MEANING OF WINDING UP

Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realised assets (or from contributions from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The two terms winding up and liquidation are used interchangeably. According to Prof. Gower, winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called liquidator, is appointed and he takes control of the company collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

MODES OF WINDING UP
There are three modes of winding up of a company, viz., 1. Winding up by the Court (Section 433 to 483). 2. Voluntary winding up (Section 484 to 521). This may be (1) members voluntary winding up, or (2) creditors voluntary winding up. 3. Winding up subject to supervision of Court.

VOLUNTARY WINDING UP (Section 484 to 520)

Voluntary winding up means winding up by the members or creditors of a company without interference by the Court. The object of a voluntary winding up is that the company, i.e. the members as well as the creditors, are left free to settle their affairs without going to the Court. They may however apply to the Court for any directions, if and when necessary. Circumstances in which a company may be wound up voluntarily (Section 484): A company may be wound up voluntarily (1) By passing an ordinary resolution: When the period, if any fixed for the duration of a company by the Articles has expired, the company in general meeting may pass an ordinary resolution for its voluntary winding up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company is to be dissolved, has occurred. (2) By passing a special resolution: A company may at any time pass a special resolution that it be wound up voluntarily. No reasons need be given where the members pass a special resolution for the voluntary winding up of the company. Even the Articles cannot prevent the exercise of this statutory right. Commencement of voluntary winding up (section 486): A voluntary winding up shall be deemed to commence at the time when the resolution (ordinary or special, as the case may be) for its voluntary winding up is passed. Advertisement of resolution (Section 485): Within 14 days of the passing of the resolution for voluntary winding up of the company, the company shall give notice of the resolution by

advertisement in the Official Gazette, and also in some newspaper circulating in the district of the registered office of the company.

TYPES OF VOLUNTARY WINDING UP

A voluntary winding up may be a: 1. members voluntary winding up, or 2. creditors voluntary winding up.

1. MEMBERS VOLUNTARY WINDING UP

Declaration of solvency (Section 488): In a voluntary winding up of a company if a declaration of its solvency is made in accordance with the provisions of section 488, it is a members voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts full within 3 years from the commencement of the winding up. The declaration shall be verified by an affidavit. The declaration shall have effect only when it is (a) made within five weeks immediately before the date of the resolution, 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 (i) 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, (ii) the balance sheet of the company, and (iii) a statement of the companys assets and liabilities as on the last mentioned date. A winding up in the case of which a declaration has been made and delivered is referred to as a member voluntary winding up and a winding up in the case of which a declaration has not been so made and delivered is referred to as a creditors voluntary winding up. Provisions applicable to a members voluntary winding up: Section 490 to 498 shall apply in relation to a members voluntary winding up (section 489). The provisions of these Sections are as follows: 1. Appointment and remuneration of liquidators (section 490): The company in general meeting shall appoint one or more liquidators for the purpose of winding up its affairs and distributing its assets. It shall also fix the remuneration, if any, to be paid to the liquidator or liquidators. Any remuneration so fixed shall not be increased in any circumstances, The liquidator shall not take charge of his office before his remuneration is fixed as aforesaid. 2. Boards powers to cease on appointment of a liquidator (section 491): On the appointment of a .liquidator, all the powers of the Board of directors, the managing or whole time directors, and manager, shall cease except when the company in general meeting or the liquidator may sanction them to continue. 3. Power to fill vacancy in office of liquidator (section 492): If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in general meeting may fill the vacancy. For this purpose a general meeting may be convened by any contributory or by the continuing liquidator or liquidators, if any.

4. Notice of appointment of liquidator to be given to Registrar (section 493): The company shall give notice to the Registrar of the appointment of a liquidator or liquidators. It shall also give notice of every vacancy occurring in the office of liquidator and of the names of the liquidators appointed to fill every such vacancy. The notice shall be given by the company within 10 days of the event to which it relates. 5. Power of liquidator to accept shares, etc. as the consideration for sale of property (section 494): This was discussed in detail in the Chapter on Compromises, Amalgamations and Reconstructions. 6. Duty of liquidator to call creditors meeting in case of insolvency (section 495): if the liquidator is at any time of opinion that the company will not be able to pay its debts in full within the period stated in the declaration, he shall forthwith summon a meeting of the creditors. He shall lay before the meeting a statement of the assets and liabilities of the company. Thereafter the winding up shall become creditors voluntary winding up. 7. Duty to call general meeting at the end of each year (section 496): In the event of the winding up continuing for more than 1 year the liquidator shall call a general meeting of the company at the end of the first year from the commencement of the winding up. Likewise, he shall call a general meeting at the end of each succeeding year. He shall lay before the meeting an account of his acts and dealings and of the conduct of the winding up during the year. 8. Final meeting and dissolution (section 497): As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up showing how the winding up has been conducted and how the property of the company has been disposed of. He shall then call a general meeting of the company and lay before it the accounts showing how the winding up has been conducted. The meeting shall be called by advertisement (a) specifying the time, place and object of the meeting; and (b) published not less than one month before the meeting in the Official Gazette, and also in some newspaper circulating in the district of the registered office of the company. Within one week after the meeting, the liquidator shall send to the Registrar and the Official Liquidator a copy each of the account and shall make a return to each of the holding of the meeting and of the date thereof. If a quorum is not present at the final meeting, the liquidator shall make a return that the meeting was duly called but could not be held for want of quorum. The Registrar on receiving the account and return shall register them. The Official Liquidator on receiving them, shall make a scrutiny of the books and papers of the company. The liquidator of the company and present officers shall give the Official Liquidator all reasonable facilities to make the scrutiny. On such scrutiny the Official Liquidator shall make a report to the Court. If the report shows that the affairs of the company have been conducted in a manner not prejudicial to the interests of its members or to public interest, then from the date of the submission of the report to the Court, the company shall be deemed to be dissolved. 9. Provisions as to annual and final meeting in case of insolvency (section 498): If in the case of a members voluntary winding up the liquidator finds that the company is insolvent, sections 508 and 509 which deal with the duty of the liquidator to call a meeting of the company and of creditors at the end of each year (section 508) and final meeting and dissolution (section 509) in case of a creditors voluntary winding up shall apply as if the winding up were a creditors voluntary winding up and not a

