Winding Up of a Company | Accountancy

The winding-up or liquidation of a company means the termination of the legal existence of a company by stopping its business. Under the circumstances, the assets of the company are disposed of, the debts are paid-off out of the realised assets or from the contributions made by its members, and the surplus, if any, is distributed among the members of the company in proportion to their holding.

That is, the company is properly administered for the benefit of the creditors and members. It is needless to mention that an administrator, and known as liquidator, is appointed and he takes control of the company, collects and pays its debts and distributes surplus, if any, among the members.

Modes of Winding-up:

There are three methods of Winding-up of a company:

A. Compulsory Winding-up by the Court;

B. Voluntary Winding-up;

(i) Members’ Voluntary Winding-up;

(ii) Creditors’ Voluntary Winding-up;

C. Voluntary Winding-Up under the supervision of the Court.

A. Compulsory Winding Up:

It takes place when a company is directed to be wound-up by an order of court.

Grounds for compulsory Winding Up (Sec. 433):

A company may be wound up by the court under the following cases:

(i) Special Resolution of the Company:

If the company has, by special resolution, resolved that the company be wound up by the court;

(ii) Default:

If a default is made in delivering the statutory report of the Registrar of Companies or in holding the statutory meeting of the company, the court may make a winding up order;

(iii) Not commencing or suspending the Company:

If the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;

(iv) Reduction of Members:

If the number of members falls below seven in case of a public company or below two in case of a private company;

(v) Inability to pay Debts:

If the company is unable to pay its debts;

(vi) The Just and Equitable Clause:

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

Petition:

i.e., who can apply for Winding up? (Sec. 439)

A petition for the winding up of a company may be presented by any one of the following entities:

(a) By the Company [Sec. 439 (1) (a)];

(b) By any Creditor [Sec. 439 (1) (b)];

(c) By any Contributory [Sec. 439 (1) (c)];

(d) By a Registrar [Sec. 439 (1) (e)]; and

(e) By any person authorised by the Central Govt. [Sec. 439 (1) (f)].

Commencement of Winding Up:

The winding up of a company by the court is deemed to commence from the time of the presentation of the petition for winding up—Sec. 441.

Where there is a resolution for voluntary winding up, before the presentation of the petition to court, the winding up is deemed to commence from the date of the resolution. But the court may direct otherwise in cases of fraud and mistake.

Powers of Court on hearing petition (Sec. 443):

The court may, on hearing a petition:

(a) Dismiss it with or without costs; or

(b) Adjourn the hearing conditionally or unconditionally; or

(c) Make any interim order that it thinks fit; or

(d) Make an order for winding up of the company with or without costs or any other order as it thinks fit.

Consequences of Winding up Order:

If the court makes an order for winding up, its consequences date back to the commencement of winding up.

The other consequences of winding up by the court are:

(a) Intimation to official liquidator and Registrar (Sec. 444);

(b) Copy of Winding up order to be filed with the Registrar;

(c) Order for winding up deemed to be notice of discharge [Sec. 445(2)];

(d) Suits stayed [Sec. 446(1)];

(e) Powers of the Court [Sec. 446(2)];

(f) Effect of winding up order (Sec. 447);

(g) Official Liquidator to be liquidator (Sec. 449).

Procedure of Winding up Order by the Court:

Official Liquidator (Sec. 448):

Appointment:

The Companies Act, 1956, provides that in each High Court there must be attached an officer known as the Official Liquidator appointed by the Central Government. There may also be Deputy or Assistant official liquidator. Upon the presentation of a petition for winding up, the court may appoint the official liquidator as the provisional liquidator. When the winding up order is passed, the official liquidator becomes the liquidator of the company — Sec. 449.

Powers of the Liquidators (Sec. 457):

(1) The liquidator in a winding up by the court has power to do the following with the sanction of the court:

(a) To institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name and on behalf of company.

(b) To carry on the business of the company so far as may be necessary for the beneficial winding up of the company;

(c) To sell the immovable property and actionable claims of the company by public auction or private contract, with power to transfer the whole thereof to any person or body corporate or to sell to the same in parcels;

(d) To raise on the security of the assets of the company any money requisites;

(e) To do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.

According to Sec. 546, the liquidator can pay any class of creditors in full, make any compromise or arrangement with creditors; and compromise any call or liability, with the sanction of the court.

The liquidator can disclaim any onerous property or unprofitable contract.

