Winding up of a Company by Samidha Hegde@Lexcliq

What is Winding Up or Liquidation of a Company?

The winding up or liquidation of a company is the process by which a company’s assets are collected and sold in order to pay its debts. Any monies remaining after all debts, expenses and costs have been paid off are distributed amongst the shareholders of the company. When the winding up has been completed, the company is formally dissolved and it ceases to exist.

Broadly speaking, a company can be wound up in one of two ways. First, the Court can compulsorily wind up a company. Secondly, the shareholders or the creditors of the company can themselves apply to wind up the company in proceedings known as “voluntary winding up”.  The following is a brief overview of compulsory winding up.

What are the different ways in which an individual can windup a Company?

A company can be wound up in two different ways-

Voluntary winding up of a Company

Compulsory winding up of a company

 

Voluntary wind up: Voluntary wind up can be commenced either by special resolution or a resolution taken during a general body meeting. By violating any of the terms and conditions of the Memorandum of Association (MOA), the winding up can be executed. Similarly, due to insufficient financial funds or the inability to clear debts, a company can be wound up. The company requires a resolution from the directors to sell off all assets of the company or to transfer the stakes to another entity.

Compulsory wind up: The compulsory winding up of a company can be executed upon the order of a tribunal or a court by passing a special resolution proposing a court intervention made by the directors during the company’s board meeting.

Identically, if any official of the company files a petition to a court or a tribunal, or if the company has indulged in any fraudulent/unlawful activities, it must be wound up compulsorily

 

Consequences of the winding up order In case the Tribunal issues a winding up order against the company, the following consequences will follow:

  1. The Tribunal shall appoint an official liquidator or liquidator from the panel maintained by the Central Government as company liquidator.
  2. The order for winding up shall operate in favour of all the creditors and contributories of the company as if it has been made out on the joint petition of creditors and contributories.
  3. The winding up order shall be deemed to be notice of discharge to the officers and employees of the company except when the business of the company is continued.
  4. The powers of the board of directors will terminate and they will now vest in the official liquidator, who shall by virtue of his office become the liquidator of the company. 5. No suit or other legal proceedings shall be commenced, or if pending at the

 Conclusion

However, giving a restrictive meaning to section 397/398 of the Companies Act, 1956 is not in the interests of the minority shareholders. It is also equally true that the frivolous litigation misusing section 397/398 of the Companies Act, 1956 is to be discouraged at the initial stage itself considering the market dynamics and the impact.

  1. The CLB can certainly look into the concluded proceedings, but, can not give a different finding on the same issue concluded by a Competent Court.
  2. The Petitioners approaching the CLB can refer to the concluded proceedings; however, the petitioner may not be able to get relief with the similar or same grievances raised in the concluded proceedings.
  3. Irrespective of pendency of any proceedings between the majority and the minority, the CLB can entertain a petition under section 397/398 of the Act and the CLB will take an appropriate decision as to the issue of grant of relief or the maintainability of a petition under those circumstances.
  4. When it comes to the issue of applicability of settled legal principles like Res Judicata or Res Judice, the CLB will exercise its discretion based on the facts of the case and no hard and fast rule can be laid in this regard.

 

References-

https://enterslice.com/winding-up-of-a-company

https://www.mondaq.com/india/corporate-and-company-law/938456/winding-up-of-company-a-statutory-glance-part-1

https://vakilsearch.com/close-your-private-limited-company

 

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