1. Winding up of Companies Is the process whereby the life of a C comes to an end and property is administered for the benefit of its creditors and members. An administrator, called a ‘liquidator’ is appointed who takes control of the C, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights. The statutory process by which this is achieved is called ‘liquidation’. Modes of Winding-up  Compulsory winding-up under an order of Court (NCLT)  Voluntary winding-up- Members Voluntary winding-up and Creditors voluntary winding-up  Voluntary winding-up under supervision of Court

2. Winding-Up by Court Compulsory winding-up Grounds for compulsory winding-up  Special resolution  Default in holding statutory meetings  Failure to commence business  Reduction in membership  Inability to pay debts  Just and Equitable When the substratum of the C has gone. When there is complete deadlock in the management Where the C was formed for fraudulent or illegal purpose. Where majority have adopted an aggressive or oppressive policy towards minority. When the Company is a bubble- does not have any real business Where the business of the Company can not be carried except at a loss. Where a private Company is in essence or substance a partnership. Requirements for investigations.

3. COMPULSORY WINDING UP There could be various grounds or reasons due to which a company may be wound up. These are as follows. 1.Special Resolution by Members Generally, shareholders have full freedom to decide the course of action, a company should adopt. They are the best judges about the future of the company. Hence, they can pass a special resolution, with at least 75 per cent of members attending and voting, for winding up. On passing of such a resolution, the company can file a winding up petition 2.

4. ….COMPULSORY WINDING UP The NCLT can give directions for holding the statutory meeting or filing of the statutory report, as the case may be. It shall order winding up only if the directions are not followed. [Section 439(7)] 3. Failure to Commence Business or Suspending Business Where a company does not commence business within a year of its incorporation, or suspends business for a whole year, the company can be wound up provided the Court is satisfied that the company has no intention of carrying on business. 4.Reduction in Membership below Statutory Minimum If the number of members falls below the statutory minimum i.e., below seven in the case of a public company, and two in case of a private company, the Companies Act provides time for filling the lacuna. However, if no action is taken within the stipulated time, NCLT may order winding up. 5.Inability to Pay Debt A company can be wound up if it is unable to pay its debts (i.e., its existing assets are not sufficient to discharge its existing liabilities). However, NCLT cannot direct the company to pay its debt, if disputed. Contd.

5. ….COMPULSORY WINDING UP 6.Just and Equitable to Order winding up. NCLT has wide discretionary powers and therefore may order winding up if it is of the opinion that it is just and equitable to do so. However, this is a residuary power, which should be exercised only in the interest of company, its employees, shareholders and creditors and in public interest. Some of the instances where courts have ordered winding up under this clause are as under: a)When substratum of the company has disappeared, i.e., company is unable to achieve any of its main objects. e.g., if it is substantially impossible to obtain necessary approvals or unable to establish business for which it is formed etc. b)It is impossible to carry on business except at a loss and there is no reasonable hope of making profits. Mere losses in a few years are not sufficient, if there are some hopes of earning profits in future. c)Existing or probable assets are insufficient to meet known existing liabilities. d)If object for which it is formed is illegal or becomes illegal by change of law.

6. ….COMPULSORY WINDING UP: Just and Equitable Ground e)If the company was formed to perpetuate a fraud on the persons who were invited to subscribe to shares. Mere fraud in conducting business is not sufficient. It must be shown that the original object of creating the company itself was fraudulent or illegal. f)Complete deadlock in the management due to hostility among directors which cannot be resolved in general or board meetings. However, mere frictions and difference of opinion among some directors is not sufficient to order winding up. g)If the company is only a ‘bubble’ i.e., it does not have any real business or property to carry on. h)If BIFR recommends winding up on some ground. i)It is in public interest that the company be wound up. As a corollary, winding up can be declined if it is against public interest.

