DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW
SESSION-2019

SYNOPSIS

CORPORATE LAW
TOPIC: VOLUNTARY WINDING UP

CLASS: B.A.LL.B. (HONS), VIth SEMESTER

SUBMITTED TO SUBMITTED BY
Ms. Priya Anuragini Anushthan tripathi

ASSISTANT PROFESSOR (LAW) ENROLLMENT NO.160101040

SECTION: A
 INTRODUCTION
VOLUNTARY WINDING UP (Section 488 of Companies Act, 1956)

The company and its creditors may apply to court for directions or orders but usually they are
left to settle their affairs within themselves. There are two kinds of voluntary winding
up, Member’s Voluntary winding up and Creditor’s voluntary winding up.

Members’ Voluntary Winding up

When the company is able to pay its debts, its Board of Directors makes a Declaration of
solvency stating that company would be able to pay debts within three years from the date of
commencement. Any false declaration made by director will be punishable up to 6 months or
fine up to Rs. 50000 or both.

Creditors’ Voluntary Winding up

When declaration of solvency is not made and delivered to the Registrar, it is case of
creditors’ voluntary winding up.

RESEARCH QUESTION
1. What are the kinds of voluntary winding up?

2. What are the circumstances under which a company may be wound up voluntarily?

3. What are the effects of voluntary winding up and processes involved in disposing the
company’s assets?

REVIEW OF LITERATURE
FRENCH DEREK “applications to wind up companies” OXFORD UNIVERSITY
PRESS, ed.3, 2015

This book deals with the procedure for obtaining a winding-up order chronologically from
presentation of a petition through to making the order. It also looks at the application process
as it applies to various classes of petitioner, such as creditors, contributories (shareholders)
and public officials.

The third edition is completely updated to cover new legislation and new procedures. It
includes new coverage of winding up through administrations, winding up insolvent
partnerships other than as unregistered companies, and considers the practice and procedure
issues of industry-specific administration regimes (from water companies to energy supply
companies) and their interaction with winding up. But the author does not talk about any
doctrine that need to be followed in India for the voluntary winding up of a company in India
neither it analyse the present judicial trends in Indian judiciary nor any comparative study.

ANANTHARAMAN K.S “LECTURES ON COMPANY LAW” LEXIS NEXIS,

ed.12,2015 pg no.351-355

The author in this book discussed about precisely about circumstances in which company
may be wound up voluntarily followed by declaration of solvency and the conditions required
for it. The author has further talked about commencement, effect, and cesser of winding up
and final meeting resulting to dissolution of company. The book doesn’t have a very
comprehensive approach and talked in a very precise manner regarding this topic and don’t
have in depth approach. Though its good as a quick reference or ready reckoner. Author has
missed various procedures such as appointment of company liquidator and notice to be given
to Registrar.

SINGH AVATAR “COMPANY LAW” EASTERN BOOK COMPANY CO, ed.16 ,2016
(page no.683-688)

The author has discussed about voluntary winding up in a very systematic and credible
manner. Starting from two ways of resolution involved to wound up a company, the author
has comprehensively enumerated the processes involved in winding up. The book also
contains the settlement procedures of assets of company after being wounded up and powers
of concerned tribunals regarding this process. This book gives detailed account about each
and every step involved in voluntary winding up.
INTRODUCTION

Winding up of a company might be required because of various reasons including conclusion

of business, misfortune, bankruptcy, passing endlessly of promoters, and so forth., The
methodology for winding up of a company can be initiated intentionally by the shareholders
or creditors or by a Tribunal. In this article, we take a gander at the methodology for winding
up of a company deliberately. On introduction of the winding up application, the court in the
wake of hearing the request of has the ability to either expel it or to make an interim request
as it thinks suitable. It can even appoint the temporary liquidator of the company till the
passing of winding up arrange. It can even appoint the temporary liquidator of the company
till the passing of winding up arrange. It might even make a request for winding up with or
without cost. It is a procedure by which the properties of the company are directed for the
advantage of its members and creditors. The individual designated for directing the
advantages and liabilities is called Liquidator. If there should be an occurrence of obligatory
winding up, the outlet is delegated by the Tribunal under section 275 of the Act; or, if there
should be an occurrence of voluntary winding up, the outlet is selected by the company itself
under section 310 of the Act. Winding up is additionally alluded as Liquidation.

