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C N L U: Voluntary Winding Up of A Company: A Critical Study
C N L U: Voluntary Winding Up of A Company: A Critical Study
C N L U: Voluntary Winding Up of A Company: A Critical Study
P ATNA .
YOURS SINCERELY
ANJALI
ROLL NO. 523
LIST OF ABBREVIATIONS4
CHAPTER 1: INTRODUCTION..5
CHAPTER 5: CONCLUSION.....16
BIBLIOGRAPHY....17
The aim of the project is to present a critical study of voluntary winding up of a company
through provisions of Company Act, 1956 and 2013 and case laws.
Sources of Data:
The following secondary sources of data have been used in the project-
1. Bare Act
2. Books
3. AIR
4. Journals
The method of writing followed in the course of this research project is primarily analytical.
The researcher has followed Uniform method of citation throughout the course of this
research project.
A .....Appeals
All .......Allahabad
Bom. ...Bombay
Del. .....Delhi
Ed. ..Edition.
i.e. .That is
Mad ..Madras
vol. ..Volume
Winding-up of a company is a procedure of allocating the assets and concluding the existence
of a company. It is a process of dissolving a company by collecting its assets, paying off its liabilities
out of the assets of the company or from contributions by its members. If any excess is left, it is
distributed amid the members in accordance with their rights.
In the words of Prof. L.C.B. Gower, Winding-up of a company is the process whereby its life
ends and its property administered for the benefit of its creditors and members. An administrator
called liquidator is appointed and he takes control of the company, collects its debts and finally
distributes any surplus among the members in accordance with their rights. 1
Thus in the words of Pennington, Winding up or liquidation is the process by which the
management of a companys affairs is taken out of its directors hand, its assets are realized by a
liquidator, and its debts and liabilities are discharged out of the proceeds of realization and any
surplus of assets remaining is returned to its members or shareholders. At the end of winding up the
company will have no assets or liabilities, and will therefore be simply a formal step for it to be
dissolved, that is its legal personality as a corporation to be brought to an end. 2
A company registered under the Companies Act, 1956 may be wound up in any of the following
modes:3
2. Voluntary winding up, which may be either: (a) Members voluntary winding up; or (b)
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.
The companies are usually wound up voluntarily as it is an easier process of winding up. It is
different from a compulsory winding up. Winding up order by the Tribunal is not common because
normally the members of the company prefer to wind up the company voluntarily for in such a case
they shall have a voice in its winding up. Further, its creditors are left to settle their affairs without
4 Substituted by Tribunal by Companies (Second Amendment) Act, 20025 Omitted by the Companies (Second
Amendment) Act, 2002
Part VII Chapter III of the Companies Act, 1956(Sections 484 to 520) extensively deals
with the provisions of voluntary winding up of a company. A company may, voluntarily wind up its
affairs, if it is unable to carry on its business, or if it was formed only for a limited purpose, or if it is
unable to meet its financial obligation, and etc. In case of voluntary winding up, the entire process is
done without the supervision of the Tribunal. 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 as it may be done by the creditors.
(a) when the period fixed for the duration of the company as mentioned in its articles has expired; or
(b) the event, on the happening of which the articles provide that the company is to be dissolved has
occurred; and
(c) the company passes a special resolution that the company be wound up voluntarily
Thus, a company may be wound up voluntarily on the expiry of the term fixed for duration of the
company or on the occurrence of the event as provided in its articles. In these two cases only an
ordinary resolution may be passed in the general meeting of the company. In British Water Gas
Syndicate v. Notts Derby Water Gas Co. Ltd.,8 held that however prosperous and solvent a company
may be, if the members wish the company to be wound up, they can do so by passing a special
resolution to that effect and no reasons need be given. No articles of the Company can prevent the
exercise of this statutory right. And the right cannot be interfered with by any Court by means of an
injunction or otherwise.
Where the required special resolution was passed at a meeting convened by giving a shorter
notice than that required by the Act, but all the members of the company unanimously agreed thereto,
8 WN 204
The resolution, when passed, must be advertised within 14 days of the passing of the
resolution in the Official Gazette and also in some newspaper circulating in the district where the
registered office of the company is situated. A default in complying with the above requirements
renders the company and every officer of the company, who is in default, liable to a penalty which
may extend to five hundred rupees for every day during which the default continues. In Bhargava
(S.P.) v. Rameshwar Shastri,10 held that a failure to advertise, may be considered to be an irregularity
and curable, not affecting the validity of winding up. A liquidator of the company is deemed to an
officer of the company for the purposes of the above requirements. 1112 It was held in Neptune
Assurance Co. Ltd. v. Union of India,15that in the Companies Act the expression voluntary winding
up, means a winding up by a special resolution of a company to that effect.
