CALL NOW +91 – 8800110989 Introduction Winding Up of a Company
Everyone once in life thinks of owning a business but business comes with its own unique challenges. Sometimes when things don’t go your way, you would have to make a tough call as well. Shutting down a business has never been easy but one has to go through it if time demands tough calls. A business owner can decide to close or wind up the business under various circumstances. Some of them are; financial insolvency, loss of profitability, completion of a project and internal disputes etc. In this article we will explain to you the various ways through which a company can be closed or wound up.
Also Read :- Prospectuses, Debentures, and Investor Confidence: Understanding Their Significance in Company Law
What is Winding Up of a Company?
The formal process of legally dissolving a company is known as winding up of the company. It is also called liquidation of the company. During this process all the business operations are being shut down and assets are being sold to settle debts of the creditors. Upon successful completion of the liquidation process the company is considered to be closed.
Modes of Winding Up of a Company:
A company can be wound up through different modes, each mode has legal provisions:
Voluntary Winding Up of a Company: This happens when the company itself, with the shareholders and creditors of the company, takes the decision to shut down its operations. It can be further categorized into two sub-categories
Members’ Voluntary Winding Up: Under this mode, the shareholder decides to wind up the company as they believe it has achieved the purpose for which it was created. And closing the business will be the best in the interest of the shareholders. The company in this case is usually a solvent company which can pay its debt within a stipulated time period. The members of the company hire a liquidator to complete the formal process of winding up and distributing the assets among the shareholders.
Creditors’ Voluntary Winding Up: Under this mode the shareholders decide to wind up the company as it has become insolvent and can’t meet its financial obligation. Hence, the liquidation process gets started to settle the debt of the creditors. In this mode the creditors hire a liquidator to complete the formal process of winding up and distributing the assets among the creditors to settle their debt. It provides a structured approach to insolvency, ensuring fairness and transparency in the distribution of assets.
Compulsory Winding Up: Under this mode the company is wound up directly on the order of the court. Companies registered in India are governed by Companies Act, any company which is found involved in an unlawful act, fraudulent act or even if they contributed any action in some fraudulent or unlawful activities then such company would be wound up compulsorily by the Tribunal. Usually it happens in situations where a company has become insolvent and is unable to pay its debts as they become due. In compulsory winding up, the liquidator is appointed by the court to manage the process and realize the company’s assets for the benefit of creditors and shareholders.
Voluntary Winding Up of a Company: A Step-by-Step Guide
There are certain legal procedures and compliances that needs to be followed in voluntary winding up of the company.
Initiating the Wind Up Process: Shareholders of the company convene a general meeting for the purpose of passing a resolution to wind up the company voluntarily. The resolution must pass with a prevailing number and majority of directors must agree for winding up. The resolution should get approval from trade creditors as well. A declaration of solvency must be made and it must be acknowledged by the trade creditors, if the company can meet its financial obligation.
Appointment of Liquidator: After passing the resolution for winding up, the shareholders or creditors depending upon the type of wind up must appoint the liquidator. The appointed will carry out the winding-up proceedings and prepare a report of the winding-up on the assets, properties, debts and so on.
Cessation of Business: Once the liquidator has been appointed the company must close all its business operations and activities and collect any pending outstanding and clear the inventory.
Realization of Assets and Settlement of Liabilities: The appointed liquidator takes charge of the winding up procedure and gathers companies assets, including property, equipment, and inventory, to generate funds and sell them to settle any liabilities and pay off the creditors as per the regulations. Secured creditors, such as banks with liens on assets, are typically paid first, followed by unsecured creditors like suppliers.
Distribution of Surplus: If after settling all liabilities any surplus assets are left then those assets need to be distributed among the shareholders in proportion to their shareholdings.
Notifying The Tribunal: The appointed liquidator of the company will make an application to the Tribunal for an order of dissolution. The Tribunal will review the submitted documents and upon being satisfied with the winding up, the Tribunal will pass an order of dissolution within 60 days of the application.
Conclusion: Winding up of the company is a long and complex process. Since there are legal procedures and various compliance involved, taking the help of an expert is advisable. After the legal existence of the company ceases to exist, hence, taking action according to the mode company dissolution needs to be done in compliance with the Company’s Act. There has to be clear understanding about the type of dissolution and paying off the companies liabilities has to be a prime concert while closing the operation.
Frequently Asked Questions:
What is the difference between liquidation and winding up?
Liquidation is just one of the steps in winding up of the company. By liquidating the company’s assets, the company generates cash which is then used to pay off debt or to be distributed among shareholders. Winding up is the complete process of legally dissolving the company.
What is the process of closing a company?
Closing a company involve several steps, below are the major steps
Resolution to close: Shareholders or a court order initiates the process.
Sell assets & pay debts: Company liquidates belongings assets to settle dues.
Distribute Surplus: Remaining funds (if any) to shareholders.
Dissolution: Company officially ceases to exist.
What is the summary of winding up?
The summary of winding up procedure is provided under section 361 of the Companies Act, 2013. Under this procedure the proceedings for liquidation are carried out by an Official Liquidator appointed by the Central Government.
