A company is an artificial or juristic person; its birth happens through incorporation under the provisions of the Companies Act, and it is dissolved through the winding-up process. The company is not dissolved once the winding-up procedure starts. It still has corporate status and authority. A company is wound up when its existence is terminated and its assets are managed for the benefit of its creditors and members.
The following discussion will cover the process, justifications, and ramifications of having a company wound up by a tribunal.
Chapter XX of the 2013 Act, which sets out the framework for winding up the company, has not yet been notified. Since the adoption of the Insolvency and Bankruptcy Code in 2016, a company can now, under Section 270 only be wound up exclusively by the Tribunal under the Companies Act of 2013. As a result, Sections 304 to 323 of the Act that stated voluntary winding up has been removed.
WINDING UP BY TRIBUNAL UNDER 2013 ACT:
Section 271 of the Act deals with the circumstances based on which a company could be wound up by the tribunal. In brief, the tribunal can wind up the company under the following circumstances:
- The special resolution passed by the company to that effect
- Threat to the sovereignty and integrity of India.
- Fraudulent purpose.
- Error in filing the financial statements or annual returns
- Just and equitable cause
- SPECIAL RESOLUTIONS:
If the company has passed a special resolution asking for the tribunal to wind it up, the tribunal may do so as long as it does not harm the general public or the firm’s interests.
- ACTS AGAINST SOVEREIGNTY:
Whereas if a company compromises India’s sovereignty and integrity, the tribunal may impose sanctions, and the company would suffer the consequences of winding up.
- FRAUDULENT CONDUCT OF AFFAIRS:
Only the Registrar or another person authorized by the Central Government may seek the Tribunal’s permission to wind up the company under this clause. If the company’s activities are being handled fraudulently or if the company was formed for defrauding or illicit purposes, the Tribunal may order its dissolution on such an application. Also, the company may be wound up if the individuals involved in the company’s creation or administration of its activities have been guilty of fraud, misfeasance, or misconduct in connection therewith.
- DEFAULT IN FILING FINANCIAL STATEMENT
The tribunal shall dissolve the company under this provision if it fails to file its financial statements or annual reports with the Registrar for five consecutive accounting years.
- JUST AND EQUITABLE CAUSE:
The additional grounds mentioned above should not be construed as ejusdem generis with the clause. In cases where the court determines that it would be unwise to keep a company alive, it may, on this independent basis, order that the company is wound up. Here are some examples of just and equitable causes:
- If a change in circumstances or a change in the law renders the company’s legal purpose illegal, the tribunal may dissolve the company for just and equitable reasons.
- The disappearance of substratum:
In Mohan Lal and Anr v Grain Chambers Ltd., the Apex Court has observed that
“The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.”
- If the company’s management is at a standstill, the tribunal will break the standstill by issuing a winding-up order .
- If the company’s operations can only be carried on at a loss, there is a legitimate and equitable reason for the tribunal to wind it up.
- If the principal shareholders, in their capacity, adopt any aggressive or oppressive policy toward the minority, the company may be wound up on this cause, claiming that it is just and equitable.
POSITION UNDER THE 1956 ACT:
Section 433 of the 1956 Act deals with circumstances in which a company may be wound up by a tribunal. In addition to the above five clauses, it also had the following:
- If the statutory report is not delivered to the registrar on time or the statutory meeting is not held,
- If the company does not begin operations within a year of its incorporation or suspends operations for an entire year,
- 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,
- If the company is unable to pay its debts,
- If the Tribunal thinks that the company should be wound up under the circumstances specified in Section 424G;
WHO CAN MAKE WINDING UP PETITION?
Section 272 of the Act describes the persons who can apply the petition of winding up and they are:
- “The company itself;
- The creditors;
- Any contributories;
- The registrar;
- Any person authorized by the central government or
- Any person authorized by the central and state government.”
COMMENCEMENT OF COMPULSORY WINDING UP:
The winding-up process does not start on the date of the order. It will be assumed to have started when the petition was presented. However, if a special resolution is passed, the winding up will be considered to have begun when the resolution was adopted.
Within seven days following the order’s passage, the tribunal must transmit the notice of the winding-up order to the company liquidator and the registrar. The registrar is then required to endorse and publish the notice in the official gazette. The company liquidator will take possession of and control over the company’s assets once the winding-up orders have been issued and he has been appointed. All of the company’s resources and assets will be regarded as being in the custody of the tribunal. Then the liquidator must apply to the tribunal for the formation of a winding-up committee to support and keep track of the development of the liquidation proceedings within 3 weeks of the date of the order. The liquidator is expected to deliver a report to the tribunal every month, along with the minutes of the committee meetings that have been officially signed by the committee members, until the final report for the company’s dissolution is filed before the tribunal. The draft final report that has been prepared by the company liquidator will be scrutinized and approved by the winding-up committee. The acceptable final report must be sent to the tribunal for it to issue the dissolution order.
The order for winding up is taken to represent a notice of discharge to the company’s officers and an employee unless the company’s operations are continued for the benefit of the firm’s winding up. Unless the tribunal orders differently, any disposal of the company’s assets, any transfer of shares, or any change in the status of the members made after the start of the winding-up process would be invalid. Further, any seizure, distress, enforcement of an order, or sale of any property without the tribunal’s permission after the beginning of the winding-up process is invalid.
DISSOLUTION OF COMPANY BY TRIBUNAL:
The company liquidator, appointed by the tribunal, must apply to the tribunal for the dissolution of the company under Section 302 of the 2013 Act after the company’s affairs have been fully wound up. The tribunal shall issue an order for the company’s dissolution following receipt of the report from the company liquidator or in any other circumstance where it determines that it is just and reasonable to order dissolution. Effective as of the order’s date, the company shall be dissolved.
The foregoing analysis of the 2013 Act shows that the winding up should not be invoked when other effective remedies are available. The tribunal’s discretionary authority to order the winding up may not be used if doing so would be detrimental to the interests of the company or the general public.
Author(s) Name: Nithya K (SDM Law College)
 Insolvency and Bankruptcy Code 2016
 Companies Act 2013, s. 270.
 Companies Act 2013, s. 271.
 Companies Act 2013, s. 271(a)
 Companies Act 2013, s. 271(b)
 Companies Act 2013, s. 271(c)
 Companies Act 2013, s. 271(d)
 Companies Act 2013, s. 271(e)
 Mohan Lal and Anr v Grain Chambers Ltd (1968) AIR 772
 Companies Act 1956, s. 433
 Companies Act 2013, s. 272
 Companies Act 2013, s. 357
 Companies Act 2013, s. 277
 Companies Act 2013, s. 283
 Companies Act 2013, s. 277
 Companies Act 2013, s. 278
 Companies Act 2013, s. 335
 Companies Act 2013, s. 302