WINDING UP OF COMPANY
The author of the blog is Ms. Anshika Jindal, pursuing BA LLB 2nd Sem, at Noida International University, Greater Noida.
What is Company?
The term “company” was very wide. A company is a type of commercial business. It is a business organization which helps public, to produce goods and services in a systematic way and sells to the consumers to consume the goods and earn profit. It may also be a non-profit organization. It may hire the people as a staff for the benefit of the company.
What is meant by Winding Up?
Winding up refers to the last stage in the life of a company. It refers to a legal process through which a company is put to an end. Winding up or you can also say that “liquidation” which simply means “to cease”. It is the process of dissolving a company. While winding up, a company ceases to do business as usual. Basically, three souls of winding up of a company that are (sell of stock, pay off creditors, and distribute their remaining assets to the partners or shareholders).
What are the grounds of Winding Up of Company?
Modes of winding up of a company:
As per Section 270 of the Companies Act, 2013 a company can be wound up either by tribunal (compulsory) or voluntary winding up. These two grounds are essential for understanding the proper procedure of winding up of company.
1. Winding up by the National Company Law Tribunal or compulsory winding up.
Compulsory windup takes place when a company is directed wound up by the orders of court.
Grounds:
Grounds of compulsory winding up is mentioned in section 433 of the Companies Act, 2013:
· Special resolution of the company.
· Default
· Not commencing or suspending the company
· Reduction of members
· Inability to pay debits
2. Voluntary winding up:
Voluntary winding up means winding up by the members of creditors of a company without involvement of court.
Resolutions Of Winding up of a company:
1. Ordinary resolution- It is passed when the AOA (articles of incorporation ) provides that co is wound up when the specified period elapse.
2. Special resolution- It requires no ground for winding up and is used in any other case such as a solvent liquidator.
Types of Voluntary winding up:-
Members voluntary winding up- Liquidator appointed by the company in the general meeting. There is no committee and no creditors meeting. It may be controlled by the members themselves. Powers can be exercised by the liquidator with the sanction of special resolution passed at the general meeting.
Creditors voluntary winding up- Liquidator nominate the members and creditor. Meetings of creditors and committee may be appointed. It should be controlled by the creditors. Powers can be exercised with the sanction of the committee of meeting of creditors.
How to voluntarily wind up a company?
The company voluntarily wind up by the two ways:
On the basis of member’s voluntarily:
A resolution in general meeting of the company within 5 weeks of declaration of solvency. Collecting the company’s assets, pay the liabilities of the company and pay the balance of the proceeds to the contributories.
On the basis of creditor’s voluntarily:
If the declaration of solvency is not made and filed with the Registrar, it may be presumed that the company is insolvent. In that case, the company must call a meeting of its creditors (for the day or the day next following the day fixed for the company’s general meeting) for passing the resolution for winding-up.
How long does the winding up of a company take?
What is Company?
The term “company” was very wide. A company is a type of commercial business. It is a business organization which helps public, to produce goods and services in a systematic way and sells to the consumers to consume the goods and earn profit. It may also be a non-profit organization. It may hire the people as a staff for the benefit of the company.
What is meant by Winding Up?
Winding up refers to the last stage in the life of a company. It refers to a legal process through which a company is put to an end. Winding up or you can also say that “liquidation” which simply means “to cease”. It is the process of dissolving a company. While winding up, a company ceases to do business as usual. Basically, three souls of winding up of a company that are (sell of stock, pay off creditors, and distribute their remaining assets to the partners or shareholders).
What are the grounds of Winding Up of Company?
Modes of winding up of a company:
As per Section 270 of the Companies Act, 2013 a company can be wound up either by tribunal (compulsory) or voluntary winding up. These two grounds are essential for understanding the proper procedure of winding up of company.
1. Winding up by the National Company Law Tribunal or compulsory winding up.
Compulsory windup takes place when a company is directed wound up by the orders of court.
Grounds:
Grounds of compulsory winding up is mentioned in section 433 of the Companies Act, 2013:
· Special resolution of the company.
· Default
· Not commencing or suspending the company
· Reduction of members
· Inability to pay debits
2. Voluntary winding up:
Voluntary winding up means winding up by the members of creditors of a company without involvement of court.
Resolutions Of Winding up of a company:
1. Ordinary resolution- It is passed when the AOA (articles of incorporation ) provides that co is wound up when the specified period elapse.
2. Special resolution- It requires no ground for winding up and is used in any other case such as a solvent liquidator.
Types of Voluntary winding up:-
Members voluntary winding up- Liquidator appointed by the company in the general meeting. There is no committee and no creditors meeting. It may be controlled by the members themselves. Powers can be exercised by the liquidator with the sanction of special resolution passed at the general meeting.
Creditors voluntary winding up- Liquidator nominate the members and creditor. Meetings of creditors and committee may be appointed. It should be controlled by the creditors. Powers can be exercised with the sanction of the committee of meeting of creditors.
How to voluntarily wind up a company?
The company voluntarily wind up by the two ways:
On the basis of member’s voluntarily:
A resolution in general meeting of the company within 5 weeks of declaration of solvency. Collecting the company’s assets, pay the liabilities of the company and pay the balance of the proceeds to the contributories.
On the basis of creditor’s voluntarily:
If the declaration of solvency is not made and filed with the Registrar, it may be presumed that the company is insolvent. In that case, the company must call a meeting of its creditors (for the day or the day next following the day fixed for the company’s general meeting) for passing the resolution for winding-up.
How long does the winding up of a company take?
