Winding Up Process

 

Winding Up Process: Yes, it still exists!

 

The winding up of a company is a legal procedure for permanently shutting down a company. It is a procedure in which the company's corporate existence comes to an end after which the company is liquidated under the supervision of a Liquidator. Section 270 to section 365 of the Companies Act, 2013 (‘Act’) deal with the procedure of Winding Up of a company.

Before we delve into winding up, it is pertinent to know that there are five ways through which closure of a company can be brought down to. They are:

1.   Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) – Under section 7 of the IBC, Financial Creditors can initiate insolvency proceedings against the corporate debtor for the non-payment of financial debt. If no resolution plan is approved by the Committee of Creditors, then the company goes into liquidation. However, the focus is on the revival of the company and not its closure.

2.     Section 9 of the IBC – Operational Creditors can initiate insolvency proceedings against the Corporate Debtor for non-payment of operational debt. The focus is on the revival of the company and not its closure

3.     Section 10 of the IBC – Corporate Person itself applies for initiation of insolvency proceedings for its failure to payment of debt. Here also, the objective is to revive the company through approval of resolution plan failing which liquidation process initiates.

4.    Section 59 of the IBC – the Corporate Person itself applies for voluntary liquidation. The company should be able to pay all its debts and will have to have a NOC from creditors for the liquidation process to be initiates under section 59. Here, liquidation process starts as soon as certain conditions are met as stipulated under section 59.

5.    Section 271 of the Companies Act, 2013  – Section 271 of  the Act provides different circumstances under which a company can be wound up. One of the ways is for the company to pass a special resolution to that effect.

It is pertinent to mention that one of grounds for which a company could be wound up used to be ‘inability to pay debts’. However, the same was omitted with the introduction of IBC in 2016. The creditors therefore cannot move before NCLT for winding up of company for non-payment of debt, with IBC being their only avenue. Section 271 does give power to a company to wind up through special resolution having justifiable reason to do so.

Section 271 of the Act provides the following circumstances under which a company be wound by the Tribunal:

1. If the Company has decided to be wound up by the Tribunal by special resolution
2. If the Company has done anything that is detrimental to India's sovereignty and integrity, security, friendly relations with foreign states, public order, decency, and morality
3. If the Company has failed to file its financial statements or annual reports with the Registrar for the previous five financial years in a row.
4. If the Tribunal deems that it is right and equitable to do so, the Company will be wound up
5. If the Tribunal finds it appropriate, on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, that the Company's affairs have been conducted in a fraudulent manner.

The following can present the petition for winding up of the company:

• Company (through special resolution)
•  Contributory or Contributories
•  Registrar of Companies
•  Central or State Government

Steps: 

Broadly, the following steps have to be followed:

1. Pass a Board Resolution approving winding up and calling a general meeting for passing up of a special resolution for winding up and a notice to that effect.
2.  Pass a special Resolution in the General Meeting to wind up the Company.
3.  File a Winding Up Petition under Section 272 of the Act and the Winding Up Rules along with statement of Affairs (not later than 30 days prior to date of filing of application) and relevant of annexures.
4. The Hon’ble NCLT will pass further appropriate orders.
5. If approved by the NCLT, the company will enter into liquidation process with the Liquidator taking control of the company.

*the above steps are not detailed and only an overview

Timeline: There is no prescribed timeline for completion of winding up process as opposed to timelines prescribed under IBC.

As opposed to IBC, where the Applicant has an option to appoint a Liquidator, the Act or the rules do not provide for the petitioner company to suggest a name of Liquidator for appointment under the Winding Up process and the appointment of the same will be done by the NCLT.

As we can see there are different avenues available to company to bring itself to closure, each avenue differs from each other, the best suited option will differ for each company considering the facts and circumstances in each case vis-à-vis legal complexities, timeline, appointment of liquidator etc.

Moreover, there exists a major dilemma which corporates have to mull over when deciding which option to choose when it comes to closure of the company viz. section 10 of the IBC (CIRP/Liquidation) or Section 271 of the Act (Winding Up). Both of the options have their merits and due consideration has to be given on the following issues while decide the apt option: 

•   Timeline and cost 
•  Appointment of Liquidator  
• Approvals from NCLT on various stags
•  Compliances thereof during the process
•  Financial condition of the company

Though, choosing any of the options for closure of the company might seem innocuous at the very outset, however opting for the wrong one could prove to be costly in terms of time and resources. Therefore, it is preferable that the Companies carefully ascertain the viability of the options vis-à-vis their liquidation and dissolution thereof.

From Team 

Factum Legal

This Article has been Compiled by Aditya Raj (Associate). 

  You can direct your queries or comments to the author at aditya@factumlegal.com

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  The contents of this article should not be construed as legal opinion. This article is             intended to provide a general guide to the subject matter. Specialist advice should be     sought about your specific circumstances. We expressly disclaim any financial or other   responsibility arising due to any action taken by any person on the basis of this article.