/Users/HP/Downloads/SSRN-id2377165%20(1).pdf .
[10] Id.
[11] MC Kucchal & Vivek Kuchhal,Business Legislation for Management, 571, (5th Ed., 2018).
[12] IBC, 2016, Sec. 59.
[13] Brasher Boot Co v. Forward Shoes (2018) 146 SCL 1- 90 taxmann.com 41 (NCLT).
[14] Pierce Leslie & Co. Ltd v. Violet Ouchterlony, 1969 AIR 843, 1969 SCR (3) 203.
[15] AK Mohata v. Karnatka State Financial Corp., (2016), 198 Comp Cas 286 (Kar).
[16] Reliance Infocomm Ltd v. Sheetal Refineries Private Ltd ,(2008) 142 Comp Cas 170 AP
[17] Veeramechineni v. Body Venkatasubbaiah, AIR 1949 Mad 675.
[18] Cine Industries& Recording Co.Ltd. RE,AIR 1942 Bom231.
[19] National Textile Worker v. Ramkrishna, 1983 SCR(1) 9.
[20] Jyothi Ltd. v.Boving Fouress Ltd, 7[2001] 3 Comp LJ 413 (Karn)
[21] MCC Finance Ltd. v. Ramesh Gandhi, (2005) 127 Comp Cas 85 (Mad).
[22] KP Devassy v. Official Liquidator,(1997) 2 KLT,80
[23] Unigreen Global Private Limited vs. Punjab National Bank and Ors. (2017 SCC Online NCLAT 566)
[24] Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Pvt. Ltd. [1972]2SCR201.
[25] Shree Ganesh Jewellery House (I) Ltd. v. Abhishek Stock Broking Services (P.) Ltd. [2018] 93 taxmann.com 46 (NCLAT).
[26] Hero Steels Ltd. v. Rolex Cycles (P.) Ltd. [2018] 91 taxmann.com 45 (NCLT).
[27] Peeyush Das, Modes of Winding Up and their Procedure,(April 20, 2021, 3:12 PM), https://bnwjournal.com/2021/02/28/modes-of-winding-up-of-companies-and-their-procedure/ .
[28] Jaya Sharma, Closure of a Company By Way of Strike Off, (April 20, 2021,5:14PM), http://jsa-cs.com/image/Closure_of_a_company_by_way_of_strike-off.pdf .
[1] Avtar Singh, Company Law 647(17th Ed., 2016).
[2] Id.
[3] Vidhi Gosar, Winding Up Under Companies Act, 2013, 2018, (Feb,20,2021, 4:20PM), https://taxguru.in/corporate-law/winding-under-companies-act-2013-ibc-2016.html .
Author Bio
when co is in loss . one directoer resgin. whom to get as new director. we want to close co. ww have out standing loans of promoters . how to cose co