Winding up a company, often referred to as liquidation, comes into play when a company faces financial difficulties and is incapable of meeting its obligations to creditors. It entails a systematic process wherein the company’s assets are liquidated to generate funds for settling its outstanding debts. After all the debts have been satisfactorily settled, any surplus funds are distributed among the shareholders and this marks the formal dissolution of the private limited company registration, bringing an end to its existence.
The winding-up of a company can be executed through two distinct avenues, either by the tribunal’s intervention or voluntarily initiated by the company itself. In this blog, we shall understand the winding up of a company by tribunal in India.
Reasons for Winding Up a Company by the Tribunal
Winding up of a company by tribunal in India is a legal process that can be initiated under various circumstances, as outlined below:
- Non-Payment of Debts Exceeding Rs 1 Lakh
In situations where a company defaults on its debt payments, and the outstanding debt owed to a creditor surpasses Rs 1 lakh, and remains unpaid for a period of 21 days beyond the due date, or if an execution decree is issued in favor of the creditor, the tribunal is authorised to decree the winding up of the company.
- Special Resolution for Winding Up
A company may be subject to winding up by the tribunal if it has passed a special resolution authorising such action.
- Failure of Revival and Rehabilitation for Sick Companies
In the case of financially distressed or “sick” companies where revival and rehabilitation efforts prove unsuccessful, the tribunal has the authority to order the winding up of the company.
- Fraudulent Formation or Conduct of Business
Should it come to light that a company was established through fraudulent means or if there exists substantiated proof of fraudulent business practices, the tribunal is empowered to issue a directive for the winding up of the company.
- Unlawful Purpose or Misconduct by Management
Winding up by the tribunal can be necessary if the company was formed for an unlawful purpose, or if the company’s management is involved in misconduct or misfeasance.
- Tribunal’s Determination for the Good Faith of the Company
The tribunal has the authority to decree the winding up of a company if it determines that such action is essential for the overall health and integrity of the company.
Who can be Petitioners for Winding Up of a Company?
The right to file a petition for the winding up of a company is granted to various entities as stipulated under Section 272 of the Act. The following parties are eligible to present such a petition:
- The Company Itself: The company in question has the authority to file a winding-up petition.
- Shareholders or Contributors: Shareholders or contributors of the company who possess fully paid-up shares also have the authority to instigate the winding-up process by submitting a petition.
- Contingent or Prospective Creditors: Those creditors whose debts remain unpaid and are either contingent or prospective in nature have the right to file a winding-up petition.
- Registrar: The registrar responsible for company affairs is empowered to file a winding-up petition.
- Liquidators: Liquidators appointed for the winding up of a company may file a petition to initiate the process.
- Government Representatives: Individuals or entities authorised on behalf of the State or Central Government also have the standing to present a winding-up petition.
These parties, in accordance with the applicable provisions, can take legal action to seek the winding up of a company by tribunal in India when deemed necessary.
Procedure for Winding Up of a Company by Tribunal in India
Winding up of a company by tribunal in India involves a systematic process as outlined below:
1. Admission of Winding Up Petition:
The petition for winding up of a company by tribunal in India is admitted by the tribunal when it is accompanied by the statement of affairs as prescribed in the specified form.
2. Creditor’s Authorisation:
Prior to submitting a winding-up petition, creditors must secure permission from the tribunal. The tribunal will consider the petition only if there is a clear, initial indication of the necessity for the company’s liquidation.
3. Registrar’s Submission:
Additionally in the process of winding up of a company by tribunal in India, a copy of the winding-up petition must be lodged with the registrar who has to furnish their assessment to the tribunal in 60 days.
4. Form and Attachments:
The petition is submitted as per the Form NCLT 1, Form NCLT 2 and Form NCLT 6.
5. Tribunal’s Order and Provisional Liquidator:
The tribunal, within 90 days of receiving the petition, will pass an order for winding up under Section 273. It can also make an interim order for the appointment of a liquidator. Notice is served to relevant parties for the appointment of the provisional liquidator.
6. Objections and Director’s Duties:
In the process of winding up of a company by tribunal in India, under Section 274, if the tribunal has prima facie reason to order winding up, it can do so. Objections can be raised within 30 days of the order. Also, the directors are required to submit the books of accounts to the liquidator within 30 days of the order.
7. Declaration if there is any Conflict of Interest:
The official liquidator has the right to declare any conflict of interest regarding their appointment within seven days, as per Section 275. The same liquidator can be removed for misconduct, fraud, misfeasance, or professional incompetence under Section 276.
8. Notification and Winding-up Committee:
The registrar, under Section 277, notifies in the official gazette the winding up of a company by tribunal in India. The official liquidator, within three weeks, applies to the tribunal for the constitution of the Winding-up Committee, which provides monthly reports and a final report after the company’s dissolution.
9. Legal Proceedings and Jurisdiction:
After completing winding up of a company by tribunal in India, no suits or legal proceedings can be entertained against the company, as stated in Section 279. The tribunal retains jurisdiction to dispose of pending cases of the company under Section 280.
10. Final Report and Timely Completion:
The liquidator must submit the final report to the tribunal within 60 days of winding up the company, as per Section 281. Section 282 requires the entire dissolution process to be completed within a specified timeframe.
11. Distribution of Assets and Fraud Proceedings:
The company carries the responsibility of liquidating all its assets and prioritising the settlement of its debts to creditors. Any remaining funds are then apportioned among the shareholders if the company is not involved in fraudulent acts.
Final Thoughts
Winding up of a company by tribunal in India of a company is a careful and legally governed process that can be initiated either by the tribunal’s intervention or voluntarily by the company itself. Winding up by the tribunal can be instigated for a number of reasons, spanning from outstanding debts to fraudulent activities and the omission of financial statement submissions. The scope for initiating a winding-up petition is extensive, encompassing creditors, shareholders, the company itself, and government officials, each with their specific rights and obligations in this process.
The procedure for winding up a company through the tribunal is well-defined, involving petition admission, creditor permissions, registrar involvement, and the eventual appointment of a liquidator. The process ensures transparency and fairness in settling the company’s affairs, protecting the interests of creditors, shareholders, and other stakeholders.