Similarly, the expression winding up by the court means winding up by an order of the
Court in accordance with S. 433 of the Companies Act.
A voluntary winding up commences from the date of the passing of the resolution for
voluntary winding up. This is so even when after passing a resolution for voluntary winding up, a
petition is presented for winding up by the Court. 13 The date of commencement of winding up is
important for various matters, such as liability of past members, who will not be affected if, on the
date of commencement of winding up, a year had elapsed after they ceased to be members, fraudulent
preference may have become unimpeachable, etc. In Re, West Cumberland Iron Steel Co.,14 where a
voluntary winding up is continued under supervision (section 522), the winding up commences not at
the date of the presentation of the petition or order for supervision but at the date of the resolution for
voluntary winding up; for the order is only to continue the winding up.
14 (1889) 40 Ch D 361
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does not require that there should be an affidavit by each of the directors making the declaration. An
affidavit by one director is sufficient. In De Courcy v. Clement,18 held that while failure to satisfy the
conditions under this section makes the declaration of no effect i.e., a nullity, a mere error or
omission, while it may expose the declarant to the penal consequences, will not prevent the statement
from being a statement for the purpose of satisfying the requirements of the section.
Such a declaration must be made within five weeks immediately preceding the date of the
passing of the resolution for winding up the company and be delivered to the Registrar for registration
before that date. The declaration must embody a statement of the companys assets and liabilities as at
the latest practicable date before the making of the declaration. Any director making a declaration
without having reasonable grounds for the aforesaid opinion, shall be punishable with imprisonment
extending up to six months or with fine extending up to Rs. 50,000 or with both. 19
The company shall appoint one or more liquidators, in a general meeting, who shall look after
the affair of winding up procedure, and distribution of assets. 20 The secretary of a company can be
appointed as liquidator, so also a solicitor can be appointed as liquidator. The liquidator so appointed,
shall be paid remuneration for his services, which shall also be fixed in general meeting. 21
The company shall also give notice of appointment of one liquidator to the registrar within ten
days of appointment.22 Once the company has appointed liquidator, the powers of Board of Directors,
Managing Director, and Manager, shall cease to exist. 23 The liquidator is generally given a free hand,
to carry out the winding up procedure, in such a manner, as he thinks best in the interest of creditors,
and company. In case, the winding up procedure, takes more than one year, then liquidator will have
to call a general meeting, at the end of each year, and he shall present, a complete account of the
procedure, and position of liquidator.24
The liquidator shall take various steps, when affairs of the company are fully wound up. He
shall call a general meeting of the members and lay before it, complete picture of accounts, winding
18 (1971) 1 All ER 681: (1971) 41 Com Cases 796 (Ch D)
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up procedure and how the properties of company are disposed of. The meeting shall be called by
advertisement, specifying the time, place and object of the meeting. The liquidator shall send to, the
Registrar and official Liquidator copy of account, within one week of the meeting. If from the report,
official liquidator comes to the conclusion, that affairs of the company are not being carried in manner
prejudicial to the interest of its members, or public, then the company shall be deemed to be dissolved
from the date of report to the court. However, if official liquidator comes to a finding, that affair have
been carried in a manner prejudicial to interest of member or public, then court may direct the
liquidator to investigate furthers.25
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Section 509 deals with the various steps to be taken by the liquidator, when affairs of the
company are fully wound up. This section has the same provisions as that of members voluntary
winding up under Section 497 of the Act. Once the company is fully wound up, and assets of the
company sold or distributed, the proceedings collected are utilized to pay off the liabilities. The
proceedings so collected shall be utilized to pay off the creditors in equal proportion. Thereafter any
money or property left may be distributed among members according to their rights and interests in
the company.29
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 Act 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. 30
The study of insolvency laws have gained importance over the years due to growing cross
borders business ventures. This has made it necessary to be aware of the legislative framework with
28 (1917)1 Ch 203
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regard to corporate insolvency and latest developments in other countries too. The laws relating to
voluntary winding up in India is very much similar to those prevailing in UK. In UK the insolvency
laws are governed by the Insolvency Act, 1986, Insolvency Rules, 1986, the Company Director
Disqualification Act, 1986. The insolvency proceedings governed by this Act fall under two categories
namely, (a) Insolvency proceedings in respect of companies registered under the Companies Act, 2006
and unregistered companies; (b) Insolvency proceedings in respect of individuals known as
bankruptcy. The Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2010 and The
Insolvency (Amendment) Rules 2010 came into force on 6 April 2010 and made a number of changes
in relation to voluntary liquidations. The amendments generally apply only to cases where the
resolution for voluntary winding up was passed on or after 6 April 2010 (unless it went into
liquidation under Paragraph 83 of Schedule B1 to the Act and the preceding administration
commenced before 6 April 2010 or was an administration by virtue of an administration order where
the application was made before 6 April 2010).31
Prior to enactment of Insolvency Act, the Bankruptcy Act 1914 did not apply to corporate insolvency.
