Winding Up Under The Companies Act, 2013 & Discussion on how a

Company makes a compromise or arrangement with its members and

creditors without going into liquidation.

By- Debina Mitra. LL.M (B.L). 2nd Semester. Amity University.

Kolkata.
Connection between The Companies Act, 2013 and The Insolvency
and Bankruptcy Code, 2016-

Prior to November 15, 2016, the term “winding-up” was neither defined under
the Companies Act, 1956 (“1956 Act”) nor under the Companies Act, 2013
(“2013 Act”).

Section 255 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) has been
notified with effect from November 15, 2016 and by virtue of Section 255, the
2013 Act stands amended in accordance with Schedule XI of the Code. The
aforesaid Schedule XI now defines the term “winding up” by introducing a new
Section 2(94A) to the 2013 Act as “winding up under this Act or
liquidation under the Insolvency and Bankruptcy Code, 2016.” Thus
winding up proceedings will now be governed by the provisions of 2013
Act as well as the Code.
Definitions of Winding Up-
 
According to Halsburry's Laws of England, “Winding up is a proceeding by means of
which the dissolution of a company is brought about & in the course of which its assets are
collected and realised; and applied in payment of its debts; and when these are satisfied, the
remaining amount is applied for returning to its members the sums which they have contributed to
the company in accordance with Articles of the Company. ”Winding up is a legal process.
 
Prof. Goer s definition of winding up:- “Winding up of a company is a process whereby its life is ended
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 To discuss in detail the various
modes of winding up of the companies; To discuss the grounds which throw a company in the pit of winding
up situation; and To discuss about the effects of winding up of a company assets, pays its debts and finally
distributes the surplus among the members in accordance with their rights”.
 

Pennington defined Winding up is a process by which the management of a company’s affairs

is taken out of its directors hands, its assets are realized by a liquidator, and its debts are paid
out of the proceeds of realization and any balance remaining is returned to its members. 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, i.e for its legal personality as a corporation to be brought to an
end.

(Pradhan 2013; Palmer 1952)

(Haniefuddin, Shaik, and Baba, n.d.; Vogelaar and Chester 1973)
 
In simple terms,

The expression ‘Winding Up’ or ‘Liquidation’ is a process by which the

existence or life of a company is put to an end.’
 It is also termed as ‘Liquidation’.

 Winding up or liquidation is a process by which the life of a company is ended

and its properties are administered for the benefit of its members and
creditors.
 The person appointed for administering the assets and liabilities is
called “Liquidator”.
 On liquidation, the company’s name is deleted from the list of companies
by the Registrar of Companies and the same is published in the Official
Gazette.
Modes of Winding Up
The Modes of Winding Up are categorically explained
under the following, namely:-
1. Winding up by the Tribunal (Section 271) and,
 

2. Voluntary Winding Up. (Section 304)

Mode # 1. Winding Up by the Tribunal:

A Company may, on a petition under Section 272, be wound up by the Tribunal:

They are:-

 If the Company is unable to pay its debts;

 If the Company has by special resolution, resolved that the company be

wound up by the Tribunal;

 If the Company has acted against the interests of the sovereignty and
integrity of India, the security of the State, friendly relations with
foreign States, public order, decency or morality;

 If the Tribunal has ordered winding up of the company under Chapter

XIX.

 If on an application made by The Registrar or any other person authorized

by the Central Government by notification under this Act, the Tribunal is of
opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful purpose or the
person concerned in the formation or management of its affairs have been
guilty of fraud, misfeasance or misconduct in connection therewith and that it is
proper that the company be wound up;

 If the Company has made a default in filing with the Registrar its
financial statements or annual returns for immediately preceding five
consecutive financial years;

 If the Tribunal is of opinion that it is just and equitable that the

Petition for Winding up (Section 272):- Subject to the provisions of this section, a
petition to the Tribunal for the winding up of a company shall be presented by:

A) The Company (Section 439(1) (a):- A company may resolve by a special

resolution to wind up the company. After such a resolution is passed the Company
may present a petition for winding up. In Re Patiala Vanaspati Co. , the
petition for winding up of the company was made by the managing director.
Rejecting the petition, The Court (now Tribunal) held that the resolution of the
general meeting was necessary for the petition as the directors or managing
director did not constitute the company for this purpose.