TYPES OF VOLUNTARY WINDING-UP

Although a ‘Voluntary Winding- Up’ is initiated by the members of the Company, the
Companies Act 1985, gives exclusive control of the liquidation to them only if the Company
is solvent. If if is not, the Creditors have an interest in the liquidation being properly
conducted, and so control over it is shared between them and the members, with the Creditors
wishes predominating. Object of Section 442 is to facilitate protection and realisation of
assets of the company for equitable distribution among its creditor

A) BY MEMBERS-

A Winding-Up is a member’s ‘Voluntary Winding- Up’ if the Directors, or a majority of

them if there are more than two, make a statutory declaration as to the Company’s solvency
within five weeks before the date when the Winding-Up resolution is passed, or on the day
when the resolution is passed but before it is passed.1 The declaration is effective as soon as it

1
Section 577(1) and (2) Companies Act 1985
is made, and a Winding-Up resolution based on it initiates a member's ‘Voluntary Winding-
Up’; ’however, the declaration must be delivered to the Registrar of Companies within 15
days after the Winding-Up resolution is passed, and an offence is committed if this is not
done. The declaration of solvency must state that the deponent Directors have made full
inquiry into the affairs of the Company, and have formed the opinion that it will be able to
pay its debts in full within a stated period not exceeding twelve months from the date when
the Winding-Up resolution is passed, and the declaration must embody a statement of the
Company’s assets and liabilities at the most recent date practicable.2 If the Company does not
pay its debts in full within the period stated in the declaration, each deponent Director may be
convicted of a criminal offence, unless he proves that he had reasonable grounds for
believing that the Company would be able to pay its debts in full within that time.

B) BY CREDITORS

If the Directors make no declaration of solvency within five weeks before the members pass a
winding resolution, the Winding-Up is a Creditor’s ‘Voluntary Winding- Up’. The general
meeting called to pass the Winding-Up resolution will normally be called to pass an
extraordinary resolution that the Company shall be wound up because it cannot continue its
business by reason of its liabilities, in which case the meeting will be called by, at least
fourteen days notice to its members. Alternatively a Creditor’s ‘Voluntary Winding- Up’ may
be initiated by a special resolution that the Company shall be wound up,in which case the
general meeting will be called by at least twenty one days notice to the members. Whether
the resolution is an extra ordinary or a special one, however, the appropriate fraction
ofmembers may consent to short notice ofthe meeting being given but in no case may that
notice be given less than seven clear days before the resolution is passed.The court may, if
moved by the company or its shareholders, instead oftreating the winding up proceedings as
invalid, direct the company to convene the creditors’ meeting.

By virtue of section 499, the provisions contained in sections 500 to 509, both inclusive,
apply to a creditors’ winding up. The Drovisions in these sections except in section 503 are
similar to the srovisions in section 490 to 498. Section 503 contains provisions for a
committee ofinspection which may exist only in a creditor’s winding up. The procedure for
creditors’ voluntary winding up is similar :o members’ voluntary winding up, in addition to
it, following procedure is followed in respect of creditors’ meeting i) hold creditors’ meeting

2
Ibid Sec. 577(1) and (2)
immediately after the general meeting preferably on the same day, or the next day, if it is not
possible on the same day; ii) ensure that the director appointed in pursuance of sub section
(3)(b) attends and presides at this meeting as required by sub section (4) ofsection 500; iii)
lay before the meeting. (a) a full statement ofthe position ofcompany’s affaris; and(b) a list of
creditors of the company with the estimated amount oftheir claims;

