Understanding The Winding Up of the Company

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Winding up of Company:

Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator, is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights.

Kind of Companies can be wound up:

Only a limited company can be wound-up. The term “winding-up” (or “wound-up”) bears a similar meaning of “liquidation”. It generally means that all the assets of the company would be realized (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up would bring a company to an end.

A limited company is a company that is registered under the Companies Ordinance. It is a separate legal entity (i.e. it can sue or be sued in legal proceedings). The liabilities of shareholders are limited to the value of the company’s shares held by them (limited by shares). Another situation, which is not common in commercial organizations, is that the liabilities of shareholders are limited to the amount in which the shareholders have agreed to contribute to the company’s assets if the company is being wound-up (limited by guarantee).

An “unlimited company” or a sole trader is not a “company” in a strict sense. It is a business operated in the form of a sole proprietorship. In other words, the business is owned by an individual. A sole proprietor is solely and personally responsible for the liability of the business.
A partnership is a form of business owned by two or more persons (partners). The partners are personally jointly and severally liable (i.e. every partner should be liable) for the liability of the business.

An overview of winding-up procedures:

You can get a general picture on the winding-up procedures (except “voluntary Winding up) from the following steps:

Firstly, issuing a written demand for debt repayment to the target company

Secondly, presenting a winding-up petition to the Court and the company.

Thirdly, Court hearing for the petition.

Fourthly, granting of winding-up order by the Court.

Fifthly, meeting of creditors and other relevant parties.

Sixthly, appointment of liquidator.

Seventhly, realization and distribution of company’s assets to the creditors.

Eighthly, release of duties for liquidator.

Lastly, dissolution of the company.

Modes of Winding up of the company:

A Company may be wound up in any of the following modes:

1. By the Tribunal i.e. compulsory winding

2. Voluntary winding up, which may be

(a) Member’s voluntary winding up;

(b) Creditor’s voluntary winding up;

Winding up by the Tribunal:

o If the company has, by special resolution, resolved that the company may be wound-up by the tribunal;

o If default is made in delivering the statutory report to the registrar or in holding the statutory meeting;

o If the company does not commence its business within a year from its incorporation, or
suspends its business for whole of a year;

o If the number of members are reduced then their required number;

o If the company is unable to pay its debts;

o If the tribunal is of the opinion that it is just and equitable that the company should be
wound up;

o If the company is in default in filing up with the Registrar its balance sheet and profit and
loss account for five consecutive financial years and

o If the company has acted against the interests of the sovereignty and integrity of India or
security of any state, friendly relation with foreign States, public order, decency and morality.

Voluntary Winding Up:

In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: –

1. When the period fixed for the duration of the company in its articles has expired

2. When an event on the happening of which the company is to be dissolved as per its articles happens

3. The company resolves by a special resolution at a general meeting to be voluntarily wound up.
A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.

Persons may petition the Court for winding up: –

1. The Company

2. Any creditor of the Company

3. Any contributory or shareholder. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of its fully paid shares. While every member of a company becomes a contributory, not every contributory is a member. Besides members, any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory.

4. The Registrar may petition for winding up in the following circumstances: –

(i) If default is made in delivering statutory report or holding the statutory report.

(ii) If the company does not commence its business within one year from its incorporation or suspends its business for a whole year.

(iii) If it appears to him either from the financial position of the company as disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts.

(iv) Where the Registrar is authorized by the Central Government to petition for winding up the company.

(v) Where the number of members of the company fall below the statutory minimum.
(vi) Where it is just and equitable that the company be wound up.

5. Any person authorized by the Central Government. Under section 243, if any report of an inspector appointed to investigate the affairs of the company discloses: –

(i) That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose

(ii) That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report so to do, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so.

6. The Official Liquidator attached to a Court where a company is already being voluntarily wound up and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributors or both.

Liquidator can be released from the relevant duties in a winding-up proceedings:

The liquidator can apply to the Court for the release of the duties once the followings have
been accomplished:

– all the assets of the company have been realized (i.e. all assets have been sold and converted
to cash);

– investigations related to the winding-up proceedings are completed; and

– a final dividend (if any) has been paid to the creditors to settle the debts

The liquidator will send notices, together with a summary of the relevant receipts and payments in the liquidation, to the creditors and contributories of the company of the intention to apply to the Court for release from the duties as liquidator. At this point, any creditor or contributory has 21 days from the date of the notice to raise objection to the intended release of the liquidator.

After obtaining the order for release from the court, the liquidator will file a “Certificate of Release of Liquidator” with the Registrar of Companies. The company shall be dissolved two years after the filing of the “Certificate of Release of Liquidator”.

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