(2) The liquidator in a winding up by the court has power to do the following things, without taking special permission from the court:

(a) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose to use, when necessary, the company’s seal;

(b) To inspect the records and returns of the company on the files of the Registrar without payment of any fee;

(c) To prove, rank and claim in the insolvency of any contributory for any balance against his estate, and to receive dividends in the insolvency;

(d) To draw, accept make and endorse any bill of exchange, hundi or promissory note in the name and on behalf of the company;

(e) To take out, in his official name, letters of administration to any deceased contributory and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company;

(f) To appoint an agent to do any business which the liquidator is unable to do himself.

The Court can limit or modify the exercise of any of the powers of the liquidator enumerated under (2) above.

Duties of Liquidator:

The duties of a liquidator are enumerated:

(i) Proceeding in Winding up:

Sec. 451(1) states that the liquidator shall conduct the proceedings in winding up the company and perform such duties as the court may impose.

(ii) Report:

After receipt of the Statement of Affairs of the company the liquidator must submit a preliminary report to the court not later than 6 months from the date of the order of winding up.

(iii) Additional Reports:

Sec. 455(2) also provides that the official liquidator may make, if he thinks fit, further report stating the manner in which the company was promoted or formed. He may also state if any fraud has been committed by any person relating to formation or any other matters which it is desirable to bring to the notice of the Court.

(iv) Custody of Company’s Property:

Sec. 456 (1) states that where a winding up order has been made or where a provisional liquidator has been appointed, the liquidator, or the provisional liquidator, as the case may be, shall take into his custody all the property, effects and actionable claims to which the company is entitled.

(v) Control of Powers:

Sec. 460(1) provides that the liquidator shall, in the administration of the asset of the company and the distribution thereof among creditors, have regard to any directions which may be given by the committee of inspection.

(vi) Meeting of Creditors and Contributories:

According to Sec. 460(3), the liquidator may summon general meeting of the creditors/contributories as soon as he thinks fit in order to ascertain their wishes. He shall summon such meeting at such times as the creditors/contributories may? By direct resolution or whenever requested in writing, to do so by not less than 1/10th in value of creditors/contributories as the case may be.

(vii) Directions from the Court:

Sec. 460(4) (4) provides that the liquidator may apply to the court for directions in relation to any particular matter arising in a winding up.

(viii) Proper Books:

Sec. 461(1) states that the liquidator shall keep proper book- for making entries or recording minutes of the proceeding at meetings and such other matters as may be prescribed.

(ix) Audit of Accounts:

Sec. 462(1) also provides that the liquidator shall, at such times as may be prescribed but at least twice each year during his tenure of office, present to the court an account of his receipts and payments as liquidators. The account must be in the prescribed form, shall be made in duplicate and duly verified—Sec. 462(2).

(x) Appointment of Committee of Inspection:

Sec. 464(1)(b) provides that the liquidator shall within two months from the date of duration by the Court, convene a meeting of the company’s creditors to determine the members of the committee of inspection.

Statement of Affairs:

When the liquidator has been appointed, a Statement of Affairs of the company is to be made to him in the prescribed form, verified by an affidavit, and containing particulars regarding the assets, liabilities, names and addresses of the creditors, etc. The statement shall be verified by a Director and the Manager Secretary or other chief officer of the company. The Statement of Affairs is required in both compulsory and voluntary winding up—Section 454 and 511 A.

Statement of Affairs contains:

(i) The assets of the company (showing separately cash in hand, Cash at Bank and negotiable securities);

(ii) Names, addresses, occupation of its creditors (showing separately the secured and unsecured debts);

(iii) Its debts and liabilities;

(iv) In case of secured debts particulars of the securities held by the creditors, their value and dates on which they were given.

(v) The debts due to the company and names and addresses of persons from whom they are due and the amount likely to be realised.

(vi) And any such further information as may be required by the official liquidators [Sec. 454(1)].

According to Sec. 455 the officers liquidator must, after the receipts of the statement, within 6 months (or such extended time as may be allowed by the court) of the order, submit to the court a preliminary report as to the amount of capital issued, subscribed and paid-up and the estimated amounts of the company’s assets and liabilities if the company has failed, the causes of its failure and whether, in his opinion, any further enquiry is desirable.

B. Voluntary Winding Up:

According to Sec. 484 of the Companies Act, a company can be wound up voluntarily under the following circumstances:

(1) By an Ordinary Resolution (passed in a general meeting in the following cases):

(a) Where the duration of the company was fixed by the articles and the period has expired; and

(b) Where the articles provided for winding up on the occurrence of any event and the specified event has occurred.

(2) By a Special Resolution — (passed by the members in all other cases):

When a resolution is passed for voluntary winding up it must be notified to the public by an advertisement in the Official Gazette an in a local. Sec. 485.

