Winding Up

Understanding the Process of Winding up A Company in India

calendar03 Apr, 2023
timeReading Time: 8 Minutes
Understanding the Process of Winding up A Company in India

The process of liquidating a company is often known as winding up a company; therefore, both terms go hand in hand. Through the process of winding up, the existence of a company comes to an end. Even during the process of winding up, the company performs its day to day activities. The only purpose for winding up a company is to liquidate its assets, and this means selling of all the assets the company owns so that they can be used to pay off its debts and afterwards distribute the remaining amount in between all the members as per their shareholding in the company.

Some Important Sections Related to the Winding up A Company

In layman’s terms, the process by which a business or a corporation is brought to an end and then its assets are redistributed is known as the winding up of a company. Before we start talking about the winding-up process of a company in India, let us look at some important Sections related to the winding up a company; and these are follows:

  • Section 271 of the Companies Act of 2013 talks about the circumstances in which company may be wound up by the Tribunal.
  • Section 272 of the Companies Act of 2013 talks about the petition for winding up a company.
  • Section 273 of the Companies Act of 2013 talks about the powers of the Tribunal.
  • Section 274 of the Companies Act of 2013 talks about the directions for filing statement of affairs.
  • Section 275 of the Companies Act of 2013 talks about the company Liquidators and their appointment.
  • Section 276 of the Companies Act of 2013 talks about the removal and replacement of liquidator.
  • Section 277 of the Companies Act of 2013 talks about the intimation to Company Liquidator, provisional liquidator and Registrar.
  • Section 278 of the Companies Act of 2013 talks about the effect of winding up order.      
  • Section 279 of the Companies Act of 2013 talks about the stay of suits, etc., on winding up order.
  • Section 280 of the Companies Act of 2013 talks about the jurisdiction of the Tribunal.
  • Section 324 of the Companies Act of 2013 talks about the Debts of all descriptions to be admitted to proof.
  • Section 325 of the Companies Act of 2013 talks about the Application of insolvency rules in winding up of insolvent companies.
  • Section 326 of the Companies Act of 2013 talks about the Overriding preferential payments.
  • Section 327 of the Companies Act of 2013 talks about the preferential payments.
  • Section 328 of the Companies Act of 2013 talks about the fraudulent preference
  • Section 329 of the Companies Act of 2013 talks about the transfers not in good faith to be void.
  • Section 330 of the Companies Act of 2013 talks about the certain transfers to be void.
  • Section 331 of the Companies Act of 2013 talks about the liabilities and rights of certain persons fraudulently preferred.
  • Section 332 of the Companies Act of 2013 talks about the effect of floating charge.
  • Section 333 of the Companies Act of 2013 talks about the disclaimer of onerous property.
  • Section 359 of the Companies Act of 2013 talks about the appointment of Official Liquidator.
  • Section 360 of the Companies Act of 2013 talks about the powers and functions of Official Liquidator.
  • Section 361 of the Companies Act of 2013 talks about the summary procedure for liquidation.
  • Section 362 of the Companies Act of 2013 talks about the sale of assets and recovery of debts due to company.
  • Section 363 of the Companies Act of 2013 talks about the settlement of claims of creditors by Official Liquidator.
  • Section 364 of the Companies Act of 2013 talks about the appeal by creditor.
  • Section 365 of the Companies Act of 2013 talks about the order of dissolution of company.
  • Section 375 of the Companies Act of 2013 talks about the winding up of unregistered companies.
  • Section 376 of the Companies Act of 2013 talks about the power to wind up foreign companies although dissolved.
  • Section 377 of the Companies Act of 2013 talks about the provisions of Chapter cumulative.
  • Section 378 of the Companies Act of 2013 talks about the saving and construction of enactments conferring power to wind up partnership firm, association or company, etc., in certain cases.

What Are The Different Ways To Close A Company?

According to the Companies Act of 2013, the process of winding up a Company has been divided into there, these are as follows:

  • Strike off a company
  • Winding up of the company

The process of winding up has been further sub-categorised into two; as per Section 270, a company can be winded up in the following ways: 

  • Compulsory Winding up of Company by Tribunal
  • Voluntary Winding up of the Company

What Is Compulsory Winding Up Of Company?

In a case where a company is forced to wind up its operations by the law is known as compulsory winding up or wind up by a Tribunal. Here the Tribunal means, the National Company Law Tribunal. This can be decided in a court of law, or it can come in the form of a court order.

In the above case, the company is required to appoint a liquidator for the company. The liquidator will be responsible for managing the sale of the company and all its assets and to distribute all the assets after the liquidation among all the creditors.

Cases Where a Tribunal Can Order To Wind Up

As outlined under Section 271 of the Companies Act, a Tribunal has all the power to issue the order to wind up a company, but only in the following circumstances. The circumstances are as follows:

  • Bypassing of special resolution for the winding up;
  • Inability to pay debts;
  • Deadlock in management;
  • Sick Company;
  • Acts against the State;
  • Fraudulent Conduct of Business;
  • In case the company fails to file financial statements with the Registrar;
  • In the case where it was just and equitable to wind up.

Who All Can File The Petition For Winding Up By Tribunal?

The following people can make a petition to the Tribunal for winding up the matters of a company as per the Section 272 of the Companies Act of 2013:

  • The Company, as per Section 272(5) of the Companies Act;
  • Any creditor(s) or potential creditors of the company;
  • Any Contributors to that company as per Section 272(3) of the Companies Act;
  • The Registrar;

Note: The Registrar must obtain prior permission from Central Government before presenting the petition for winding up of the company. Further, it is mandatory for the Central Government to give the company a reasonable opportunity before granting such permission to the Registrar. A copy of such petition must be sent to the Registrar, and then the Registrar must submit his view to the Tribunal within the period of sixty (60) days from receiving such petition.

