AMITY LAW SCHOOL

NOIDA

MERGERS AND ACCQUISATIONS LAW PROJECT

TOPIC: WINDING UP OF COMPANIES UNDER THE
COMPANIES ACT, 2013

Submitted by

,Jahnavi Singh

A11911114083

B.A.LL.B(Hons.)

8th Semester

Section - A

Batch - 2014-19
 ACKNOWLEDGMENT

This project is the outcome of the study by the author. Any material written by another
person that has been used in the paper has been thoroughly acknowledged. As my research
has concluded, there are a number of people I would like to thank for the successful attempt.

I thank the esteemed director of this institution, Mr.Indranil Baneerjee for inculcating the
concept of preparing a project and allowing the researcher to present his/ her point of views
in liberal manner and encouraging the researcher by providing all the much needed support

I would also like to express my exceptional gratitude and acknowledgment to Mr. Indranil
Banerjee who undertook the role of a supervisor and guide for the successful preparation of
this project and for supporting throughout the time of research and writing.

I would also like to extend my thanks and gratitude for the contribution of all those who
helped me in this work as individuals or otherwise. On a personal level I would like to extend
my appreciation to my family and friends who supported me to conclude this project.
 INTRODUCTION

More than three years ago, the Companies Act, 2013 (“2013 Act”) was passed by both
Houses of Parliament and received assent of the President of India. The 2013 Act seeks to
replace the Companies Act, 1956 (“1956 Act”). The different provisions of the 2013 Act are
being brought into effect in phases. On December 7, 2016, the Ministry of Corporate Affairs,
Government of India (“MCA”) issued a notification (“December 7 Notification”) notifying
several sections of the 2013 Act and appointing December 15, 2016 as the date on which the
said provisions shall come into force. The notified sections include provisions relating to
schemes of arrangements, compromises, mergers and amalgamation, and those relating to
winding up.

Along with the December 7 Notification, on the same day, MCA also notified the Companies
(Transfer of Pending Proceedings) Rules, 2016 and the Companies (Removal of Difficulties)
Fourth Order, 2016. Pursuant thereto, all proceedings under the 1956 Act with High
Courts shall stand transferred to the Benches of the National Company Law Tribunal
(“NCLT”) exercising respective territorial jurisdiction with effect from December 15, 2016,
other than proceedings relating to winding up which have been dealt with separately.
However, proceedings which are reserved for orders for allowing or otherwise of such
proceedings shall not be transferred. All cases of winding up under the 1956 Act (instituted
on the ground of inability to pay debts) which are pending before the High Courts as on
December 15, 2016 and wherein petitions have not been served to the respondents shall be
transferred to NCLT, and such petitions shall be treated as applications under the relevant
provisions of the Insolvency and Bankruptcy Code, 2016 (“Bankruptcy Code”). All other
winding up petitions filed under clauses (a) and (f) of section 433 of the 1956 Act pending
before a High Court and where the petition has not been served on the respondent shall be
transferred to NCLT and such petitions shall be treated as petitions under the provisions of
the 2013 Act.

This note provides an overview of the key changes which have been introduced pursuant to
the notification of sections 230 to 240 of the 2013 Act1relating to compromises,
arrangements and amalgamations. The specified sections are a comprehensive code in itself
providing the manner in which compromises, arrangements and amalgamations are to take
place involving members or creditors. With the aforesaid provisions coming into force, the
corresponding provisions of the 1956 Act would no longer be in effect.
Winding-up of a company is a process of putting an end to the life of a company. It is a
proceeding by means of which a company is dissolved and in the course of such dissolution
its assets are collected, its debts are paid off out of the assets of the company or from
contributions by its members, if necessary. If any surplus is left, it is distributed among the
members in accordance with their rights. Winding-up is the process by which management of
a company’s affairs is taken out of its directors’ hands, its assets are realized by a liquidator
and its debts are realized and liabilities are discharged out of proceeds of realization and any
surplus of assets remaining is returned to its members or shareholders. At the end of the
winding up the company will have no assets or liabilities and it will, therefore, be simply a
formal step for it to be dissolved, that is, for its legal personality as a corporation to be
brought to an end. The main purpose of winding up of a company is to realize the assets and
pay the debts of the company expeditiously and fairly in accordance with the law. However,
the purpose must not be exploited for the benefit or advantage of any class or person entitled
to submit petition for winding up of a company. It may be noted that on winding up, the
company does not cease to exist as such except when it is dissolved. The administrative
machinery of the company gets changed as the administration is transferred in the hands of
the liquidator. Even after commencement of the winding-up, the property and assets of the
company belong to the company until dissolution takes place. On dissolution the company
ceases to exist as a separate entity and becomes incapable of keeping property, suing or being
sued. Thus in between the winding up and dissolution, the legal status of the company
continues and it can be sued in the court of law. Is Winding up and dissolution are
synonymous? The terms “Winding up” and “Dissolution” are sometimes erroneously used to
mean the same thing.
Winding up – Concept and Modes

