Winding up, also known as liquidation, refers to the process of bringing a company’s operations to an end and distributing its assets to its creditors and shareholders. It can occur voluntarily or involuntarily and involves the realization of the company’s assets, settlement of its liabilities, and dissolution of its legal existence. There are different concepts and modes of winding up, which are explained below:
Winding up is a legal process that marks the end of the life of a company. It involves the realization and distribution of the company’s assets to its creditors and the settlement of its liabilities. The primary objective of winding up is to ensure an orderly and equitable distribution of the company’s assets and to bring a final resolution to its affairs.
Modes of Winding Up:
Voluntary Winding Up:
Voluntary winding up occurs when the members or shareholders of a company resolve to wind up the company voluntarily. There are two types of voluntary winding up:
- Members’ Voluntary Winding Up: This mode of winding up is initiated when the company is solvent and the members believe that the company has accomplished its objectives or is unable to continue its business. In a members’ voluntary winding up, the company’s assets are more than its liabilities, and the company is able to pay its debts in full within a specified period. The members appoint a liquidator to oversee the winding up process and distribute the assets to the members.
- Creditors’ Voluntary Winding Up: This mode of winding up is initiated when the company is insolvent, meaning its liabilities exceed its assets or it is unable to pay its debts as they become due. In a creditors’ voluntary winding up, the directors of the company make a declaration of insolvency and call a meeting of creditors. The creditors appoint a liquidator who takes charge of the winding up process and realizes the assets to pay off the company’s debts.
Compulsory Winding Up:
Compulsory winding up, also known as winding up by the court, occurs when the court orders the winding up of a company. It can be initiated by various parties, including creditors, shareholders, regulatory authorities, or the company itself. The court may order the winding up if the company is unable to pay its debts, has acted in a fraudulent or unlawful manner, or it is just and equitable to wind up the company. In compulsory winding up, the court appoints an official liquidator to oversee the winding up process and the distribution of assets among the creditors.
Winding Up Under the Supervision of the Court:
Winding up under the supervision of the court is a hybrid mode of winding up that falls between voluntary winding up and compulsory winding up. It is initiated voluntarily by the company, but the court supervises the winding up process to ensure the interests of the stakeholders are protected. The court appoints a provisional liquidator who works in collaboration with the company’s directors and shareholders to facilitate the orderly winding up of the company.
Winding Up by the Tribunal:
Under certain jurisdictions, a specialized tribunal may have the authority to order the winding up of a company. This mode of winding up is similar to compulsory winding up, but the decision is made by the tribunal instead of the court. The tribunal appoints a liquidator to carry out the winding up process and distribute the assets.
The winding up process involves various steps, including the appointment of a liquidator, realization of assets, settlement of liabilities, and distribution of surplus assets (if any) to the shareholders. The liquidator has the responsibility to act in the best interests of the company’s stakeholders and ensure a fair and equitable distribution of the company’s assets.
It’s important to note that the specific provisions and procedures related to winding up may vary across jurisdictions and are governed by the company laws and regulations of each respective jurisdiction. The process of winding up can be complex and requires compliance with legal requirements and the involvement of various stakeholders, including shareholders, creditors, regulatory authorities, and the appointed liquidator.
During the winding up process, the liquidator has several key responsibilities and duties, including:
- Realization of Assets: The liquidator is responsible for identifying, collecting, and realizing the company’s assets. This may involve selling the assets, settling outstanding contracts or legal claims, and converting assets into cash.
- Settlement of Liabilities: The liquidator must settle the company’s liabilities, including paying off creditors, employees, and other outstanding obligations. The liabilities are settled in accordance with the established priority of payments as prescribed by the law.
- Verification of Claims: The liquidator examines and verifies the claims submitted by creditors. Claims that are valid and verified are paid in the prescribed order of priority. The liquidator may also resolve any disputes or objections regarding the validity or quantum of claims.
- Distribution of Assets: Once the assets have been realized and the liabilities settled, the liquidator distributes the remaining assets to the shareholders or other entitled parties. The distribution is made in accordance with the legal provisions and the rights of the stakeholders.
- Investigation and Reporting: The liquidator may conduct investigations into the affairs of the company, including the conduct of its directors and any fraudulent or wrongful actions. The liquidator prepares reports detailing the findings of the investigations and submits them to the relevant authorities.
- Closure of the Company: Once all the assets have been distributed, liabilities settled, and necessary reports and filings made, the liquidator applies for the dissolution of the company. The company’s legal existence is officially terminated, and it ceases to carry on any business activities.
It’s important to note that the winding up process is subject to the supervision and oversight of the court or regulatory authorities, depending on the mode of winding up. The liquidator is required to act impartially, in the best interests of the company and its stakeholders, and in compliance with the applicable laws and regulations.
Provisions of Winding up under Insolvency and Bankruptcy Code, 2016
Under the Insolvency and Bankruptcy Code, 2016 (IBC), the provisions related to winding up are primarily focused on the liquidation of corporate entities in a time-bound and efficient manner. The IBC provides a streamlined process for the initiation and conduct of winding up proceedings, with the objective of maximizing the value of the company’s assets and ensuring a fair distribution to its stakeholders. Here are the key provisions of winding up under the Insolvency and Bankruptcy Code:
Initiation of Winding Up:
- Voluntary Winding Up: A company can initiate voluntary winding up by passing a special resolution with the approval of the shareholders. The resolution must be passed by a minimum of three-fourths of the total voting power of the shareholders.
- Compulsory Winding Up: Winding up proceedings can be initiated by a creditor, shareholder, or the company itself by filing an application before the National Company Law Tribunal (NCLT). The NCLT can order winding up if it determines that the company is unable to pay its debts or if it is just and equitable to wind up the company.
Once the winding up proceedings are initiated, a moratorium is imposed, which prevents the company’s assets from being alienated, transferred, or encumbered. This provides protection to the assets during the winding up process and ensures that all stakeholders are treated equally.
Appointment of Liquidator:
The NCLT appoints a liquidator to manage the affairs of the company during the winding up process. The liquidator has the responsibility to verify claims, realize assets, settle liabilities, and distribute the proceeds to the stakeholders.
Verification and Priority of Claims:
The liquidator is responsible for verifying and determining the claims of creditors. Claims must be submitted within a specified period, and the liquidator has the authority to admit or reject claims based on their validity and priority. The IBC provides a hierarchy of priority for the distribution of proceeds, with secured creditors having priority over unsecured creditors and operational creditors.
Sale of Assets and Settlement of Liabilities:
The liquidator has the power to sell the company’s assets through a transparent and competitive process to maximize the value for the stakeholders. The proceeds from the sale are used to settle the company’s liabilities, including payments to secured and unsecured creditors, statutory dues, and employee dues.
Once the liquidation process is completed, the NCLT passes an order for the dissolution of the company. The company’s legal existence comes to an end, and it ceases to carry on any business activities.
It’s important to note that the provisions of winding up under the Insolvency and Bankruptcy Code, 2016, emphasize the resolution of distressed companies and the maximization of value for stakeholders. The objective is to provide a time-bound and efficient mechanism for the liquidation of companies, while also promoting the possibility of revival or resolution wherever feasible.