Winding up a company, often referred to as liquidation, comes into play when a company faces financial difficulties and is incapable of meeting its obligations to creditors. It entails a systematic process wherein the company’s assets are liquidated to generate funds for settling its outstanding debts. After all the debts have been satisfactorily settled, any surplus funds are distributed among the shareholders and this marks the formal dissolution of the private limited company registration, bringing an end to its existence.
The winding-up of a company can be executed through two distinct avenues, either by the tribunal’s intervention or voluntarily initiated by the company itself. In this blog, we shall understand the winding up of a company by tribunal in India.
What is Winding Up by Tribunal?
Winding up by tribunal is a type of compulsory winding up that is initiated by an external entity, such as a creditor, and is usually done through a tribunal. The tribunal is a judicial body that has the power to order the winding up of a company on various grounds, such as:
- The company is unable to pay its debts.
- The company’s actions have been detrimental to public order, decency or morality, the security of the state, friendly relations with foreign states, and India’s sovereignty and integrity.
- The company has been conducting its affairs in a fraudulent or unlawful manner.
- The company has made a default in filing its financial statements or annual returns for five consecutive financial years.
- The company has been ordered to be wound up by a tribunal under any other law for the time being in force.
- The tribunal is of the opinion that it is just and equitable that the company should be wound up.
The tribunal can also order the winding up of a company on the application of the Registrar of Companies, the Central Government, the State Government, or a person authorized by the Central Government.
The tribunal can appoint a provisional liquidator or a company liquidator to take charge of the company’s affairs and assets, and to carry out the winding up process. The tribunal can also supervise the winding up process and give directions to the liquidator as it deems fit.
The tribunal can also make orders for the dissolution of the company, the distribution of the assets, the settlement of claims, the audit of accounts, and the disposal of records.
Reasons for Winding Up a Company by the Tribunal
- Non-Payment of Debts Exceeding Rs 1 Lakh- In situations where a company defaults on its debt payments, and the outstanding debt owed to a creditor surpasses Rs 1 lakh, and remains unpaid for a period of 21 days beyond the due date, or if an execution decree is issued in favor of the creditor, the tribunal is authorised to decree the winding up of the company.
- Special Resolution for Winding Up- A company may be subject to winding up by the tribunal if it has passed a special resolution authorising such action.
- Failure of Revival and Rehabilitation for Sick Companies- In the case of financially distressed or “sick” companies where revival and rehabilitation efforts prove unsuccessful, the tribunal has the authority to order the winding up of the company.
- Fraudulent Formation or Conduct of Business- Should it come to light that a company was established through fraudulent means or if there exists substantiated proof of fraudulent business practices, the tribunal is empowered to issue a directive for the winding up of the company.
- Unlawful Purpose or Misconduct by Management- Winding up by the tribunal can be necessary if the company was formed for an unlawful purpose, or if the company’s management is involved in misconduct or misfeasance.
- Tribunal’s Determination for the Good Faith of the Company- The tribunal has the authority to decree the winding up of a company if it determines that such action is essential for the overall health and integrity of the company.
Who can be Petitioners for Winding Up of a Company?
The right to file a petition for the winding up of a company is granted to various entities as stipulated under Section 272 of the Act. The following parties are eligible to present such a petition:
- The Company Itself: The company in question has the authority to file a winding-up petition.
- Shareholders or Contributors: Shareholders or contributors of the company who possess fully paid-up shares also have the authority to instigate the winding-up process by submitting a petition.
- Contingent or Prospective Creditors: Those creditors whose debts remain unpaid and are either contingent or prospective in nature have the right to file a winding-up petition.
- Registrar: The registrar responsible for company affairs is empowered to file a winding-up petition.
- Liquidators: Liquidators appointed for the winding up of a company may file a petition to initiate the process.
What are the Related Laws under the Company Act, 2013?
The Company Act, 2013 is the main law that governs the winding up of a company by tribunal in India. The Act provides for the following provisions related to the winding up of a company by tribunal:
| Section | Provision |
|---|---|
| 271 | Specifies the circumstances under which the tribunal may order the winding up of a company |
| 272 | Specifies the persons who may file a petition for the winding up of a company by tribunal, and the form and manner of the petition |
| 273 | Specifies the powers of the tribunal to order the winding up of a company or to dismiss the petition or to make any other order as it thinks fit |
| 274 | Specifies the directions that the tribunal may give to the company or the creditors or any other person in relation to the winding up petition |
| 275 | Specifies the appointment and removal of the provisional liquidator by the tribunal |
| 276 | Specifies the effect of the appointment of the provisional liquidator on the powers of the board of directors and the status of the company |
| 277 | Specifies the powers and duties of the provisional liquidator |
| 278 | Specifies the appointment and removal of the company liquidator by the tribunal |
| 279 | Specifies the effect of the winding up order on the status and powers of the company and the board of directors |
| 280 | Specifies the powers and duties of the company liquidator |
| 281 | Specifies the submission of the report by the company liquidator to the tribunal and the creditors and the members of the company |
| 282 | Specifies the appointment and constitution of the advisory committee to assist the company liquidator in the winding up process |
| 283 | Specifies the custody and vesting of the company’s assets in the company liquidator |
| 284 | Specifies the settlement of the list of contributories and the application of the assets in the winding up process |
| 285 | Specifies the examination of the promoters, directors, and other officers of the company by the tribunal or the company liquidator |
| 286 | Specifies the arrest and seizure of the property of the persons who are liable to pay money to the company or who have misapplied or retained the company’s property |
| 287 | Specifies the books and papers of the company to be kept by the company liquidator and the inspection and audit of the same |
| 288 | Specifies the payment of the debts of the company and the ranking of the claims in the winding up process |
| 289 | Specifies the payment of the surplus, if any, to the members of the company after the payment of the debts and the expenses of the winding up process |
| 290 | Specifies the dissolution of the company by the tribunal after the completion of the winding up process |
| 291 | Specifies the appeal against the orders of the tribunal in the winding up process |
| 292 | Specifies the stay of the winding up proceedings by the tribunal or the appellate tribunal |
| 293 | Specifies the continuance of the suits and other legal proceedings against the company after the winding up order |
| 294 | Specifies the voluntary winding up of the company not to stop after the winding up order by the tribunal |
| 295 | Specifies the committee of inspection to supervise the winding up process and to assist the company liquidator |
| 296 | Specifies the powers of the company liquidator to accept the shares or securities of another company as a consideration for the sale of the company’s assets |
| 297 | Specifies the power of the Central Government to order the winding up of a company on the ground of national security or public interest |
| 298 | Specifies the power of the Central Government to appoint inspectors to investigate the affairs of the company before or after the winding up order |
| 299 | Specifies the power of the Central Government to direct the company liquidator to prosecute the persons who are guilty of any offense in relation to the company |
| 300 | Specifies the power of the Central Government to enforce the orders and directions of the tribunal in the winding up process |
| 301 | Specifies the power of the Central Government to make rules for the winding up of a company by tribunal |
| 302 | Specifies the power of the tribunal to make regulations for the winding up of a company by tribunal |
| 303 | Specifies the application of the provisions of the Act to the winding up of a company by tribunal |
What are the Challenges Faced by Tribunals in the Winding Up Process?