MODES OF WINDING UP

A company registered under the Companies Act, 1956 may be wound up by any of the
following modes:

1. By the Court i.e. compulsory winding up;

2. Voluntary winding up, which may be either: (a) Members’ voluntary winding up; or (b)
Creditor’s voluntary winding up;

3. Winding up subject to the supervision of the Court. (omitted and the same is yet to be
notified) Section 425 of the Companies Act, 1956 lays down the above three modes of
winding up and provides that the provisions of the Act with respect to winding up shall apply,
unless the contrary appears, to the winding up of a company in any of these three modes. In
every winding up, a liquidator or liquidators is or are appointed to administer the property of
the company and he or they must apply the assets of the company, first, in the payment of the
creditors in their proper order, and then, in distributing the residue among the members
according to their rights.

WINDING UP BY THE COURT

Winding up by the Court or compulsory winding up is initiated by an application by way of

petition to the appropriate Court for a winding up order. A winding up petition has to be
resorted to only when other means of healing an ailing company are of absolutely no avail.
Remedies are provided by the statute on matters concerning the management and running of
company. The extreme and irretrievable step of winding up must be resorted to only in very
compelling circumstances. [Daulat Makanmal Luthrid v. Solatire Hotels (1993) 76 Comp.
Cas. 215 (Bom. HCD)]. It is primarily the High Court which has the jurisdiction to wind up
companies under Section 10 of the Companies Act, 1956 in relation to the place at which
registered office of the company concerned is situated except to the extent to which
jurisdiction has been conferred on any District or District Courts subordinate to the High
Court. The Central Government may empower any District Court to exercise that jurisdiction,
presumably to reduce the burden of the High Court, only in respect of small companies with
the paid-up capital of less than one lakh rupees and having their registered office within the
District, with a view to achieving expeditious and efficient disposal of winding up
proceedings. Sections 435 to 438, confers wide powers upon the High Court to regulate the
conduct of such proceedings. Accordingly the High Court which is the winding up Court may
direct a District Court to retain and continue winding up proceedings which should not really
have been commenced in that Court (Section 437). It may also withdraw any winding up
which is in progress in a District Court from that Court and proceed with the winding up
itself, or transfer it to another District Court (Section 436), and with respect to all proceedings
subsequent to its own order of winding up, direct them to be had in a District Court or with
the consent of any other High Court, in such High Court or in a District Court subordinate to
that High Court, whereupon the Court in respect of which such direction is given shall be
deemed to be the Court with all powers and jurisdiction of the High Court under the Act
(Section 435). Lastly, the High Court can pass orders under any of the foregoing sections at
any time and at any stage, whether or not an application in that behalf is made by any of the
parties to the proceedings (Section 438). There must be strong reasons to order winding up as
it is a last resort to be adopted. Temporary difficulty cannot be ground for liquidating
company when company is on path of revival. D. Ashokan v. S.T. Reddiar & Sons (2002) 40
SCL (Ker. HC DB). 708 EP-CL Grounds on which a Company may be wound up by the
Court A company under Section 433 may be wound up by the Court if (a) the company has
passed a special resolution of its being wound up by the Court; or (b) default is made in
delivering the statutory report to the Registrar or in holding the statutory meeting; or (c) it
does not commence business within a year from its incorporation or suspends business for a
whole year; or (d) the number of its members in the case of a public company is reduced
below seven and in the case of a private company, below two; or (e) it is unable to pay its
debts; or (f) the Court is of the opinion that it is just and equitable that it should be wound up.
(g) the company has made a default in filing with the registrar its balance sheet and profit and
loss account or annual returns for any five consecutive financial years. (h) the company has
acted against the interests of the sovereignty and integrity of India, the security of the State,
friendly relations with foreign States, public order, decency or morality, or (i) the court is of
the opinion that the company should be wound up under the circumstances specified in
Section 424G. Provided that the tribunal shall make order for winding up of a company under
clause (h) on application made by the Central Government or a State Government. The
winding up petition is not a legitimate means of seeking to enforce payment of debt, which is
bona fide disputed by the company.
LIQUIDATION

