Winding Up of a Company: 3 Modes | Accounting

The modes of winding up may be discussed under the following three heads, namely:- 1. Compulsory winding up by the court.  2. Voluntary winding up without the intervention of the court.  3. Voluntary winding up with the intervention of the court i.e., under the supervision of the court.

Mode # 1. Compulsory Winding Up by the Court:

Winding up of a Company by an order of the court is called the compulsory winding up. Section 433 of the Companies Act lays down the circumstances under which a Company may be compulsorily wound up.

They are:

(a) If the Company has by special resolution, resolved that the Company may be wound up by the court.

(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting.

(c) If the Company does not commence its business within a year from its incorporation or suspends it for a whole year.

(d) 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.

(e) If the Company is unable to pay its debts.

(f) If the court is of the opinion that it is just and equitable that the company should be wound up.

Persons Entitled to Apply for Liquidation:

The Petition for winding up of a Company may be presented by any of the following persons (Sec. 439):

(1) The Company.

(2) The creditors which include contingent creditors, prospective creditors, secured creditors, debenture holders, or a trustee for debenture holders.

(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and 428).

(4) The Registrar.

(5) Any person authorised by the Central Government on the-basis of report of inspectors.

Mode # 2. Voluntary Winding Up:

A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.

This mode of winding up takes place on:

(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution to wind up voluntarily; or

(b) The passing of a special resolution by the Company to wind up voluntarily.

Section 488 provides for two types of voluntary winding up;

(a) Member’s voluntary winding up and

(b) Creditor’s voluntary winding up.

(a) Member’s Voluntary Winding Up:

This type of winding up occurs only when the Company is solvent. It requires a declaration of the Company’s solvency at the meeting of Board of Directors. The declaration must specify the director’s opinion that the Company has no debt or it will be able to pay its debts in full within three years of the commencement of the winding up.

The company in general meeting must then appoint a liquidator and fix his remuneration. With his appointment, all the powers of the Board and the managing director or manager cease unless the company in general meeting sanctions otherwise.

The liquidator must annually call a general meeting to lay before it an account of his dealings and the conduct of the winding up.

When the company’s affairs are fully wound up, he must:

(a) Prepare an Account – Liquidator’s Final Statement of Account – to show the disposition and disbursement of the company’s property;

(b) Call a final meeting of the company of laying the final account before it, and

(c) Send a copy of the account and a return of the meeting to the Registrar of Companies. The company thereafter dissolves.

(b) Creditor’s Voluntary Winding Up:

It occurs in the absence of declaration of solvency i.e., when the company is insolvent. Hence, the Act empowers the creditors of dominate over the members in this mode of winding up so as to effectively protect their interest. It requires the company to hold the creditors’ meeting wherein the Board must make a full statement of the company’s affairs together with a detailed list of creditors including their estimated claims.

Both the members and creditors at their respective meeting nominate a liquidator and on their disagreement, the creditor’s nominee is appointed as the liquidator. All the powers of the Board then cease unless the creditor’s meeting sanctions otherwise.

The liquidator must annually call here not only the members’ meeting but also the creditors’ meeting to lay an account of his dealings and the conduct of the winding up. So also, he must call a final general meeting of the members and creditors for the company’s dissolution as in the case of member’s winding up.

Mode # 3. Winding Up Subject to Supervision of the Court:

Windings up with the intervention of the court are ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court. A court may approve a resolution passed by the Company for voluntary winding up but the winding up should continue under the supervision of the court.

The court will issue such an order only under the following circumstances:

(a) If the resolution for winding up was obtained by fraud by the company; or

(b) If the rules pertaining to winding up are not being properly adhered to; or

(c) If the liquidator is found to be prejudicial or is negligent in releasing the assets of the company.

The Court may exercise the same powers as it has in the case of compulsory winding up under the order of the court.