| Challenge | Description |
|---|---|
| Delays | The process may take a long time due to the backlog of cases, the lack of infrastructure and manpower, the complexity of the issues, and the frequent appeals and stay orders |
| Valuation | The valuation and realization of the assets of the company may be difficult, especially in the case of intangible assets, disputed assets, or assets located in different jurisdictions |
| Conflicts | The conflicts and disputes among the stakeholders, such as the creditors, the shareholders, the employees, and the government, may arise over the claims, the distribution, and the priority of the assets |
| Risks | The risks of fraud, mismanagement, and malpractice by the company or the liquidator may occur, such as the siphoning of funds, the falsification of records, the destruction of evidence, or the collusion with the interested parties |
| Resources | The resources and expertise required to manage the liquidation process efficiently and effectively may be inadequate, such as the legal, financial, technical, and administrative support |
Procedure for Winding Up of a Company by Tribunal in India
1. Admission of Winding Up Petition: The petition for winding up of a company by tribunal in India is admitted by the tribunal when it is accompanied by the statement of affairs as prescribed in the specified form.
2. Creditor’s Authorisation: Prior to submitting a winding-up petition, creditors must secure permission from the tribunal. The tribunal will consider the petition only if there is a clear, initial indication of the necessity for the company’s liquidation.
3. Registrar’s Submission: Additionally in the process of winding up of a company by tribunal in India, a copy of the winding-up petition must be lodged with the registrar who has to furnish their assessment to the tribunal in 60 days.
4. Form and Attachments: The petition is submitted as per the Form NCLT 1, Form NCLT 2 and Form NCLT 6.
5. Tribunal’s Order and Provisional Liquidator: The tribunal, within 90 days of receiving the petition, will pass an order for winding up under Section 273. It can also make an interim order for the appointment of a liquidator. Notice is served to relevant parties for the appointment of the provisional liquidator.
6. Objections and Director’s Duties: In the process of winding up of a company by tribunal in India, under Section 274, if the tribunal has prima facie reason to order winding up, it can do so. Objections can be raised within 30 days of the order. Also, the directors are required to submit the books of accounts to the liquidator within 30 days of the order.
7. Declaration if there is any Conflict of Interest: The official liquidator has the right to declare any conflict of interest regarding their appointment within seven days, as per Section 275. The same liquidator can be removed for misconduct, fraud, misfeasance, or professional incompetence under Section 276.
8. Notification and Winding-up Committee: The registrar, under Section 277, notifies in the official gazette the winding up of a company by tribunal in India. The official liquidator, within three weeks, applies to the tribunal for the constitution of the Winding-up Committee, which provides monthly reports and a final report after the company’s dissolution.
9. Legal Proceedings and Jurisdiction: After completing winding up of a company by tribunal in India, no suits or legal proceedings can be entertained against the company, as stated in Section 279. The tribunal retains jurisdiction to dispose of pending cases of the company under Section 280.
10. Final Report and Timely Completion: The liquidator must submit the final report to the tribunal within 60 days of winding up the company, as per Section 281. Section 282 requires the entire dissolution process to be completed within a specified timeframe.
11. Distribution of Assets and Fraud Proceedings: The company carries the responsibility of liquidating all its assets and prioritising the settlement of its debts to creditors. Any remaining funds are then apportioned among the shareholders if the company is not involved in fraudulent acts.
FAQs
How can I avoid the winding up of my company by tribunal?
The best way to avoid the winding up of your company by tribunal is to ensure that your company is financially sound, legally compliant, and ethically responsible. You should also try to resolve any disputes or claims with your creditors, shareholders, employees, or government authorities amicably and promptly. If you receive a winding up petition from any party, you should consult a legal expert and take appropriate steps to defend your company or negotiate a settlement.
How long does it take to wind up a company by tribunal?
The time taken to wind up a company by tribunal depends on various factors, such as the size and nature of the company, the complexity and number of the issues involved, the cooperation and consent of the stakeholders, and the efficiency and availability of the tribunal and the liquidator. There is no fixed time limit for the winding up process, but it may take anywhere from a few months to several years.
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