Liquidation is the process where a firm's assets and liabilities are terminated, realized and
subsequently distributed. In many cases, the firm ceases to exist. Members of the firm
sometimes voluntarily initiate the liquidation process. Other times it is compelled by a
creditor's petition to the courts for failure to uphold contractual payments.

VOLUNTARY WINDING UP

When the members or the creditors without the intervention of Tribunal wind up a company,
it is called as 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 or
the creditors.

Voluntary winding up/ liquidation actually falls into two subcategories:

a) Those with a declaration of solvency; and

b) Those without An otherwise solvent company might determine that, through
liquidation, it is able to pay its debts within a specified period. Its directors can then issue a
formal declaration of solvency and its shareholders can lead the appointment of a liquidator.
This is sometimes called a '"members' voluntary liquidation." Shareholders may elect to
initiate liquidation without the directors having issued a declaration. In these cases, the
liquidator is appointed by the company's directors, not the shareholders.

Purpose
To avoid moral hazard in a lending relationship, a creditor need to be able to recoup some
value if a borrowers fails to repay a loan. Debtor companies are disciplined by the threat of
bankruptcy and liquidation, much like an individual borrower who pledges an asset as:

S.270 of the Act prescribe the below mentioned three ways, in which a company may be
wound up.
A. Winding up by the court.
B. Voluntary winding up:
* Member’s Voluntary winding up
* Creditor’s Voluntary winding up
C. Winding up subject to supervision of the court

Petition for Winding Up, S.272

A petition for winding up of a company shall be presented to the Tribunal by the following
authorized persons incorporated under this Act of 2013:
Ø The Company;
Ø Any creditor or creditors, including any contingent or prospective creditor or creditors;
Ø Any contributory or contributories;
Ø All or any of the persons specifies in the above clauses together;
Ø The Registrar
Ø Any person authorized by Central Government in that behalf; or
Ø In a case falling under clause (c) of sub-section (1) of Section 271, by the Central or State
Government

Modes of Voluntary Winding Up, Section 304

It may take place by:-

By passing an ordinary resolution in the general meeting if
(i) The period fixed for the duration of the company by the articles has expired; or

(ii) Some event on the happening of which company is to be dissolved, has happened.

By passing a special resolution to wind up voluntarily for any reason whatsoever.

Within 14 days of passing the resolution, whether ordinary or special, it must be advertised in
the Official Gazette and also in some important newspaper circulating in the district of the
registered office of the company.

Commencement of Voluntary Winding Up, S.308

It shall be deemed to commence on the date of passing of the resolution for voluntary
winding up under section 4.

Conditions
It is possible in the case of solvent companies which are capable of paying their liabilities in
full. There are two conditions for such winding up:-
A declaration of solvency must be made by a majority of directors, or all of them if they are
two in number. It will state that the company will be able to pay its debts in full in a specified
period not exceeding three years from commencement of winding up. It shall be made five
weeks preceding the date of resolution for winding up and filed with the Registrar. It shall be
accompanied by a copy of the report of auditors on Profit & Loss Account and Balance
Sheet, and also a statement of assets and liabilities up to the latest practicable date; and
Shareholders must pass an ordinary or special resolution for winding up of the company.