Types of Voluntary Winding Up:

Voluntary winding up is of two types:

(a) Members’ Voluntary Winding up and

(b) Creditors’ Voluntary Winding up.

(a) Members’ Voluntary Winding up:

It the company is, at the time of winding up, a solvent company, i.e., able to pay its debts and the directors make a declaration to that effect, it is called a Members’ Voluntary Winding Up. The declaration must be verified by an affidavit.

The declaration must be:

(a) Made within the five weeks immediately preceding the date of passing of the resolution of winding up by the company and delivered to the Registrar for registration before that date; and

(b) Accompanied by a copy of the report of the auditors of the company on the Profit and Loss Account of the company from the date of the last Profit and Loss Account to the latest practicable date immediately before the declaration of solvency, the Balance Sheet of the company; and a statement of the company’s assets and liabilities as on the last mentioned date.

(b) Creditors’ Voluntary Winding Up:

If the declaration of solvency is not made and filed with the Registrar, it may be presumed that the company is insolvent. In that case, the company must call a meeting of its creditors (for the day or the day next following the day fixed for company’s general meeting) for passing the resolution for winding up.

(c) Voluntary Winding up under the supervision of Court:

At any time after a company has passed a resolution for voluntary winding up, the court may make an order that the voluntary winding up shall continue but subject to the supervision of the court—Sec 522. A supervision order is usually made for the protection of the creditors and contributories of the company. A petition for the continuance of a voluntary winding up subject to the supervision of the court is deemed to be a petition for winding up by the court (Sec. 523).

Consequences of Winding up:

The consequences of winding up may be explained under the following heads:

(a) Consequences as to Shareholders:

A shareholder is liable to pay the full amount up to the face value of the shares held by him. The liability of the shareholder on this account continues even after the company goes into liquidation although he is, in this case, unknown as a contributory. The liability of a present contributory is the amount remaining unpaid on the shares held by him. A past contributory can only be called upon to pay if the present contributory is unable to pay.

(b) Consequences as to Creditors:

It has already been stated earlier that a company goes into compulsory winding up when it is unable to pay its debts. But it may be wound up on other grounds as well even though it is solvent. Where a solvent company is wound-up, all claims of its creditors, when proved, are fully met. When a company is insolvent and is wound-up, the same rule prevails as in the case of law of insolvency (Sec. 529).

Needless to mention that creditors are of two types, viz. secured and unsecured.

An unsecured creditor may:

(1) Rely on security, and ignore the liquidation, or

(2) Value his security and prove for the deficit, or

(3) Surrender his security and prove for the whole debt.

But as regards unsecured creditors and/or debts of an insolvent company, preferential payments are made first, then other debts are paid pan passu.

The order of priority in paying off debts in a winding up is as under:

(a) Secured Creditors;

(b) Costs and charges for winding up,

(c) Preferential debts;

(d) Floating charges,

(e) Unsecured creditors.

At the same time, if there is any surplus, the same is returned first to preference shareholders and then to equity shareholders.

Preferential Payments (Sec. 530):

Sometimes some unsecured debts are paid in priority to all other debts. These payments are known as preferential payments.

They are:

(i) All revenues, taxes, cesses, and rates due to the Central or State Govts., or to a local authority. The amount should have become due and payable within 12 months of winding up.

(ii) All wages or salary of an employee in respect of services rendered to the company and due for a period not exceeding four months within 12 months before winding up and any compensation payable to any workman under the Industrial Disputes Act, 1947. The amount should not exceed Rs. 1,000 in case of any one claimant.

(iii) All accrued holiday remuneration becoming payable to any employee on account of winding up.

(iv) All amounts due in respect of contributions payable during 12 months before the winding up order under the E.S.I. Act, 1948, or any other law. This, however, does not apply when the company is being wound up voluntarily for the purpose of reconstruction or amalgamation with another company.

(v) All amounts due in respect of any compensation or liability under Workmen’s Compensation Act, 1923, in respect of death or disablement of any employee of the company.

(vi) All sums due to any employee from a provident fund, a pension fund, a gratuity fund, or any other fund for the welfare of the employees, maintained by the company.

(vii) The expenses of any investigation held in pursuance of Sec. 235 or 237, in so far as they are payable by the company.

(c) Consequences as to Servants and Officers:

A winding up order is deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued [Sec. 445(3)]. Such a discharge relieves them from all obligations under their contract of service. A voluntary winding up also operates as a notice of discharge to the company’s servants.