members voluntary winding up. It should be noted that in such a case section 508 and 509 shall apply to the exclusion of sections 496 and 497.

2. CREDITORS VOLUNTARY WINDING UP:

A voluntary winding up of a company in which declaration of its solvency is not made is referred to as a creditors voluntary winding up. Provisions applicable to creditors voluntary winding up Sections 500 to 509 shall apply in relation to a creditors voluntary winding up (section 499). The provisions of these Sections are as follows: 1. Meeting of creditors (section 500): The company shall call a meeting of the creditors of the company on the day on which there is to be held the general meeting of the company at which the resolution for voluntary winding up is to be proposed, or on the next day. It shall send notices of the meeting to the creditors by post simultaneously with the sending of the notices of meeting of the company. It shall also cause notice of the meeting of the creditors to be advertised once at least in the Official Gazette and once at least in 2 newspapers circulating in the district of the registered office of the company. The Board of directors of the company shall cause a full statement of the position of the companys affairs together with a list of the creditors and the estimated amount of their claims to be laid before the meeting. It shall also appoint one of their members to preside at this meeting. It shall be the duty of the director so appointed to attend the meeting and preside thereat. 2. Notice of resolution to be given to Registrar (Section 501): Notice of any resolution passed at the creditors meeting shall be given by the company to the Registrar within 10 days of the passing thereof. 3. Appointment of liquidator (Section 502): The creditors and the members at their respective meetings may nominate a liquidator. If they nominate different persons, the creditors nominee shall be the liquidator. But any director, member or creditor of the company may apply to the Court for an order that the person nominated as liquidator by the company or any other person shall be the liquidator. The application shall be made to the Court within 7 days after the date on which the nomination was made by the creditors. If no person is nominated by the creditors, the person nominated by the members shall be the liquidator. Likewise, if no person is nominated by the company, the person nominated by the creditors shall be the liquidator. 4. Appointment of committee of inspection (section 503): The creditors at their meeting may if they think fit, appoint a committee of inspection consisting of not more than 5 persons. If such a committee is appointed, the company may also at a general meeting appoint not more than 5 members to the committee. However, the creditors may, if they think fit resolve that all or any of the persons appointed by the company ought not to be members of the committee of inspection. If the creditors and members do not agree on a common list, the Court may constitute a committee of inspection. 5. Liquidators remuneration (section 504): The committee of inspection, or if there is no such committee, the creditors, may fix the remuneration of the liquidator. Where the remuneration is not so fixed, it shall be determined by the Court. The remuneration shall not be increased in any circumstances.

6. Boards powers to cease on appointment of liquidator (section 505): On the appointment of a liquidator, all the powers of the Board of directors shall cease. But the committee of inspection, or if there is no such committee, the creditors in general meeting, may sanction the continuance of the Board. 7. Power to fill vacancy in office of liquidator (Section 506): If a vacancy occurs by death, resignation or otherwise, in the office of a liquidator (other than a liquidator appointed by, or by the direction of, the Court), the creditors in general meeting may fill the vacancy. 8. Power of liquidator to accept shares etc., as consideration for sale of property (Section 507): The provisions of section 494 (discussed in previous chapter) shall apply in the case of a creditors voluntary winding up. However the powers of the liquidator under section 494 shall not be exercised except with the sanction either of the Court or of the committee of inspection. 9. Duty of liquidator to call meeting at the end of each year (Section 508): The liquidator shall call a general meeting of the company and a meeting of the creditors every year, within 3 months from the close of every year. This will be so if the winding up continues for more than 1 year. He shall lay before the meeting an account of his acts and dealings and of the conduct of winding up during the preceding year and position of the winding up. 10. Final meeting and dissolution (Section 509): As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up showing how the winding up has been conducted and how the property of the company has been disposed of. He shall then call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meeting and giving explanation therefor. Thereafter the procedure shall be the same as laid down in section 497.