Provisions
The provisions applicable to members' voluntary winding up are as follows:-
# Appointment of liquidator and fixation of his remuneration by the General Meeting.
# Cessation of Board's power on appointment of liquidator except so far as may have been
sanctioned by the General Meeting, or the liquidator.
# Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator
by the general meeting subject to an arrangement with the creditors.
# Sending the notice of appointment of liquidator to the Registrar.
# Power of liquidator to accept shares or like interest as a consideration for the sale of
business of the company provided special resolution has been passed to this effect.
# Duty of liquidator to call creditors' meeting in case of insolvency of the company and place
a statement of assets and liabilities before them.
# Liquidator's duty to convene a General Meeting at the end of each year.
# Liquidator's duty to make an account of winding up and lay the same before the final
meeting.

Reasons for winding up

Company is unable to pay debts when:
a) The company on demand of the creditor a sum within 21 days of receipt of the demand
notice is unable to provide adequate security or is unable to restructure the debt or compound
the debt to reasonable satisfaction of the creditor.

b) If the execution decree in favor of the creditor is returned unsatisfied.

c) If the tribunal is satisfied by the incapacity of the tribunal to pay debts

Procedure For Voluntary Winding Up

1. Conduct a Board meeting with 2 directors and thereby pass a resolution with a declaration
given by directors that they are of the opinion that company has no debt or it will be able to
pay its debt after utilizing all the proceeds from the sale of its assets.

2. Issues notices in writing for calling a general meeting proposing the resolution along with
the explanatory statement.

3. In General Meeting, pass the ordinary resolution for winding up by ordinary majority or
special resolution by 3/4th majority. The winding up shall start from the date of passing the
resolution.

4. Conduct a meeting of creditors after passing the resolution, if majority creditors are of the
view that winding up is beneficial for all the parties.

5. Within 10days of passing the resolution, file a notice with registrar for appointment of
liquidator.

6. Within 14days of passing such resolution, give a notice of the resolution in the official
gazette and also advertise in the newspaper.

7. Within 30days of general meeting, file certified copies of ordinary or special resolution
passed in general meeting.

8. Wind up the affairs of the company and prepare the liquidators account and get the same
audited.

9. Conduct a General Meeting of the company.

10. In that meeting, pass a special resolution for disposal of books and all necessary
documents of the company, when the affairs of the company are totally wound up and it is
about to dissolve.
11. Within 15days of final general meeting of the company, submit a copy of accounts and
file an application to the tribunal for passing an order for discussion.

12. If the tribunal is of the opinion that the accounts are in order and all the necessary
compliances have been fulfilled, the tribunal shall pass an order for dissolving the company
within 60 days of receiving such application.

13. The appointed liquidator would then file a copy of order with the registrar.

14. Once the order passed by the tribunal is received, the registrar will then publish a notice
in the Official Gazette declaring that the company is dissolved.

Who may file Petition for the Winding up?

An application for the winding up of a company has to be made by way of petition to the
Court. A petition may be presented under Section 439 by any of the following persons: (a)
the company; or (b) any creditor or creditors, including any contingent or prospective creditor
or creditors; or (c) any contributory or contributories; or (d) all or any of the parties specified
above in clauses (a), (b), (c) whether together or separately; or (e) the Registrar; or (f) any
person authorised by the Central Government in the case falling under Section 243, i.e.,
following upon a report of inspectors. *(g) by the Central government or state Govt., in a case
falling under clause (h) of Section 433.* The Official Liquidator or any of the persons
mentioned above as being entitled to present a petition under Section 439, will have a right to
present a winding-up petition when a company is already being wound up voluntarily or
subject to the supervision of the Court, and such voluntary winding up cannot be continued
with due regard to the interests of the creditors or contributories or both (Section 440). In
Mumbai Labour Union v. Indo French Time Industries (2002) 38 SCL 924, it was held that a
trade union can not file winding up petition for unpaid wages of workmen/employees. They
are disentitled as other legitimate and efficacious remedy under labour laws is available. In
such case, filing winding up petition is abuse of law. * inserted Vide Companies (Second
Amendment) Act, 2002.

Who appoints the liquidator in case of Members voluntary winding up?