(d) Consequences as to Proceedings against the Company:

If a winding up order has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceedings against the company can be commenced except by the leave of the court. Similarly, if a suit is pending against the company at the date of the winding up order, it cannot be proceeded with against the company, except by the leave of the court—Sec. 446(1).

(e) Consequences as to Costs:

According to Sec. 476, if assets are insufficient to satisfy liabilities, the court may order for payment for the costs, charges and expenses of the winding up out of assets. The payment must be made in such order of priority inter se as the court thinks just.

Similarly, all costs, charges and expenses properly incurred in a voluntary winding up, including the remuneration of the liquidator, are paid out of the assets of the company in priority to all other claims. The payment is, however, subject to the rights of secured creditors—(Sec. 520).

Winding up of Unregistered Companies:

According to Sec. 582, the expression ‘unregistered company.

(a) Shall not include:

(i) A railway company incorporated by any Act of Parliament of the U.K.;

(ii) A company registered under this Act; or

(iii) A company registered under any previous companies’ law and not being a company the registered office whereof was in Burma (Myanmar), Aden, or Pakistan immediately before the separation of that country from India, and

(b) Save as aforesaid, shall include any partnership, association or company consisting of more than 7 members at that time when the petition for winding up the partnership, association or company, as the case may be, is presented before the court.

An unregistered company can wind up under the Companies Act. The procedure is similar to the compulsory winding up with certain minor exceptions. Such companies cannot be wound up voluntarily. If a foreign company, carrying on business in India, ceases to do so, it can be wound up according to the procedure applicable to unregistered companies.

Preparation of the Statement of Affairs:

According to Sec. 454, within 21 days of the date of the winding up order to the appointment of the official liquidator as provisional liquidator, the company has to submit a statement to the official liquidator as to the affairs of the company unless the court otherwise orders. The statement must be in the prescribed form.

It must be verified by affidavit and must contain the following particulars:

(i) The assets of the company, stating separately the cash in hand and cash at Bank and negotiable securities.

(ii) The debts and liabilities of the company;

(iii) Names and addresses of its creditors, stating separately the amount of secured and unsecured debts;

(iv) In the case of secured debts, particularly of the securities held by the Creditors, their value and dates on which they were given;

(v) The debts due to the company and names and addresses of the persons from whom they are due and the amount likely to be realised.

(vi) Such further information as may be required by the official liquidator.

Prescribed Form of Statement of Affairs—[Form No. 57 of the Companies (Court) Rules, 1959]

Form of Statement of Affairs:

Statement as to the affairs of… Ltd. on the…. day of 20….being the date of winding up order appointing provisional liquidator, or the date directed by the official liquidator as the case may be, showing assets of estimated realisable values and liabilities expected to rank.

Liquidator’s Final Statement of Account:

It is the duty of liquidator to realise the assets and disburse the same among those who have a proper claim. He is to prepare a statement showing how much he has realised and how the same would be disbursed. For this purpose he is to prepare a statement of account which is known as Liquidator’s Final Statement of Account.

This account takes the form of Cash Account and the following receipts are shown on the debit side of the account:

(a) Amount realised on sale of fixed assets;

(b) Amount received from delinquent directors and officers of the company;

(c) Contributions made by contributories.

The credit side of the account (i.e., the payment side) shows the following payments:

Rank of Payment:

(a) Secured creditors;

(b) Legal charges; (including the expenses of litigation and other expenses, or cost of winding up);

(c) Remuneration to the liquidator;

(d) Preferential creditors;

(e) Debenture-holders or other creditors (having a floating charge on assets);

(f) Unsecured Creditors;

(g) Preference shareholders (including premium, if any); and

(h) Equity shareholders.

Secured Creditors:

Payment is to be made to secured creditors up to their claims or up to the amount realised by sale of securities held by them, whichever is less. If the creditors dispose of the securities and if it is found that the realisation of such securities are more than their claims, the excess or surplus is to be handed over to the liquidator.

In this case, the surplus is to be shown as a receipt but the payment of secured creditors is not shown in the Liquidator’s Final Statement of Account). But if it is found that the realisation of securities are less than their claims, the deficit is to be added with unsecured creditors.

Ruling:

Liquidators’ Final Statement of Account of the winding up (Members’/Creditors’ Voluntary winding up (Pursuant to Sections 497/509):

1. Name of the company … … …

2. Nature of proceeding … … …

3. Date of commencement of the winding up… … …

4. Name and address of the liquidator:

Statement showing how the winding up has been conducted and the property of the company has been disposed of from…. 20. (Commencement of winding up) to…. 19 (close of winding up).