  • Any person who the Central Government authorises to do so;
  • By the Central Government or State Government itself, in a case where the company is acting against the interest of sovereignty and integrity of India

Stages Involved In The Process Of Winding up A Company by Tribunal

The following is the procedure for compulsory winding up a company by tribunal:

  • The company has to appoint a liquidator as per the terms of Section 275 of the Companies Act. The liquidator will be responsible for examining the debts and credits of the company in order to check the eligibility of the company for compulsory wind up by the tribunal.
  • Following this, the liquidator has to submit the report to the Tribunal as per Section 281 of the Act.
  • After analysing the report, the tribunal then issues an order to the liquidator to start the process of dissolving the company as per Section 281 of the Companies Act, 2013.

What Is Voluntary Winding Up A Company?

The second way of closing a company is through voluntary winding up. The process is generally initiated by the shareholders or partners of the company, and it is usually done by passing a special resolution. The decision to wind up voluntarily is taken when the shareholders feel that the company will be insolvent and will not be able to discharge its liabilities. The process of winding up terminates the existence of the corporation by selling off its assets and settling all the outstanding financial obligations.

The main motive behind the wind-up is to cash out the business that does not have a bright future or does not have a purpose left to serve. Such type of liquidation or winding up is not mandated by the court. It is purely approved by the shareholders and board of directors of the company, also in a case where market situations are not favourable and stakeholders feel that the company is facing challenges due to such conditions. In that situation, they can pass a resolution to wind up the company.

Stages Involved In The Process Of Voluntary Winding up A Company

The following is the procedure for voluntary winding up a company by the board of directors of the company:

  • Firstly pass a resolution regarding the wind-up in the general meeting of the company;
  • Afterwards, provide the declaration of the solvency of the company for all the unpaid debts;
  • The auditor should prepare a report regarding the financial statement of the company.
  • The auditor’s report, along with the declaration of solvency to the Registrar of Companies (ROC);
  • The company is required to appoint a liquidator for the winding up process; also, the process for winding up starts from the date of passing such resolution;
  • The liquidator then prepares the report and calls a general meeting of the company to declare the final accounts of the company before the wind-up process; 
  • Then the company has to pass the resolution by a majority; 
  • After the resolution has been passed by the board of directors, the liquidator must send a copy of statements to the ROC and a copy of its report to the Tribunal;
  • After analysing the report, the Tribunal must pass an order to complete the winding-up process;
  • A copy of the Tribunal’s order must be sent to ROC by the liquidator within a period of thirty (30) days from the date of passing such order. Failure to do this will attract some penalties on the liquidator. 
  • If ROC is satisfied, it approves the winding up of the company and finally strikes the name of the applicant company from the Registrar Of Companies. 
  • Then ROC sends a notice for publication in the Official Gazette of India.

What is a Fast Track Exit Scheme (FTE)?

The MCA[1], also known as the Ministry of Corporate Affairs, through a notification dated December 26, 2016, introduced a scheme called as Fast Track Exit also known as FTE.  As the name suggests, through this scheme, companies can strike off the name from the Registrar of Companies (ROC). The aim behind introducing this scheme was to provide all the defunct companies with an opportunity to get their names removed from ROC.

The FTE scheme does not apply to the following companies:

  • Listed companies as per Indian Company law;
  • Companies that are de-listed due to non-compliance with any other statutory laws;
  • Section 8 Companies;
  • Vanishing companies as per Indian Company law;
  • Companies that are under some inspection/investigation;
  • Companies against which prosecution for a non-compoundable offence is pending in court;
  • Companies that have outstanding public deposits, secured loans or dues towards the banks and financial institutions or any Government Departments or have management disputes;
  • Company for which filing of documents has been stayed by court or Company Law Board (CLB) or Central Government or any other competent authority.

Situation Where a Company Can Wound Up Through FTE

Following is the list of situations where a company can strike off their name from ROC under the FTE (Fast Track exit) scheme. The companies that fall under the following conditions will be known as defunct companies, and therefore, they can wind up their business through a Fast Track exit scheme.  The situations are as follows:

  • When a company does not have any liabilities or assets left;
  • When a company has not performed any business activity after its incorporation;
  • When a company has not performed any business for at least one year.

Stages Involved In The Process Of FTE

The process of striking off the company’s name by the way of Fast Track Exit Scheme, involves the following steps:

  • The first step involves by sending an application to the Registrar of Companies (ROC) under form FTE.
  • The applicant must submit the abovementioned form along with the prescribed fee.
  • Once the application has been received, the ROC will examine the request form. Also ROC is required to start the process of winding up within a period of 30 days from the date of receiving such a request.
  • The ROC, after this, places the name of the applicant company on the MCA portal, so that all the stakeholders who want to raise the objection against such a strike off can do so, but only within a period of 30 days.
  • After this, the ROC intimidates the Income Tax Department about the winding up. If the department has any concern or query, they can raise that in front of the ROC, within a period of 30 days.
  • If no one has raised any query and ROC is satisfied, it approves the winding up of the company and finally strikes the name of the applicant company from the Registrar Of Companies.
  • Then ROC sends a notice for publication in the Official Gazette of India.

Conclusion

The process of winding up a company brings the existence of a company to an end. The company gets dissolved by selling all of its assets so that it can pay off debts. During the winding-up process in India, the company pay off its debts, remove all the liabilities and afterwards distribute all the remaining amount in between the members of the company as per their shareholding in the company. Winding up is an essential term for all the business owners to understand. One must follow all the legal processes in order to wind up a company in India, so make sure that you follow each and every step.

Also Read:
Marking The Legalities For Winding Up Of A Private Limited Company In India

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