Voluntary Winding Up As discussed earlier, where a declaration of solvency of the company

is not made and delivered to the Registrar in a voluntary winding up it is a case of creditor’s
voluntary winding up. Distinction between Members’ and Creditors’ Voluntary Winding Up
The main differences between the two are as follows:

1. A member’s voluntary winding up results where, before convening the general meeting of
the company at which the resolution of winding up is to be passed, the majority of the
directors file with the Registrar a statutory declaration of solvency. A creditors’ voluntary
winding up is one where no such declaration is filed.

2. In a member’s voluntary winding up, the creditors do not participate directly in the control
of the liquidation, as the company is deemed to be solvent; but in a creditors’ voluntary
winding up, the company is deemed to be insolvent and, therefore, the control of liquidation
remains in the hands of the creditors.

3. There is no meeting of creditors in a members’ voluntary winding up and the liquidator is

appointed by the company; whereas in a creditors’ voluntary winding up, meetings of
creditors have to be called at the beginning and subsequently the liquidator is appointed by
the creditors.

4. In a members’ voluntary winding up the liquidator can exercise some of his powers with
the sanction of a special resolution of the company; but in a creditors’ voluntary winding up
he can do so with the sanction of the Court or the Committee of Inspection or of a meeting of
creditors.

Powers of the Court to Intervene in Voluntary Winding Up In voluntary winding up it is left

to the company, the contributories and the creditors to settle their affairs without intervention
of the Court as far as possible.

However, the Companies Act, 1956, contains certain provisions which provide a means of
access to the Court with a view to speed up the liquidation proceedings and to overcome the
difficulties that may arise in the course of liquidation. The Court will intervene in the
voluntary winding up whenever it is satisfied that such an intervention will be just and
beneficial. In appropriate cases the Court can be approached for compulsory winding up
(Section 440) or winding up being conducted under the supervision of the Court (Section
522). up – Concept and Modes 713 The Court is vested with the following powers in
voluntary winding up: (i) To appoint the Official Liquidator or any other person as liquidator
where no liquidator is acting [Section 515(1)]. (ii) To remove the liquidator and appoint the
Official Liquidator or any other person as liquidator on justifiable cause being shown
[Section 515(2)]. (iii) To determine the remunerations of liquidator when the Official
Liquidator is appointed as a liquidator [Section 515(3)]. (iv) To amend, vary, confirm or set
aside the arrangement entered into between a company and its creditors on an appeal being
made by any creditor or contributory within 3 weeks of the completion of the arrangement
(Section 517). (v) On an application of the Liquidator or contributory or creditor: (a) to
determine any question arising in the winding up of a company [Section 518(1)(a)]; (b) to
exercise, as respects the enforcing of calls, the staying of suits or other legal proceedings or
any other matter, all or any of the powers which the Court might exercise if the company
were being wound up by the Court [Section 518(1)(b)]. (vi) To set aside any attachment,
distress or execution started against the estate or effects of the company after the
commencement of the winding up on such terms as it thinks fit on an application made by the
liquidator, creditor or contributory if the Court is satisfied that it is just and beneficial to do so
[Section 518(3) and (4)]. (vii) To order public examination of any person connected with
promotion or formation of a company or any officer connected with the affairs of the
company in regard to matters of promotion or formation or conduct of the business of the
company or as to his conduct or dealing as officer thereof. Such an examination can be
ordered on a report of the liquidator where he is of the opinion that a fraud has been
committed by the persons aforesaid in the formation or promotion of the company or in the
conduct of its affairs [Section 519(1)].
 CONCLUSION

Though the much-awaited sections of the 2013 Act pertaining to winding up of companies on
grounds other than inability to pay debts were made effective from December 15, 2016, the
final Rules for the same are yet to be notified. Therefore, in view of provisions of Section
468(3) of the 2013 Act pertaining to applicability of the Court Rules, till the time Rules are
prescribed by the Central Government, under the current scenario, an application for winding
up on these grounds will be made before the Tribunal and the same will be dealt with in
accordance with the procedure prescribed under the Court Rules.

The fresh applications for initiation of corporate insolvency resolution process on grounds of
“default” under the Code shall be made before the Tribunal in accordance with the procedure
prescribed under the Insolvency and Bankruptcy Board of India (Insolvency Resolution
Process for Corporate Persons) Regulations, 2016, notified with effect from December 01,
2016.