* State the number; preferential creditors need not be separately-shown if all creditors have been paid in full.

† State face value and class of share.

(1) The following assets estimated to be of the value of Rs.…. have proved to be unrealisable:

(Give details of the assets which have proved to be unrealisable).

(2) Amount paid into the company’s Liquidation Account in respect of:

(a) Unclaimed dividend payable to creditors in winding up Rs. ….

(b) Other unclaimed distributions in the winding up Rs. ……

(c) Money held by the company in trust in respect of dividends or other sum due before the commencements of the winding up to any person as a member of the company Rs. …..

(3) Add here any remarks the liquidator thinks desirable:

I declare that the above statement is true and contains a full and accurate account of the winding up from the commencement to the close of the winding up.

Contributories:

According to Sec. 428 of the Companies Act, the term ‘contributory’ means every person liable to contribute to the assets of a company in the event of its being wound-up. It includes the holder of any shares which are fully paid up. It is to be noted that a holder of fully paid shares is not placed on the list of contributories, as he is no longer liable to make any contribution to the assets of the company, except at his own desire, or in cases where surplus assets are likely to be available for distribution (Re. Aidall Ltd. 1933).

Persons Liable as Contributories:

The following persons are liable as contributories:

(a) Past and Present Members:

Needless to mention here that a member of a limited company shall be liable to contribute the unpaid amount of shares on which he is a contributory, or the amount he has guaranteed to pay in the event of winding up. A past member is also liable to contribute if he ceased to be a member within one year before the commencement of winding up and the present members fail to meet their liabilities.

(b) Legal representatives of a Deceased Member:

The legal representatives of a deceased member shall be liable to contribute to the assets of the company if a contributory dies either before or after he has been placed on the list of contributories.

(c) The Officials Assignee or Receiver of a Contributory:

When a contributory is adjudged insolvent, his assignees in insolvency must be the contributories (Sec. 431).

(d) Liquidator of a Body Corporate:

Sec. 432 states that if a Body Corporate which is a contributory is ordered to be wound up, its liquidator shall be the contributory.

(e) Directors/Managers whose Liabilities are unlimited:

Sec. 427 provides that when a Limited Company is wound up, any director or manager, past or present, whose liabilities are unlimited must be liable as if he were a member of an unlimited company which requires a court’s order. But he shall not be liable if he has ceased to hold office for a year or more before the commencement of winding up.

Settlement of List of Contributories:

Sec. 467(1) lays down that as soon as may be after making a winding up order, the court shall settle a list of contributories, with power to rectify the register of members in all cases where rectification is required in pursuance of this Act.

Where it appears to the court that it will not be necessary to make calls on, or adjusts the right of contributories, the court may dispense with the settlement of the list of contributories. Sec. 467(2) states that in settling the list of contributories, the court shall distinguish between those who are contributories in their own right and those who are contributories as being representatives or liable for debt or others.

Lists of Contributories:

It includes List A and List B.

List A:

It includes the present member of the company, i.e., members whose names appear on the company’s Register of Members at the time of winding up i.e., members at the commencement of winding up.

Needless to mention that the liability of the present member (i.e., List A contributory) is limited:

(i) In case of a company limited by a guarantee, the contribution shall be limited to the guarantee.

(ii) In case of a company limited by shares, they shall not be required to pay exceeding the amount, if any, unpaid on the shares in respect of which he is liable to contribute.

List B:

It includes the past members of the company i.e., those who have ceased to be members within one year preceding the commencement of the winding up.

Liability of the Past Members:

A member in List B (i.e., a past member) is not liable to contribute:

(i) If he has ceased to be a member for one year or upwards before the commencement of the winding up;

(ii) In respect of any debt or liability of the company contracted after he ceased to be a member; and

(iii) Unless it appears to the court that the present members are unable to satisfy the contributions required to be made by them.

Example:

Suppose Mr. X held 500 shares of P. Ltd. of Rs. 10 each. Rs. 8 per share paid up. He transferred his shares on 30th November 1988 to Mr. Y. The company goes into liquidation on 31st March 1989. A debt existing on 30th November remains unpaid. Hence, X can be called upon to pay the debt subject to the maximum limit of Rs. 1,000 (i.e., 500 x Rs. 2) as his total liability was Rs. 2 per share.

Now, if Mr. X would transfer his shares, say, on 20th March 1989, he would have no liability. Or, if Y has paid the amount due on the shares, Mr. X has no liabilities at all, i.e. he is discharged. Similarly, if there are more than one member, each of them will have to pay proportionately (subject to the maximum due on the shares).