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Types Of Winding Up Of A Company

There are two main types of company winding-up processes in India: voluntary winding up and compulsory winding up through a tribunal.

1. Voluntary Winding Up 

This occurs when a company’s shareholders decide to close the business. It’s often chosen when a company is no longer profitable, has achieved its initial purpose, or when the owners simply want a straightforward exit. The process begins with the company’s directors or shareholders passing a special resolution to initiate the winding up. A declaration of solvency must be filed to prove the company can settle all its debts. Voluntary winding up is also an option for companies with no assets or liabilities, where a simpler process called “strike-off” can be used.

2. Compulsory Winding Up (Tribunal Initiated) 

A tribunal, specifically the National Company Law Tribunal (NCLT), initiates this process, usually when a company is unable to pay its debts. The NCLT can also order a company to be wound up if it’s found to be acting against national interests, operating fraudulently, or if it has failed to file financial statements for five consecutive years. In this process, the NCLT appoints an official liquidator to take control of the company’s assets and liabilities, and it issues the final dissolution order after reviewing the liquidation report. The tribunal’s intervention ensures the winding-up is fair and lawful, especially to protect public and stakeholder interests.

Process for Winding Up of a Company

1. Voluntary Winding Up 

Voluntary winding up occurs when a company’s members decide to close the business. The process is as follows:

• Board and Shareholder Resolution: A special resolution must be passed in a general meeting, with at least 75% of the company’s members approving the decision to wind up.

• Appointment of Liquidator: The shareholders appoint a liquidator to manage the process. The liquidator’s duties include valuing assets, repaying debts, and distributing any remaining funds to shareholders.

• Declaration of Solvency: The company’s directors must file a statement confirming the company’s solvency and its ability to pay all debts within 12 months. This declaration, along with relevant documents, is filed with the Registrar of Companies (RoC).

• Final Accounts and Dissolution: The liquidator prepares the final financial accounts and a report on the completion of the winding-up. These documents are submitted to a final general meeting and then sent to the RoC. The RoC subsequently removes the company’s name from the official register, and the company is legally dissolved.

2. Compulsory Winding Up 

Compulsory winding up is a legal proceeding initiated by the National Company Law Tribunal (NCLT), typically due to insolvency or legal non-compliance. The procedure is:

• Filing of Petition: A petition is filed with the NCLT by the company itself, its creditors, the RoC, or the government, outlining the specific reasons for the winding up as per the Companies Act.

• Appointment of Official Liquidator: If the tribunal approves the petition, it appoints an official liquidator to take control of the company’s assets, records, and operations. The liquidator reports directly to the NCLT.

• Asset Realization & Debt Settlement: The liquidator sells the company’s assets to generate funds. These funds are used to settle outstanding debts according to a legal order of priority, with any remaining amount distributed to shareholders.

• Final Order by Tribunal: Once the liquidation is complete, the official liquidator presents a final report to the NCLT. The tribunal then issues a final order for the company’s dissolution. This order is registered with the RoC, which officially strikes off the company’s name.

Documents Required for Winding Up of a Company

No matter if the firm chooses voluntary winding-up or is directed to wind up by a tribunal, there is a list of documents to be prepared and filed to facilitate a compliant and smooth winding-up process. The list of required documents are as below:

• Copies of board resolution consenting to the winding up certified
• Special shareholder resolution authorizing closure
• Latest audited financial statements of a chartered accountant
• Complete report of liabilities and assets as of the date of winding up
• Declaration of solvency (in case of voluntary winding up)
• Sworn affidavit by directors stating the company’s solvency to pay debts to be submitted to the Registrar of Companies (ROC)
• Creditors’ No Objection Certificate (NOC) and auditor’s report
• Written consent of secured and unsecured creditors
• Auditor’s verification of financial accuracy and solvency
• NCLT Petition (in case of compulsory winding up)
• Statutory petition made by the qualified parties (company, creditors, ROC, etc.) along with supporting documents and reasons for winding up as per Section 271

Consequences of Winding Up

The process of winding up a company brings its legal existence to an end, leading to significant consequences for everyone involved.

1. Cessation of Business Activities 

All business operations cease permanently. The company stops trading, entering into new contracts, and generating revenue. Licenses and registrations are also canceled, and the company’s name is removed from the Register of Companies upon its final dissolution.

2. Impact on Shareholders 

Shareholders lose their ownership in the company once it is dissolved. However, in cases of voluntary winding up, they may receive any remaining assets after all debts and liabilities have been settled.

3. Change in Directors’ Authority 

Directors lose their authority to manage the company. Their powers are transferred to an appointed liquidator, and the directors are required to fully cooperate throughout the liquidation process.

4. Priority of Creditors 

During the distribution of assets, creditors are given priority. Secured creditors (those with a claim on specific assets) are paid first, followed by unsecured creditors. Any remaining assets are then distributed to the shareholders in proportion to their shareholding, ensuring a fair and legal closure of the company.

Legal Provisions & Relevant Sections

Company winding up in India is governed by two key legal frameworks: the Companies Act, 2013, and, for insolvent companies, the Insolvency and Bankruptcy Code (IBC), 2016. These laws ensure the closure process is transparent and orderly.

Companies Act, 2013

This act provides the primary legal basis for company closure.

• Section 248 allows the Registrar of Companies (ROC) to strike off the name of a company that is no longer operational, providing a simple way for voluntary closure.

• Sections 271-275 govern compulsory winding up. Section 271 lists the reasons why the National Company Law Tribunal (NCLT) can order a company to be wound up, while Sections 272-275 outline who can file a winding-up petition, the duties of the official liquidator, and the final steps for dissolution.

Companies (Winding Up) Rules, 2020

These rules provide a detailed procedural framework for winding up, especially for smaller companies with assets not exceeding ₹1 crore. They clarify the steps for filing documents, issuing public notices, and the reporting duties of the liquidator, ensuring a clear and standardized process.

Insolvency and Bankruptcy Code (IBC), 2016

When a company is unable to pay its debts and becomes insolvent, the winding-up process falls under the IBC. This code is designed for resolving corporate insolvency and liquidation, ensuring that creditors’ interests are prioritized during the financial hardship.