Process of Winding up a CompanyOctober 31, 2022 By Dinesh Parmar
Winding up of a company is an unfortunate event and no one wants to discuss those nitty grits. But as with all the red-tapism, this too can take long and even the winding-up process might become tedious and challenging. To save you the trouble of going through a maze of topics on different search engines, we list down important modes and processes by which a winding-up of operations will occur.
Before we jump onto the process of winding up, let’s first understand what does winding up means and what is its impact.
What does the winding up of a company mean?
Winding up of a company means cessation of all its operations, it no longer remains in existence afterwards and all its assets and liabilities are taken care of as per relevant provisions of law.
In fact, Chapter 20 of the Companies Act 2013 between Sections 270 to 365 discusses in detail the provisions and impact of winding up a company.
As a general rule, companies' assets are liquidated and sold to settle the company's obligations. The charges, expenditure, debts and liabilities are cleared first, and any excess that remains are distributed among the shareholders as per their rights.
What are the modes of winding up of a company?
A company may go for winding up of operations in 2 modes as per section 270 of the companies act:
By Tribunal Order- Compulsory Winding up
The first mode of winding up of a company is by court or tribunal order, this occurs in specific situations and pertains to mandatorily winding up of operations.
Section 271 of the Companies Act 2013 lists down certain criteria on which a company may be ordered to wind up operations by the Hon'ble tribunal.
These consist mainly of the declaration of a company as sick ( unable to pay dues and settle obligations ), fraudulent conduct of business, acts against the state, failure to file financial statements with the registrar, passing of the special resolution and in case the tribunal feels it is just and equitable that the company winds up its operations.
Procedure in brief:
Under section 272 certain individuals like creditors or contributors to the company, registrar, and central government authorised persons are allowed to file petitions for winding up of operations before a tribunal.
The procedure starts with the appointment of a liquidator by the tribunal who assesses exhaustively the companies debts and credits and thereafter as per section 281 submits a detailed report to the tribunal. The tribunal after analysis orders that company property be shifted into custody and that the outstanding of creditors and contributors are cleared first as per relevant provisions. Finally, after receiving the audit reports and various assessments, the tribunal directs the dissolution of the company under section 302 of the Companies Act 2013.
Voluntary winding up of a company
The second mode of winding up of a company is a voluntary one, it doesn’t mean, any one person can decide but rather the board of directors and shareholders take the call
As per section 304 of the Companies Act 2013, a company may be voluntarily wound up if it fulfills either of 2 conditions: If the board of directors via special resolution approves for winding up of the company OR if in a general meeting of a company, a resolution for the same is passed as per its articles or an unforeseen event has occurred that requires winding up of operations.
Being a voluntary process, the procedure is a tad bit long, however keeping the writing constraints in mind, we will try to provide a detailed picture in brief.
- It starts with the convening of a board meeting wherein the directors approve a resolution for winding up, stating the company has no leftover obligations or if it has they would be settled by selling off the assets.
- The resolution if ordinary needs to be passed by a simple majority or if it is an extraordinary resolution then by 3/4th majority.
- A liquidation date is finalised and informed.
- The Creditor's meeting takes place the day after the scheduled liquidation meeting and if two third of the total creditors agree then the company may be wound down voluntarily.
- Certified copies of ordinary or extraordinary resolutions as the case may be need to be filed with the registrar within 30 days.
- After the resolution is passed, within 10 days, notification of the appointment of the liquidator must be filed.
- The liquidator must file an audit report with the registrar after considering all company accounts and other financials.
- Companies' books and documents need to be disposed of via the passing of a special resolution.
- Within two weeks of the company’s general meeting, an application for dissolution needs to be filed before the tribunal, which shall dispose of the same within the subsequent 60 days.
- After obtaining the order from the tribunal, the registrar will publish a notice in the official gazette stating the current status of the company.
Companies Act is a detailed document enlisting provisions for dealing with such unforeseen circumstances like winding up, which cease the very existence of a company. But the technical details, jargons and complex processes make it harder for common people to understand the provisions, that is why services of a professional law firm are required, which can advise, guide and provide valuable feedback as to how the process should be undertaken properly while conforming to legal laws.
Legal advice helps companies navigate through the maze of rules, laws and regulations in an effective way and make it possible for the company to wind up operations in as short a time as possible.
To provide the best results and a hassle-free experience, the experts at Parker are ever-ready to help clients in a meaningful and professional way. Whether the winding up is a voluntary process or a tribunal ordered, the legal experts here are sure to provide sound legal advice and make the process happen in an efficient manner.