What is Winding Up of a Company?

Winding up refers to when a company ceases its operations. The business

activities end, and the company liquidates. The assets are sold to pay off the
company's liabilities. There are multiple types of winding up of a company in
India.

o Winding up happens when the company is unable to move forward. It is

often due to company finances. The business isn't able to pay day-to-day
expenses and liabilities.
o Winding up can also happen due to court orders. This order can be from a
suit by an external party. It may also be the result of a bankruptcy
application.
o Winding up of a company also requires a legal process. The company must
follow the due rules to ensure a valid winding up.
o The winding-up without following rules can lead to penalties for the
business.
o The business can still get fined even if it has wound up. It is often because
of not following the rules.
o The company gets a liquidator for the winding-up process. This liquidator is
responsible for the winding up of a company and asset sales. The proceeds
are used to settle all the creditor claims.
o The company creditors must submit and explain the claims per the time
limits. These claims are settled with the asset sale amounts.

Types of Winding Up

Compulsory Winding Up
A compulsory winding-up type is ordered by the court. This can be the effect of a suit. The
company has to appoint a liquidator for this process. The liquidator further manages the
company affairs for asset sales and settlements. The compulsory liquidation in the types of
winding up of a company can happen because of the following reasons.

Special Resolution
The company may have a special resolution. It can decide to wind up operations with a court
order. Company owners decide this resolution. But, the court is not required to pass this order.
It can decide the same after due diligence. The court may not pass the resolution order if it's
disadvantageous to the company.
Statutory Meeting Default
The company can default in submitting statutory reports or holding the meeting. This default
may result in a court order. It can lead to winding up of a company.
Example: For example, company ABC started operations on July 1, 2022. The company is
required to hold a shareholders meeting after one month and before months from that date. It
is the first meeting after business commencement.
However, ABC was not able to do so because of internal company conflicts. The deadline
crossed after three months. Thus, ABC may receive a compulsory winding-up order.
.
Voluntary Winding Up
The company can also decide on its own in the voluntary types of winding up of a company. It
can be because of low prospects. The company members may also choose the same because of
internal reasons. The voluntary types of winding up of a company can happen by the following
methods.
o Ordinary Resolution: The company can pass an ordinary resolution for the
voluntary types of winding up of a company. It can happen when the company's period
expires. This is mentioned in company articles. There may be other cases where the
company requires a voluntary winding up. An ordinary resolution then leads to the
winding up.
o Special Resolution: The company owners can also pass a special resolution for
voluntary types of winding up of a company. The same must be notified to the
stakeholders within fourteen days. The business operations end when this resolution is
applicable. The special resolution can be due to any relevant reasons. The company
owners decide it.
Types of Voluntary Winding Up
The voluntary winding up can be of two types.
Member's Voluntary Winding Up
The company members may decide to wind up the company. It can be because they've sold the
business or the company isn't trading. The key is that the company must be solvent. It means
that the company must be able to pay its debts. The member's voluntary types of winding up
of a company can only be when it's solvent.
If the company cannot fulfill debt, it will automatically be a creditor's induced winding up.
Example: Suppose ABC company was a subsidiary. It was made for the purpose of one
construction project. After the completion of the project, the members agree to wind up the
business.
Thus, this winding-up was voluntary. The company was still solvent.

Creditors voluntary winding up

The company's creditors can also trigger a winding up. It happens when the creditors don't
receive their dues. The liquidator has to assess the company's assets and debt obligations
carefully. Also, the company is insolvent at this time.
 A liquidator is a person with the legal authority to act on behalf of a
company to sell the company's assets before the company closes in
order to generate cash for a variety of reasons including debt
repayment. Liquidators are generally assigned by the court, by
unsecured creditors, or by the company's shareholders

A liquidator is appointed to:

 investigate your company's financial affairs

 establish what caused it to fail
 investigate possible offences by your company or
directors of your company, and
 identify and sell the unsecured assets of your company to
repay your debts.

If the liquidation is a solvent liquidation then, a written

declaration signed by the directors that the company will be
able to pay its debts in full within a period of not more than 12
months after the appointment of the liquidator must be
submitted to the Registrar. The directors must make this
declaration after making an inquiry into the affairs of the
company within 20 working days before the appointment of the
liquidator and include a statement of affairs of the company
showing the:

 the property of the company, and the total amount

expected to be realised from that property; and
 the liabilities of the company; and
 the estimated expenses of the liquidation

Company Liquidators and their appointments.

 275. (1) For the purposes of winding up of a company by the Tribunal, the Tribunal at
the time of the passing of the order of winding up, shall appoint an Official Liquidator or
a liquidator from the panel maintained under sub-section as the Company Liquidator.
 [ (2) The provisional liquidator or the Company Liquidator, as the case may, shall be
appointed by the Tribunal from amongst the insolvency professionals registered under
the Insolvency and Bankruptcy Code, 2016. ]
 (3) Where a provisional liquidator is appointed by the Tribunal, the Tribunal may limit
and restrict his powers by the order appointing him or it or by a subsequent order, but
otherwise he shall have the same powers as a liquidator.
 (4) [***]
 (5) The terms and conditions of appointment of a provisional liquidator or Company
Liquidator and the fee payable to him or it shall be specified by the Tribunal on the basis
of task required to be performed, experience, qualification of such liquidator and size of
the company.
 (6) On appointment as provisional liquidator or Company Liquidator, as the case may be,
such liquidator shall file a declaration within seven days from the date of appointment in
the prescribed form disclosing conflict of interest or lack of independence in respect of
his appointment, if any, with the Tribunal and such obligation shall continue throughout
the term of his appointment.
 (7) While passing a winding up order, the Tribunal may appoint a provisional liquidator,
if any, appointed under clause (c) of sub-section (1) of , as the Company Liquidator for
the conduct of the proceedings for the winding up of the company.

Powers & Duties of Company Liquidator

 The company liquidator has the power & duty to carry on the business.
He has to complete/effort to complete the subsisting contract.
 To do all acts and execute all documents, deeds, receipts & other
documents.
 Deal with the movable/ immovable property.
 Sell the whole undertaking as a going concern. (After the order of
winding up is given the board of directors have no role. All the powers
are given to liquidator and if after notice of winding up somebody
wants to buy the company, the liquidator is in the position/power to
sell it without taking further permission.)
 Prosecution
 Invite and settle the claims of different creditors.
 Inspect the records/ financial statements of the company.
 Negotiable Instrument: cheque, promissory note, bill of exchange. All
such negotiable instrument has to be signed by the liquidator (earlier
board of director used to do it with the seal of the company) i.e. draw,
accept endorse the negotiable instrument.
 Professional assistance: He can call for the help of an expert if he finds
difficulties i.e Lawyers, CA & etc.
 He can take actions related to signature, execution and verification of
any documents, application, bond, petition which are necessary for
winding up. He can also take actions related to the distribution of
assets and all such actions are done under the control of NCLT. The
extent of control of NCLT is different for company liquidator &
provisional liquidator. There are some actions for which company
liquidator doesn’t require the permission of NCLT (except for selling of
undertaking) but provisional liquidator can’t exercise any power & duty
without the permission of NCLT.