Corporate insolvency provisions were contained in the Companies Act, 1985. Kenneth Cork
Committee (Insolvency Law Review Committee) recommended spin off and enactment of Insolvency
Act 1985. Thereafter the 1985 Act on the very first day was replaced by Insolvency Act 1986. It was
substantially amended by Insolvency Act 1994. Further the Enterprise Act 2002 has attempted to
fundamentally change approaches to corporate insolvency regulation in the United Kingdom. 32 By
endeavouring to improve the administration procedure first introduced by the Insolvency Act 1986,
the legislature has given paramount consideration to corporate rescue outcomes through the
administration procedure, as originally envisaged by the Cork Committee in its seminal report of
1982.3334
31 http://www.legislation.gov.uk/ukpga/1986/45/part/IV/chapter/III
32 http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft916.pdf
33 John Tribe Company voluntary arrangements and rescue: a new hope and a
Tudor orthodoxy,
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there are few striking differences relating to the power of liquidators and directors during the winding
up procedure.
Like the Companies Act, 1956 there are two types of voluntary winding up under the
Insolvency Act, 1986. Members voluntary winding up is commenced by a resolution of the
shareholders that the company is wound up and that a named licensed insolvency practitioner is
appointed the liquidator.36 If the directors make a statutory declaration of solvency within five weeks
prior to the resolution, the liquidation will proceed as a members voluntary liquidation. 37 Otherwise
the process will be a creditors voluntary liquidation and a meeting of creditors must be held within 14
days of the members resolution. 38 If the meeting of creditors nominates a practitioner other than the
one nominated by the members as liquidator, the creditors choice will prevail.
Further, as stated earlier under Section 490 of the Companies Act, 1956 the remuneration cannot be
increased in any circumstances whatever; even the court does not have power to increase it. In English
law, however, by virtue of the rules under the English Insolvency Act, 1986, a voluntary liquidator can
make an application showing that his remuneration is insufficient according to objective standards.
35 Palmer's Company Law, 24th Edn., 1987, Vol. 1, Para 89-01A, Pages 1493
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The court then gets an unfettered discretion both as to the amount and the basis of the increase having
regard to all the circumstances and to the criteria set out in the rules. 40
Under the Indian law, the liquidator's remuneration is paid out of the assets of the company. But
where those assets were not sufficient to pay him for his labours, English Court allowed him to
recover his costs and remuneration out of the trust property which was held by the company on trust
for its investors.41
Section 494 of the Companies Act does not render the liquidator the position of an officer of
the court but, subject to this, his position as regards taking possession of the assets is the same as in
the case of a winding up by the Court. The liquidator should at once take possession of the books,
deeds and documents of the company etc. However, the position of the liquidator is a stronger one by
virtue of Section 246 of the English Act whereby it is provided that a lien or other right to retain
possession of the books, papers or other records of the company is unenforceable to the extent that its
enforcement would deny possession of any books, papers or other records to the office-holder.
Under Section 502 of the Companies Act, 1956, the creditors are given a preferential right in
the matter of the appointment of a liquidator, with a power to the court to vary the appointment on
application made within seven days, by a director, member or creditor. However, the Insolvency Act,
1986 restricts the authority of directors to enter into transactions which are binding on the company
where no liquidator is appointed or nominated in a creditors voluntary winding up. 42
Part II of Chapter XX (Sections 304 to 323) of the Companies Act, 2013 deals with
voluntary winding up. The provisions of the Act are similar to that of the Act. The only difference is
the provisions are compressed unlike the elaborative sections in the Act. The procedure for voluntary
winding up, powers of liquidator, commencement etc. remains the same with slight or no difference.