B) Any creditor or creditors, including any contingent or prospective creditor

or creditors (Section 272 (1) (b)- Any creditor or creditors including any contingent
or prospective creditor or creditors can apply for winding up vide a petition taking
the leave of the Court for the admission of such a petition. In Central Bank of
India v. Sukhani Mining Industries, it has been held that a creditor who is
pursuing his ordinary remedy in a civil suit for recovery of his debt, can also make
a petition for winding up under Section 271 of The Companies Act, 2013. The
Tribunal may order the stay of his suit but cannot disqualify him from presenting a
petition for winding up on that ground. (AIR 1953 Pepsu 195)
(1977) 47 Comp. Cas. I (Pat)
C) Any contributory or contributories (Section 272 (1) (b)- A ‘contributory’ means every person liable
to contribute to the assets of a company in the event of its being wound up, and includes the holder
of fully paid up share and he shall be entitled to present petition for winding up notwithstanding that
he may be the holder of fully paid up shares.

D)All or any of the persons specified in clauses (a), (b) and (c) together (Section 272 (1)
together or separately- A petition for winding up of a company maybe presented by all or any of
the parties, namely the company, the creditors or the contributories whether together or separately.

E) The Registrar (Section 272 (4)- The Registrar can present a petition to wind up on the
following grounds:-
 If there is default in delivering the Statutory Report to the Registrar or holding the
statutory meeting;
 If the Company does not commence its business within a year from its incorporation or
suspends its business for a whole year.
 If the number of Members of a public company is reduced below 7, and that of a
private company below 2;
 If the Company is unable to pay its debts;
 If the Court is of the opinion that it is just and equitable that the Company should be
wound up

F)Any person authorized by the Central Government (Section 272 (1) (f),
In a case falling under clause © of sub-section (1) of Section 271 by the
Central or State Government (Section 272 (1) (g).
Mode # 2. Voluntary Winding Up (Sections 304 to 323): Voluntary winding up
means, winding up by the members or creditors of a Company without
interference by the Court. The object of a voluntary winding up is that the
company, i.e the member as well as the creditors, are left free to settle their
affairs without going to the Court. They may, however, apply to the Court for any
directions, if and when necessary.
 
This mode of winding up takes place when:
(a) The period fixed for the duration of the Company by the Articles has expired
or the event has occurred on the occurrence of which the Articles provide that
the Company is to be dissolved and the Company in general meeting has passed
a resolution to wind up voluntary; or
(b) The Company has passed special resolution to wind up voluntarily. Thus, a
Company may be wound up voluntarily at any time and for any reason if a
special resolution to this effect is passed in its general meeting.
Why Winding Up becomes necessary??
 
Winding up of a company might be required because of an
array of reasons including;-

• conclusion of business,

• misfortune,

• bankruptcy,

• death of promoters, and so forth.

What happens after the Winding Up Application is placed before the
Tribunal?

The methodology for winding up of a company can be initiated intentionally by the

shareholders or creditors or by a Tribunal.

o On introduction of the winding up application, the court in the wake of hearing the
request has the ability to either expel it or to make an interim request as it thinks
suitable.

o It can even appoint the temporary liquidator of the company till the passing of
winding up.

o It might even make a request for winding up with or without cost.

o It is a procedure by which the properties of the company are directed for the
advantage of its members and creditors.

o The individual designated for directing the advantages and liabilities is called
Liquidator.

o If there should be an occurrence of obligatory winding up, the outlet is

delegated by the Tribunal under section 275 of the Act; or,

o if there should be an occurrence of voluntary winding up, the outlet is selected

by the company itself under section 310 of the Act.
Is Liquidation Irreversible?

An effective insolvency law:-

"should strike a balance between rehabilitation and liquidation. It should provide an

opportunity for genuine effort to explore restructuring/ rehabilitation of potentially
viable businesses with consensus of stakeholders reasonably arrived at. Where
revival / rehabilitation is demonstrated as not being feasible, winding up should be
resorted to.

Where circumstances justify, the process should allow for easy conversion
of proceedings from one procedure to another. This will provide
opportunity to businesses in liquidation to turnaround wherever possible.

The objective of the Insolvency and Bankruptcy Code, 2016 (IBC) is "to ensure
revival and continuation of the corporate debtor by protecting the corporate debtor
from its own management and from a corporate death by liquidation" and provides
for liquidation only as a last resort. Accordingly, the IBC has clear
restructuring/rehabilitation proceedings (in the form of corporate insolvency
resolution processes (CIRPs) which can convert into liquidation proceedings only if
the committee of creditors so decides by requisite majority,
The 2005 Report of the Expert Committee on Company Law (JJ Irani Committee
Report)
Schemes of Restructuring or Compromise or Arrangement for
Companies in
Liquidation.