Members and creditors voluntary winding up compared

1. Declaration of solvency: In case of a members voluntary winding up, there is declaration of solvency. In case of a creditors voluntary winding up, there is no such declaration. 2. Control of winding up: In a members voluntary winding up, the member s control the winding up of the company and the creditors do not participate directly as the company makes a declaration of solvency. In a creditors voluntary winding up, the creditors control the winding up of the company as the company is deemed to be insolvent. 3. Meetings: In a members voluntary winding up, there is no meeting of creditors. In a creditors voluntary winding up, whenever there is a meeting of contributories, there is a corresponding meeting of creditors. 4. Appointment of liquidator: In a members voluntary winding up, the liquidator is appointed by the company and his remuneration is fixed by the company. In a creditors voluntary winding up, he is appointed by the creditors and his remuneration is fixed by the committee of inspection or, if there is no such committee, by the creditors. 5. Committee of inspection: There is no committee of inspection in a members voluntary winding up; in a creditors voluntary winding up the creditors may appoint a committee of inspection. 6. Powers of liquidator: In a members voluntary winding up, the liquidator can exercise certain powers with the sanction of a special resolution of the company; in a creditors voluntary winding up,

he can do so with the sanction of the Court or the committee of inspection or of a meeting of the creditors.

WINDING UP SUBJECT TO SUPERVISION OF COURT (Section 522 to 527):

Power of Court to order winding up subject to supervision by Court (section 522): Winding up subject to the supervision of the Court presupposes a voluntary winding up of a company. 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. The Court may give such liberty to creditors, contributories or others to apply to it as it thinks just. Right to present winding up petition (section 440): Where a company is being wound up voluntarily subject to the supervision of the Court, a petition for is winding up by the Court may be presented by (a) any person authorised to do so under section 439 (which deals with provisions as to applications for winding up) : or (b) the Official Liquidator: The Court shall not make a winding up order on the petition presented to it unless it is satisfied that the voluntary winding up or winding up subject to the supervision of the Court cannot be continued with due regard to the interests of the creditors or contributories or both. Effect of petition for winding up (section 523): A petition for the continuance of a voluntary winding up subject to the supervision of the Court shall be deemed to be a petition for winding up by the Court. Power of Court to appoint or remove liquidators (Section 524): Where an order is made for a winding up subject to supervision of the Court, the Court may, by that or any subsequent order, appoint an additional liquidator or liquidators. The Court may remove any such liquidator and fill any vacancy occasioned by the removal, or by death or resignation. The Court may appoint the Official Liquidator as a liquidator. It may also appoint or remove a liquidator on an application made by the Registrar.

CONSEQUENCES OF WINDING UP
1. Consequences as to shareholders/members In a company limited by shares, a shareholder is liable to pay the full amount up to the face value of the shares held by him. His liability continues even after the company goes Into liquidation, but he is then described as a contributory. Aontributory may be present or past. The liability of present and past contributories has already been discussed in this Chapter. In a company limited by guarantee, the members are liable to contribute up to the amount guaranteed by them. 2. Consequences as to creditors (1) Where the company is solvent (Section 528): Where a company is being wound up all debts payable on a contingency and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company. A just estimate of the value of such debts or claims shall be made. Where a solvent company is wound up all claims of creditors, when proved, are fully met.

(2) Where the company is insolvent (Section 529): Where a company is insolvent and is wound up, the same rules shall prevail as in the case of insolvency with regard to: (a) debts provable; (b) the valuation of annuities and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors. The security of every secured creditor shall, however, be deemed to be subject to a, pari passu charge in favour of the workmen to the extent of the workmens portion therein. Where a secured creditor instead of relinquishing his security and proving debt, opts to realise his security (a) the liquidator shall be entitled to represent the workmen and enforce the workmens charge; (b) any amount realised by the liquidator by way of enforcement of the workmens charge shall be applied rateably for the discharge of workmens dues; and (c) the debt due to the secured creditor or the amount of the workmens portion in his security, shall rank pari passu with the workmens dues for the purposes of section 529 -A (which deals with overriding preferential payments). All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they are entitled to make. 3. Consequences as to servants and officers A winding up order shall be deemed to be a notice of discharge to the officers and employees of the company, except when the business of the company is continued. Such a discharge shall relieve them of all obligations under their contract of service. A voluntary winding up shall also operate as a notice of discharge to the companys servants. 4. Consequences as to proceedings against the company When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding against the company shall be commenced except by leave of the Court. Similarly if a suit is pending against the company at the date of the winding up order, it shall not be proceeded with against the company, except by leave of the Court. In a voluntary winding up also, the Court may restrain proceedings against the company if it thinks fit. 5. Consequences as to costs If assets are insufficient to satisfy liabilities, the Court may order for payment of the costs, charges and expenses of the winding up out of the assets of the company. The payment shall 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, shall be paid out of the assets of the company in priority to all other claims. The payment shall, however, be subject to the rights of secured creditors.