Section 484 remains intact with the corresponding Section being 304. Section 485 is amended
by Section 307 by increasing the fine to five thousand rupees from five hundred. Section 486 and 487
remain intact with corresponding Sections being 308 and 309 respectively. Section 488 is amended by
Section 305 by adding two more things that the declaration must contain namely, Cl.305 (2) (b) it
contains a declaration that the company is not being wound up to defraud any person or persons and
Cl.305 (2) (d) where there are any assets of the company, it is accompanied by a report of the
valuation of the assets of the company prepared by a registered valuer. Further the punishment under
41 Horris v. Conway, 1989 BCLC 28: (1989) 2 Comp LJ 145, 157 (Ch D)
42 A Company (No 006341 of 1992), Re; B. Ltd. Ex p., (1994) 1 BCLC 225 (Ch D)
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Cl.305 (4) has been enhanced from six months and fifty thousand rupees to imprisonment for a term
which shall not be less than three years but which may extend to five years or with fine which shall
not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both.
Sections 490 and 502 have been combined in the same Section and have been amended by Section
310. Under this earlier the company in general meeting could appoint the liquidator however now this
has to be followed by appointing Company Liquidator from the panel prepared by the Central
Government. Section 500 and 501 has been combined under Section 306 and now notice of the
meeting of the creditors need not be advertised in the Official Gazette and newspapers. Further the
punishment for default is enhanced from ten thousand rupees to fine which shall not be less than fifty
thousand rupees but which may extend to two lakh rupees and the director of the company who is in
default shall be punishable with imprisonment for a term which may extend to six months or with fine
which shall not be less than fifty thousand rupees but which may extend to two lakh rupees, or with
both.
Sections 492 and 506 have been combined in Section 311; however, earlier the company had
power only to fill the vacancies and there was no provision as to removal of Company Liquidator. The
new Section has clear provisions regarding the removal of the Liquidator. Section 493 has been
amended by Section 312 whereby the fine has been reduced to five hundred rupees from one thousand
rupees. Section 491, 503, 512 remains intact with the corresponding Sections being 313, 314 and 315
respectively.
Sections 496 and 508 have been combined under Section 316 and now the Company
Liquidator shall report quarterly on the progress of winding up of the company. Further the fine has
been enhanced from one thousand rupees to ten lakh rupees. Sections 497 and 509 have been
combined under Section 318 whereby the time limit for sending the copy of final winding up accounts
of the company has been raised to two weeks from one week. Further the fine has also been enhanced
from five thousand to one lakh rupees. Sections 494, 511, 517, 518 and 520 remain intact with the
corresponding Sections being 319, 320, 321, 322 and 323 respectively.
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CHAPTER 5: CONCLUSION
After a clear perusal of the laws and procedures of voluntary winding up under the
Companies Act, 1956 and Insolvency Act, 1986, it can be concluded that these provisions may not be
verbatim copies of each other, yet they are very similar in many aspects. A clear understanding of the
international insolvency laws is important due to rise in cross border business ventures. Hence from
the above discussion we can draw a conclusion that most of the provisions carry similar meaning
however there are few striking differences to be found in the English Law is that the position of the
Liquidator is stronger than that in India. For instance, if there are grievances regarding his
remuneration he can apply to the Court and get his dues or even increase it, restrictions on directors
rights etc.
The Companies Act, 2013 is not that elaborative like the Act. It contains all the provisions of
the Act however, many of the sections are combined under a single Section and certain provisions
have been removed. The most important thing to be noted is that most of the provisions relating to the
punishments have been amended. Where the company or an officer of the company fails to comply
with the said provisions of the Act or Act, the fine amount and the imprisonment term is enhanced.
Further the time limit for submitting reports by liquidator or members to authorities have also been
altered.
It can be concluded that voluntary winding up is preferred because it is easier and speedier. The
members and creditors have a say and control over the proceedings. It is to be noted that winding up
by the Tribunal is approached only if there is a dire need for it, if the proceedings are detrimental to
the interests of the company and public at large.
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BIBLIOGRAPHY
PRIMARY SOURCE
SECONDARY SOURCE
Books Referred:
C.R.Datta, The Company Law, (2008), LexisNexis Butterworths Publications, 6th Edn.
Palmer's Company Law, (1987), Stevens & Sons Ltd. Publications, Vol 1, 24th Edn.
Articles Referred:
John Tribe Company voluntary arrangements and rescue: a new hope and a Tudor
orthodoxy, 2009, Journal of Business Law, J.B.L. 2009, 5, 454-487
Anne Sharp, Members' solvent liquidation, 2011, Financial Regulation International, F.R.I.
2011, May, 4-6
Websites visited:
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Affairs)
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