Liquidation proceedings are now evolving into

restructuring/rehabilitation proceedings by taking recourse to Section
230 of the Companies Act, 2013 (Companies Act). Section 230
allows the liquidator of a company undergoing liquidation to file an
application before the NCLT to seek sanction for a scheme of
arrangement between the company and its creditors and,
where applicable, its members. Similar provisions also exist in other
jurisdictions, notably in the Companies Act 2006 of the United Kingdom
(UK Act) and the Companies Act, 1967 of Singapore (Singapore Act).
What is meant by Arrangement with creditors?

The Word Arrangement is of very wide importance and its meaning is not to
be limited to something analogous to a compromise. The Scheme of
Arrangement is a procedure under Section 230-234 of the
Companies Act, 2013 for obtaining NCLT approval for compromise
or arrangement between a company and its creditors or class of
creditors. Essentially, a scheme can be used to bind a majority of creditors
or class of creditors, as the NCLT can sanction a scheme once it has been
approved by a majority in number representing 75% in value of the class of
creditors in question.
MEANING OF CORPORATE RESTRUCTURING
Restructuring as per Oxford dictionary means, “to give a new
structure to, rebuild or rearrange".

Restructuring is a method of changing the organizational

structure in order to achieve the strategic goals of the
organization or to sharpen the focus on achieving them. The
essentials of corporate restructuring are efficient and
competitive business operations by increasing the market
share, brand power and synergies.
OBJECTIVES OF CORPORATE
RESTRUCTURING:-

 — orderly redirection of the firm's activities;

 — deploying surplus cash from one business to finance

profitable growth in another;

 — exploiting inter-dependence among present or

prospective businesses within the corporate portfolio;

 — risk reduction; and

 — development of core competencies.

KINDS OF RESTRUCTURING
Restructuring may be of the following kinds:-

Financial restructuring which deals with the restructuring of capital base and
raising finance for new projects. This involves decisions relating to acquisitions,
mergers, joint ventures and strategic alliances.

Technological restructuring which involves, inter alia, alliances with other

companies to exploit technological expertise.

Market restructuring which involves decisions with respect to the product

market segments, where the company plans to operate based on its core
competencies.

Organizational restructuring which involves establishing internal structures and

procedures for improving the capability of the personnel in the organization to
respond to changes. This kind of restructuring is required in order to facilitate and
implement the above three kinds of restructuring.

These changes need to have the cooperation of all levels of

employees to ensure that the restructuring is successful.
 CONCLUSION
A Winding Up Petition is the most serious or a drastic action, a creditor can bring
against one’s company as well as the company can do the same against itself
for its ultimate closure when it is going through severe losses and unable to
meet its liabilities and in situations when the company is going through a series
of inconsistent chase for payment, a winding up petition is a predictable outcome.

Unless any steps are taken to promptly deal with the petition, the petitioner or
the creditor- which in most of the cases proceed to advertise the petition, thereby
alerting to the other creditors to its existence and stir them to take severe
action too against the company. When a Bank becomes aware of the petition, they
take steps to freeze the company’s bank accounts so that no further transactions
take place.
Therefore to avoid such Winding Ups by the Creditors, and to avoid the Court proceedings
as well, the Company can adhere to the following suggestions:-
 
 The company’s lawyer or practitioner can suggest and discuss a Company Voluntary Arrangement (CVA).
If the business appears to be workable, this offers the creditor a ratio of the debt over a longer period of time, and
allows the company’s breathing space to turn the business around.

 To apply for an adjournment of the matter for the time being and be fixed up on another date so that by
that time, the drafting of petitions and objections can be prepared with utmost care.

 If the company is placed voluntarily into Administration- this may avoid a Winding Up Order being passed by the
Courts. Company’s belongings would be prized and sold by an appointed officer to cover some or all of the debt.

 Pay the total due amount to the creditor, perhaps using asset financing as a way to raise the funds.

 Disputing the debt is an option- which is a serious step. This type of claim against the creditor is called
‘abuse of court process’ and is one which requires solid evidence to back it up.

 An injunction could potentially be taken out to either delay or prohibit the petition which is being
advertised in order to stop the other creditors from getting aware of the situation as the banks keep an eye
to these advertisements in order to freeze all company accounts.

 The last but not the least, a company can avoid winding up by Restructuring/ Compromise / Arrangement with
its creditors.
THANK
YOU…
