“Winding up is a means by which the dissolution of a company is brought about and its assets realised and applied in payment of its debts, and after satisfaction of the debts, the balance, if any, remaining is paid back to the members in proportion to the contribution made by them to the capital of the company.”[1]
Section 2 (94A) of the companies act of 2013 (hereinafter “the act”) refers to winding up under the act or juxtapose as per the Insolvency and Bankruptcy Code, 2016.[2] To begin with the prima facie understanding of the said procedure, a company winding up will always have an administrator who will act like a liquidator responsible for the distribution of remaining resources by assuming control. Once the liquidator has audited and assessed the assets of the of company, he collects the same for one: paying the debts if in case the company owes any, and two: further distributes the leftover surplus among various decrees of members according to their rights and position.[3]
But is dissolution of a company a pre-requisite to winding up? Essentially no. dissolution occurs when a company can no more be seen as a corporate and legal entity, when it ceases to exist in entirety whereas winding up could be referred to as one of the ways through which dissolution is executed, a company continues to be a legal entity during it’s initial wrapping up phase and can still be sued in the tribunal of law and the company is also allowed to function in it’s normal course so long as it is aiding in the winding up procedure, however this is not the case for dissolution since it is viewed as more absolute and less tangible exemplified by how the company is struck off in the registrar of companies post dissolution.
As much as winding up comes across as a linear process it actually is branched into a variety starting with:
1. Compulsory winding up:
the application that sets out needs to be following the guidelines of the restructuring and dissolution act (IRDA) 2018
This is court of law – tribunal regulated. u/s 271 the order for the same is issued upon certain grounds: if the court deduces that the company has worked or acted against the interests of the nation “sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality” [4], if there is any dissuasion with the affairs of the company or in its conduct that might have led to unlawful persuasions.[5] If a company is unable to commence business after even a full year of registry or has the business on standstill for over a year and therefore the court might not consider it a fair business, the central provides a minimum number of members and so if a private company has less than 2 members and a public company below 7 the court has legible grounds to call for a winding up and failure of payment of debts. There are several more grounds but it just goes on to iterate the vast scope of the discretionary power that the tribunal holds and it is referred to as ‘just and equitable’, this does not mean that the tribunal only takes into consideration the external factors before calling for a dissolution but also keeps in mind the interests of the shareholders, creditors, minority right holders of the company and sometimes might trash the entire proceeding if there is an alternate remedy available.
2. Voluntary winding up :
A voluntary winding up as reflected in the name is initiated by the company and its organs, it could be a decision brought upon by either the members or the creditors or both and is passed by forming of a resolution. This is also further branched out as the company being solvent or insolvent and depending upon the declaration in form of a written statement by members or creditors.
If incase the company is insolvent the creditors are not paid completely or however it was promised rightfully and they are divided into two kinds : secured and unsecured creditors. Secured as the name suggests enjoy certain rights that are not in view for the latter and their claim over whatever asset would be totally in a personal capacity.
Winding Up A Corporate Diaspora
But we need to take into account that during the said process there are also several liabilities in the spectrum and not just assets: the pari passu principle explains the procedure of liquidation and all the important exceptions it entails. “the general principle is that upon the liquidation of an insolvent company its property must be applied pari passu – ie rateably or proportionately, to satisfy the claims of its creditors at the time when it goes into liquidation.” [6]
To touch upon some landmark judgements : Madhusudan Gordhandas & Co. vs. Madhu Woollen Industries Pvt. Ltd.[7]where it was held by the apex court
“If any debt is bona fide disputed and defence is a substantial one, the court will not wind up the company. But when debt is undisputed the court will not act upon a defence that the company has ability to pay the debt but the company chooses not to pay the particular debt. Further, when there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of debt is disputed, the court will nevertheless make a winding up order without requiring the creditor to quantify debt precisely.”
the court on several occasions has relied on its analysis of the above case.
In another peak judgement delivered by the supreme court in the case of Innoventive Industries Limited v. ICICI Bank Limited[8] it was one of the first cases where the apex court delivered its interpretation of insolvency and bankruptcy code of 2016 and the country saw a paradigm shift in the laws pertaining to companies. The bench thus observed:
[9] “The concept of default under the Insolvency Code is very wide. It is simpliciter a non-payment of debt when the same becomes due and includes non-payment of even a part thereof. Even non-payment of a disputed financial debt when due would constitute a default under the Code. In other words, as long as the debt is due it does not matter if the same is disputed.”
The above judgement was highly commended and was seen as a very progressive view in the future of the company law and in totality for a nation who’s economic stealth grows every passing day.
And finally CoC Essar Steel v. Satish Kumar Gupta[10] the key issues in the said case that were looked over by the apex court were the time that was taken during a legal proceeding of winding up and it is harming the litigants in any capacity such as carrying out of business. There were several appeals filed before the supreme court discrediting the order released by the NCLAT and finally the bench reinforced the upper hand of financial creditors when it came to asset distribution and calculation of liabilities.
To conclude with the recent developments and controversies pertaining to the winding up of the companies, Bombay high court recently refused to intervene with a company’s winding up and held that “when debt is undisputed the court need not intervene”[11]
[1] A Ramaiya A Guide to the Companies Act, 17th Ed.2010
[2] Taxxman chapter 14 winding up of companies
[3] L. C. B. Gower Gower’s Principles of Modern Company Law 4th Ed. p. 719.
[4] Section 217 (b) the companies act of 2013
[5] Section 217 ( c) the companies act of 2013
[6] Taxxman, chapter 14, winding up of companies.
[7] Madhusudan Gordhandas & Co. vs. Madhu Woollen Industries Pvt. Ltd., (1971) 3 SCC 632
[8] Innoventive Industries Limited v. ICICI Bank Limited, MANU/SC/1063/2017
[9] L. Viswanathan & Indranil Deshmukh on September 1, 2017
POSTED IN DISPUTE RESOLUTION, INSOLVENCY AND BANKRUPTCY, india corporate law, Cyril amarchandmangaldas blogs
[10] CoC Essar Steel v. Satish Kumar Gupta, Civil Appeal No. 8766-67 of 2019
[11] Nitish Kashyap, livelaw, 22 jan 2017
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