It generally takes around 28 days, in total for winding up order to take effect. Once you are in receipt of a winding up petition , you need to act quickly to save your company.
The winding up petition is sent to and reviewed by the court. If it’s passed, it’s then sent to the insolvent company. The company then has seven days to act. If it fails to act or runs out of time and the court approves the winding up order, the liquidation process will begin.
If more than 90% of shareholders agree to short notice, liquidation can happen within seven days. This is the minimum statutory notice for creditors. It doesn't stop there in that the liquidators now have to sell the assets etc, do investigations and file the necessary paperwork. This can take 1-2 years, if not longer. The bigger the liquidation, the longer it takes (usually).For compulsory liquidation, the time between the initial threat and the end-of-court proceedings is usually three months.
However, in both cases, this is just the time it takes to approve the liquidation. After approval, the appointment of a liquidator, the sale of company assets, and agreeing creditors’ claims and working out what return goes to them can add anywhere from three months to a year to liquidation proceedings.
There is no legal time limit on business liquidation. From beginning to end, it usually takes between six and 24 months to fully liquidate a company. Of course, it does depend on your company’s position and the form of liquidation you’re undertaking.
CASE LAW:
1) Mann V Goldstein[1968]
Facts- 2 creditors had filed separate winding-up petitions for monies owed by the company.
- The company applied for an injunction restraining the petitioners from advertising or taking any further steps in prosecuting the winding-up petitions on the ground that both of the winding-up petitions were based on further debts.
Judgment:
Where a company was under an undisputed obligation to pay a specific sum and failed to do so, it could be inferred that it was unable to do so; that accordingly, the defendants could properly swear to their belief in the plaintiff company’s.
2) Foss V Harbottle
Facts- Two minority shareholders initiated legal proceedings against, among others , the directors of the company. They claimed that the directors had misapplied the company’s assets.
Judgement- The court rejected the two shareholders claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders.
3) R V Grantham
Facts- Mr. Grantham was tried for fraudulent trading, contrary to the Companies Act 1948 section 332(3) (now Insolvency Act 1986 section 213). The jury were directed that they could find dishonesty and intent to defraud if they thought Mr. Grantham obtained credit when he knew there was no good reason for thinking that his company would be able to repay the debt when it became due.
Mr. Grantham was convicted. He appealed that the jury was given the wrong direction.
Judgment- Court held there was no error in the direction. Applying the House of Lords case Welham v DPP [1961] AC 103, under section 332 (now section 213, Insolvency Act 1986) an intent to defraud was established on proof of intention to dishonestly prejudice creditors in being repaid.
Conclusion:
(i) Companies are given life through ensouling of incorporation and are vanished through the process of winding up which ends in dissolution of company.
(ii) During the wind up directors are incapable liquidator receiver takes the control into his hands, and acting in accordance with law give end to the artificial legal personality.
The winding up petition is sent to and reviewed by the court. If it’s passed, it’s then sent to the insolvent company. The company then has seven days to act. If it fails to act or runs out of time and the court approves the winding up order, the liquidation process will begin.
If more than 90% of shareholders agree to short notice, liquidation can happen within seven days. This is the minimum statutory notice for creditors. It doesn't stop there in that the liquidators now have to sell the assets etc, do investigations and file the necessary paperwork. This can take 1-2 years, if not longer. The bigger the liquidation, the longer it takes (usually).For compulsory liquidation, the time between the initial threat and the end-of-court proceedings is usually three months.
However, in both cases, this is just the time it takes to approve the liquidation. After approval, the appointment of a liquidator, the sale of company assets, and agreeing creditors’ claims and working out what return goes to them can add anywhere from three months to a year to liquidation proceedings.
There is no legal time limit on business liquidation. From beginning to end, it usually takes between six and 24 months to fully liquidate a company. Of course, it does depend on your company’s position and the form of liquidation you’re undertaking.
CASE LAW:
1) Mann V Goldstein[1968]
Facts- 2 creditors had filed separate winding-up petitions for monies owed by the company.
- The company applied for an injunction restraining the petitioners from advertising or taking any further steps in prosecuting the winding-up petitions on the ground that both of the winding-up petitions were based on further debts.
Judgment:
Where a company was under an undisputed obligation to pay a specific sum and failed to do so, it could be inferred that it was unable to do so; that accordingly, the defendants could properly swear to their belief in the plaintiff company’s.
2) Foss V Harbottle
Facts- Two minority shareholders initiated legal proceedings against, among others , the directors of the company. They claimed that the directors had misapplied the company’s assets.
Judgement- The court rejected the two shareholders claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders.
3) R V Grantham
Facts- Mr. Grantham was tried for fraudulent trading, contrary to the Companies Act 1948 section 332(3) (now Insolvency Act 1986 section 213). The jury were directed that they could find dishonesty and intent to defraud if they thought Mr. Grantham obtained credit when he knew there was no good reason for thinking that his company would be able to repay the debt when it became due.
Mr. Grantham was convicted. He appealed that the jury was given the wrong direction.
Judgment- Court held there was no error in the direction. Applying the House of Lords case Welham v DPP [1961] AC 103, under section 332 (now section 213, Insolvency Act 1986) an intent to defraud was established on proof of intention to dishonestly prejudice creditors in being repaid.
Conclusion:
(i) Companies are given life through ensouling of incorporation and are vanished through the process of winding up which ends in dissolution of company.
(ii) During the wind up directors are incapable liquidator receiver takes the control into his hands, and acting in accordance with law give end to the artificial legal personality.
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