Winding up of a Company

winding up

The shareholders of a Company have decided on Winding up of Company. They plan to close the business and pay off the debts and liabilities of the company. Broadly there are 3 options available for winding up a Company, most of the times “voluntary winding-up” option seems to be the most viable for reasons set out in this article.

  1. Company/ Asset Sale;
  2. Defunct Company – section 560;
  3. Voluntary Winding-up.
  1. COMPANY SALE:
  • While “company sale” would be the simplest and fastest method for closing the business, it may be difficult to comprehend the “sale price”.
  • Furthermore, if the Company is sold to the purchaser, the liabilities that may crop up after the sale, but relating to the period prior to the sale, will have to be discharged by the original collaborators, which would imply that each party indemnifies the purchaser from such liabilities.
  1. SECTION 560:

This section authorises the Registrar to strike off the name of a company, which is not carrying on business or is not in operation, from the register. Before the Registrar moves to strike off the name of the company from the register, it must ascertain whether or not the company is carrying on business and whether the available assets are sufficient to meet any liability and costs of liquidation.

  • Under section 560, although the Registrar may strike the name of the company off the register, such action does not materially affect the creditors of the company. Such creditors may enforce their claims against the directors or any other officer, as if the name of the company had not been struck off.
  • The creditors have the liberty to apply for the restoration of the company, if the amount due to the creditor has not been discharged or the creditor has certain grievances against the company. If the court is satisfied with the reasons for restoration, the Court will not shy away from restoring the company.
  • The managing director/whole time director must file an affidavit to the effect that the company has no assets or liabilities and that the company has not been carrying on any business during the last one year. The aforesaid directors must also file an indemnity bond to the effect that they will meet any liability that may arise after the name of the company is struck off.
  1. VOLUNTARY WINDING-UP:
  • A voluntary winding up does not put an end to the corporate existence of the company. The company exists until it is dissolved.
  • Although, the process of winding-up a company takes its time, all formalities with regard to outstanding debts and liabilities are complied with and the company ceases to exist once it is dissolved. However, a voluntary winding up does not operate as a stay of any existing proceedings or prevent the institution of new proceedings.
  • To initiate the process of voluntary winding up, a company must, in its general meeting, pass a special resolution to that effect. Once the resolution is passed, the company must comply with the other requirements of the Companies Act dealing with the procedure for winding up, such as publication of the resolution, timely action, etc. A voluntary winding-up commences when the special resolution is passed, i.e. the company must initiate the winding up process from such date.
  • Once the company passes the resolution for winding-up, it must cease its business activities, except for the beneficial winding up of the business. The directors must make a declaration to the effect that they have made a full inquiry into the affairs of the company and that they believe that the company has no debts, or that it will be able to pay its debts in full within three years from the commencement of the winding up.
  • The company (including its directors) must comply with the following requirements, amongst others, to achieve the voluntary winding-up:
  • Appoint a liquidator for the purpose of winding up the affairs and distribute the assets;
  • Cease to exercise any power, except for intimation of appointment of liquidator;
  • Attend the final general meeting for finalising the accounts, showing how the winding up has been conducted.

SUGGESTIONS:

  • Before initiating any step to either strike off the company, one must ascertain the financial position of the (target) company. If the company has not done any business in the past one year and has no balance in its profit and loss account, it may request the Registrar to strike the name of the company off its records. However, unlike in a winding-up process, there is no provision in section 560 for the distribution of the assets (or their realisable value), if any, to the shareholders. The threat of restoration of the company by a creditor, maybe for the purpose of harassment, is omnipresent.
  • In Winding-up process, on realisation of the value of these assets, the same would be distributed to the shareholders. Voluntary winding-up permits the distribution of the assets (or their realisable value) to the shareholders. Once dissolved, the company ceases to exist.
  • However, one has to look at the facts of the case, before any Company adopt any winding-up route.

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Posted in Law India, Lawyer.