Company Liquidation in India and Winding-Up of a Company

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Imagine a critical scenario- An entrepreneur incorporated his private limited company in 1973.
Over the course of time, the company begins to lose heavily in the market and due to poor
management or other factors. The internal corporate fabric of the company is collapsing.

In 2015, the son of the entrepreneur (lets call him Samarth), who had inherited the company in
2005, decides that enough is enough. He does not want to carry on the business of the company
any longer. Can he do something to ensure that the company no longer exists in the eyes of law?

The Companies Act of 1956 says he can.

Law and 'Winding-up': Company Liquidation in India

A company is a juristic person that can not only be created but also ended, just like a human who
is born and dies. The Act provides for a process called Winding up of a company, informally
known as Company Liquidation. Winding up is a process by which the company is given a legal
death and its property is administered for the purpose of its members and creditors. After being
wound up, the company will cease to exist in the eyes of law.

Samarth, along with his board of directors, decides to wind up his company. Lets look at what
the law says. The Act of 1956 provides for two ways in which a company may be wound up:

1. Voluntary winding-up of the company;

2. Winding-up of the company by the Tribunal constituted under the Companies Act of 1956

For better understanding, we will look at them one by one.

Company Liquidation in India: Voluntary Winding Up of the Company

If Samarth and his directors choose this option, they will have to work according to Section 484
of the Companies Act which lays down the instances where a company may be voluntarily
wound up (7). The section reads:

A company may be wound up voluntarily

(a) when the period, if any, fixed for the duration of the company by the articles has expired, or
the event, if any, has, occurred, on the occurrence of which the articles provide that the company
is to be dissolved, and the company in general meeting passes a resolution requiring the company
to be wound up voluntarily ;

(b) if the company passes a special resolution that the company be wound up voluntarily.
In all, it outlines three instances:

1. The period that was fixed for the operation of the company has expired;

2. An event that was mentioned in the articles of the company which would result in the
dissolution of the company, has occurred;

3. The board of directors has passed a special resolution by a majority.

When a resolution for the voluntary winding up is passed by the company, the Act mandates that
the resolution be published in the Official Gazette and a local newspaper.

Company Liquidation in India: Difference between Dissolution and Winding-up

Here, the section seems to carry the implication that the term dissolution of a company is
synonymous with winding up. That is not true.

A legal distinction exists; at the end of the procedure for winding up the company, there will no
assets and liabilities existing in the name of the company.

Thus, the emptied company is then dissolved which means that its name is no longer present on
the Register of Companies.

Thus, dissolution follows the winding up of the company.

Company Liquidation in India: What happens after the resolution?

Getting back to Samarth, his board of directors has passed the special resolution. How do they go
forward? First, the board has to appoint a Liquidator who will take charge of the company. Then,
he will liquidate the assets of the company and pay the outstanding debts of the company.
Finally, if there is any surplus left, it will be distributed among the members of the company.

That marks the end of the company liquidation. Samarth will no longer have to worry about the
company!

Company Liquidation in India: Winding Up of the Company by the Tribunal

If Samarth and his board of directors choose this option, then the procedure will be initiated only
if the conditions in Section 433 of the Act are satisfied. The said section provides the instances
wherein a company may be wound up by the Tribunal:

if the company has passed a special resolution to the effect that the company be wound
up by the Tribunal;
if default is made in delivering the statutory report to the Registrar or in 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 is reduced, in the case of a public company, below seven, and
in the case of a private company, below two;
if the company is unable to pay its debts ;
if the Tribunal is of opinion that it is just and equitable that the company should be
wound up;
if the company has made a default in filing with the Registrar its balance sheet and profit
and loss account or annual return for any five consecutive financial years ;
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.

When the company is compulsorily wound up by the Tribunal, the Liquidator is appointed by the
Court and not the Board of Directors of the company. The functions of the Liquidator remain the
same, that is, he performs the liquidation of the assets, pays the debs and distributes the surplus.

Company Liquidation in India: The way forward

Thus, Samarth has the option of compulsorily winding up his company by the order of the
Tribunal.

For him, freedom is just Section 484 or 433 away!

In a nutshell, this is a summary of the process of Company Liquidation.