Winding Up of a Company

What is Winding Up of a company?

WInding Up also known as Liquidation is a process in which a running company gets shut down and its existence comes to an end. This may occurs when businesses are unable to pay their creditors and need to sell off their properties in order to compensate them. While this may also be a voluntary act under which, law ensures that all the debts of a company of existence are paid before it is closed or shut down.

As per companies act 2013 winding up of a company may be done in either:

Under section 270 winding up can be done:

a. By tribunal

b. Voluntary winding up

Notwithstanding anything contained in any other Act, the provisions of this Act with respect to winding up shall apply to the winding up of a company in any of the modes specified under sub-section 1.

The 2016 Insolvency and Bankruptcy Code effectively consolidates the insolvency laws for various companies into a common legislation. It extends equally to companies, partnership businesses and limited liability partnership companies. This Code empowers creditors and thus gives them the right to freely lend money to Indian entrepreneurs.

IBC Code 2016 or Insolvency and Bankruptcy Code 2016 shall amend different corporate Winding Act, 2013 rules. As per the 2016 IBC Code, the concept of winding up was modified to be winding up or liquidation under the 2016 Code of Insolvency and Bankruptcy.

Overview of the WInding Up Code

The Code sets out a two-step procedure for corporate debtors-settlement resolution process and liquidation. First, the borrower or the debtor must lodge an application with the adjudicating authority. This procedure is to be supervised by the resolution professional with the aid of a creditors' committee, and they have 180 days from the date the application is accepted to initiate a resolution plan to either restructure or liquidate the debtor. During this time the adjudicating authority shall order a moratorium. The resolution plan requires approval by voting share of 75 per cent of financial creditors and approval by the adjudicating authority to be binding on all creditors.

If the situation of the debtor can not be resolved within the period given or if the creditors oppose the resolution plan or if the 75 per cent majority of the creditor 's committee wishes to liquidate the corporate debtor at some point during the process, the debtor is placed in liquidation and the professional liquidator who understands and distributes the assets in the new priority order.

Changes introduced in section 270, 271, & 272 of companies act 2013 and in the code:

The Code also introduced some amendments to sections 270, 271 and 272 of the Companies Act, 2013. Section 270, which provided for the various winding up modes, is substituted by a notification issued under the Code so as to cover only winding up by the tribunal. Likewise, section 271, which elucidates the situations under which a company can be wound up by the tribunal, no longer deals with the situation in which a company is unable to pay its debts, since the Code now deals with the aforementioned situation. Specific amendments to section 272 have been made to delete "any creditor or creditor, including any contingent or prospective creditor or creditor" from the list of persons who may present a petition to the tribunal for winding up.

The provision to end up on the grounds of failure to pay debts now falls within the framework of Section 7 to 9 of the Code. In fact, creditors have the right to seek a settlement of the insolvency proceeding in the event of default for which a liquidation request could be lodged.

Types of Winding Up

Voluntary liquidation

Voluntary winding up is introduced under the terms of Section 59 in the Insolvency and Bankruptcy Code, 2016. A corporate person who has not committed any default can initiate the voluntary liquidation process before NCLT. The process of winding up shall begin on the date on which the members / partners of the corporate person pass a special resolution to liquidate the corporate person and appoint an insolvency professional to act as the liquidator. The Companies Act, 2013 did not include this mechanism for initiating winding-up proceedings against financially solvent companies that had defaulted in debt payment. Under the bankruptcy Code, this is however possible.

Winding up on inability to pay debts

Section 271(1)(a) of the Companies Act , 2013, as indicated earlier, has been replaced by section 255 of the Code and the same is now dealt with in compliance with sections 7-9 of the Code. This parts discuss starting the process of corporate insolvency resolution. If a default occurs, a creditor (financial and operational) must file an application with the Tribunal. A professional is assigned to insolvency. Upon failure, the corporate person's liquidation is the relation to whom the application was made.

Right of creditors to initiate a petition before the NCLT

Under Section 272 of the Companies Act, 2013, creditors no longer have the power to start winding-up. However, the Code provides ample remedy. They have the right to initiate insolvency proceedings on failure which may result in a liquidation application.

Process of Winding Up

Process for Volutary liquidation:

STEP 1: Phase I: Declaration(s) by the Board of Directors stating that the company will be able to pay its obligations and will not be liquidated to defraud another person;

STEP 2: Acceptance of the plan for voluntary liquidation and appointment of a liquidator within 4 (four) weeks of the above-mentioned declaration(s). If a corporate person owes debts it would also require the approval of two-third majority creditors after such declaration.

STEP 3: Public announcement inviting claims of all stakeholders, in newspaper as well as on the Corporate Person's website, within 5 (five) days of Members' approval;

STEP 4: Preparing a preliminary report on the capital structure, asset and liability estimates, planned action plan, etc., and sending it to a corporate individual within 45(45) days of such approval;

STEP 5: Claims review, within 30 (thirty) days from the last date of receipt of claims and list preparation of all stakeholders, within 45 (forty-five) days from the last date of receipt of claim;

STEP 6: Opening a bank account in the corporate person's name followed by the words 'in voluntary liquidation,' in a scheduled bank, for obtaining all the money owed to the corporate person;

STEP 7: Sale of properties, recovery of corporate monies, realization of undisclosed capital or unpaid capital contribution;

STEP 8:  distribution of the proceeds from realization to the stakeholders within 6 (six) months of receiving the amount;

STEP 9: Submission of the liquidator's final report to the corporate entity, the board and application for dissolution to the National Company Law Tribunal ('NCLT');

STEP 10: submission of the NCLT dissolution order to the ROC concerned within 14 (fourteen) days of receiving the order.