COMPARISON WITH ‘WINDING- UP’ ORDER BY TRIBUNAL

The procedure to initiate a ‘Voluntary Winding- Up’ is obviously far simpler than the
procedure for obtaining a Winding-Up order. No Provisional Liquidator may be appointed,
the official receiver has no part to play, the Liquidator and Committee of Inspection are
normally appointed by a meeting of members or Creditors and not by the Court, and the
Liquidator does not have to give security to the secretary of state for trade and industry.
Indeed, a ‘Voluntary Winding- Up’ may be carried out without the intervention of the Court
at any point.3 There is a useful provision in the Companies Act 1985, however, by which the
aid of the Court may be invoked in a ‘Voluntary Winding- Up’. The Liquidator or any
Contributory or Creditor may apply to the Court to determine any question arising in the
Winding-Up, or to exercise any of the powers, which the Court could exercise if the
Company were in compulsory liquidation and the Court may make such order as it thinks
just. Under its jurisdiction to determine questions, the Court may, for example,4 compel the
Liquidator to pay regard to the wishes of the Committee of Inspection or the Creditors or
members in exercising his powers. Under its jurisdiction to exercise the powers which it has
in a ‘Compulsory Winding- Up’, the Court may stay the ‘Voluntary Winding Up’ itself, or
may stay actions or proceedings which were pending against the Company when the
Winding-Up resolution was passed, or which are brought against it thereafter, or may transfer
any such pending action brought by or against the Company to the Companies Court. In a
‘Voluntary Winding- Up’ actions and proceedings against the Company are not automatically
stayed.

LEGAL POSITION OF LIQUIDATOR

the liquidator’s legal status/position can be summarised as follows:- i) The status ofthe
liquidator is that of an agent of a company. He acts for and on behalf ofthe company while
discharging the functions of the realisation and disbursement of proceeds. He is a trustee of

3
Ibid Sec. 577(1) and (2)
4
Dawson’s Bank v. Nippon Menka ,1935; PC 79; 13 Rang. 256
the company in narrow sense that he holds the company’s property in trust. Unlike a trustee,
under the Trusts Act, the property of the company , however, does not pass to him. Further, it
has been judicially held that the position of a liquidator in the examination of proof for
admission or rejection in a winding up is the same as that of a trustee in bankruptcy. ii) He
may act both as a liquidator and as a receiver for debenture holders, but is not liable
personally on his contracts unlike the receiver for debenture holders. iii) He is not an officer
ofthe Tribunal. He owes his appointment to the members/creditors ofthe company, as the case
may be; iv) He is a principal officer of the company, within the meaning of (i) sections
485(2) and 501 of the Act; and (ii) section 2(35) of the Income tax Act, 1961; v) He has more
freedom of action than a liquidator appointed by the Tribunal, official liquidator or
provisional liquidator, though his powers and duties are very similar; vi) His liability for
breach of duties attracts the application of principles of agency. By virtue of being an agent
of the company, and not a trustee for members or creditors, he cannot be sued by any member
or creditor. An an individual member or creditor has to seek an order ofthe Court with regard
to his conduct; vii) On the dissolution of the company, he is out of office. He cannot exercise
any power after the dissolution of the company. However, he remains liable for his
commissions and omissions before the dissolution ofthe company. He may be held personally
liable, if he knowingly neglected to pay a creditor.

CONSEQUENCES OF ‘VOLUNTARY WINDING- UP’- SECTION (487,518) –

The effect of a ‘Voluntary Winding- Up’ is also to crystallize debentures with a floating
charge and to make immediately payable debentures payable at a future date. Directors cease
to function, on the appointment of the Liquidator, so that they can no more exercise their
powers or take any part in the affairs of the Company, except to the extent to which they are
allowed to act or exercise their powers. They may be so allowed by the Liquidator, or the
members ofthe Company in their general meeting (in case the Winding-Up is a member’s
‘Voluntary Winding- Up’), or by the Committee of Inspection (or the Creditors if there is no
Committee of Inspection appointed), in the case of a Creditors ‘Voluntary Winding- Up’.5 It
is the general practice of the Courts to order a stay of execution against the Company’s
assets. As to whether a ‘Voluntary Winding- Up’ discharges the servants of the Company
would depend upon whether the business of the Company ceases or continues. Decisions are
conflicting. It seems and the better view is, that a ‘Voluntary Winding- Up’ operates as a

5
Wills v. Association of Universities ofBritish Commonwealth 1965, 35 Comp. Cas 442
notice of discharge of the employees of the Company, if it has ceased doing business.6But
ifthe Company is carrying on business just for a beneficial Winding-Up, the employees of the
Company continue to be in the 80 Company’s employment.

6
Midland Countries District Bank Ltd. v. Attwood, 1905, 1 Ch. 357; In re Imperial Wine Company 1872, 14
Eq.417; Reigate v. Union Manufacturing Co. Ltd; 1918, 1 K.B. 592