7. Winding-Up by Court Compulsory winding-up Who may petition  by the company by a special resolution; or  by any creditor or creditors, including any contingent or prospective creditor or creditors; or  by any contributory or contributories; or  by all or any of the parties specified in clauses above, acting jointly or separately; or  by the Registrar; or  The official liquidator

8. COMMENCEMENT OF WINDING UP: LIQUIDATION Proceedings of winding up are conducted by an official liquidator under the supervision of Court who is attached to each High Court and is appointed by the Central Government. Terms of appointment and remuneration of official liquidator. The terms and conditions for the appointment of the Official Liquidator (professional) and the remuneration payable to him/her shall be approved by the Tribunal subject to a maximum remuneration of five per cent of the value of debt recovered and realization of sale of assets. In case of an Official Liquidator appointed [i.e. Central Government employee], the remuneration will be in accordance with the rules made by Central Government in this regard Remuneration of liquidator is first charge on realization of assets. The amount of the remuneration payable forms an obligatory part of the winding up order made by the Tribunal. It is to be treated as first charge on the realization of the assets, and is to be paid to the official liquidator or to the Central Government, as the case may be. However, the liquidator’s remuneration has first charge only on realization of assets and not on debts recovered.

9. ….COMMENCEMENT OF WINDING UP: LIQUIDATION Working of the Liquidator. The liquidator conducts the proceedings of winding up and performs duties in reference to winding up as per the directions of NCLT. He is described as the ‘Official Liquidator’ of a particular company that is under liquidation. He will work under that title and not in his individual name. If the assets are in the hands of the official liquidator, a receiver cannot be appointed without the permission of the NCLT. The major task of the official liquidator comprises the following. 1.Taking over possession of assets, books of accounts, and other records of the company in liquidation, 2.Completion of inventories of assets and books of account etc. of the company in liquidation, 3.Valuation of property of the company in liquidation, 4.Completion of sale of assets and handing over possession of property to buyers, 5.Scrutiny of books and records of companies and submission of report to NCLT in respect of transferor company u/s 394(1), 6.Invitation of claims and settlement of list of creditors, 7.Payment to creditors, and submission of final dissolution report

10. VOLUNTARY WINDING UP A company can be wound up voluntarily where Time fixed by the Articles for duration of company has expired, or Articles specify an event on occurrence of which the company is to be dissolved and such event as specified in Articles has occurred, or Company voluntarily decides to wind-up by a special resolution [Section 484(1)] case of (a) or (b) above, an ordinary resolution for winding up is sufficient. In case of (c) above, a special resolution is required. Once the resolution for winding up is passed, the company must give notice of such resolution by advertisement within 14 days in the official gazette and also in some newspapers circulating in the district where the registered office of the company is situated. In case of default, the company and every officer in default is liable to fine upto Rs 500 per day till the default continues. The voluntary winding up commences as soon as the resolution for voluntary winding up is passed. The voluntary winding up can further be due to members’ voluntary winding up or creditors’ voluntary winding up.

11. Voluntary Winding-up Distinction between members and creditors voluntary winding-up: Only a solvent company can be wound up in members’ voluntary winding up. In members’ voluntary winding up, liquidator is appointed by members. In creditors’ voluntary winding up, if members and creditors nominate different persons, liquidator appointed by creditor prevails. In case of creditors’ voluntary winding up, provision for Committee of Inspection’ has been made. There is no such provision in case of members’ voluntary winding up. In creditors’ voluntary winding up, meeting of both creditors and members are necessary. The first meeting may be for approval of resolution of winding up. In case of members’ voluntary winding up, remuneration of liquidator is fixed by members. In case of creditors’ voluntary winding up, remuneration is fixed by Committee of Inspection, if appointed, else by creditors. In case of members’ voluntary winding up, powers of Board of Directors after resolution of winding up are fixed by members, while in case of creditors’ voluntary winding up; it is fixed by Committee of Inspection or creditors.

12. Voluntary winding-up under supervision of Court At anytime after a Company has passed a resolution for voluntary winding up, the Court may make an order that the voluntary winding-up should continue subject to the supervision of the Court. Application for such order may be made either by a creditor, a contributory, the company or the liquidator. Such order is passed under the following circumstances:  The resolution for winding-up was obtained by fraud, or  The rules relating to winding-up are not being observed, or  The liquidator is prejudicial or is negligent in collecting the assets.