UNIT 20 WINDING UP

Structure
20.0 Objectives
20.1 Introduction
20.2 Meaning of Winding Up
20.3 Modes of Winding Up
20.4 Procedures for Winding Up Order
20.4.1 Preferential Payments
20.4.2 Contributory
20.5 Removal of Name of a Company
20.6 Let Us Sum Up
20.7 Key Words
20.8 Answers to Check Your Progress
20.9 Terminal Questions

20.0 OBJECTIVES
After studying this Unit, you should be able to:
 explain the meaning of winding up of a company;
 distinguish between winding up and dissolution of a company;
 describe the modes of winding up of a company;
 explain the procedure for winding up of a company;
 define preferential payments and contributory; and
 explain the procedure for removal of name of a company.

20.1 INTRODUCTION
A company is a person, artificial, invisible, intangible and exists in the eyes of
law. It has a perpetual succession. It never dies. The end of a company comes
only through its winding up procedure. The Companies Act 2013 came into
force on 29th August, 2013. It has been amended in 2015, 2017, 2018 and
2019. Latest changes have been brought by the Insolvency and Bankruptcy
Code 2016, mainly in provisions of winding up of a company. The mode of
voluntary winding up has totally been dropped by this code given in part II
from sections 304 to 323 of the Act 2013. A company now be wound up
under the Companies Act, 2013 only by the tribunal. In this unit you will learn
about meaning of winding up, difference between winding up and dissolution,
modes of winding; procedures for winding up, and preferential payments and
contributory and removal of the name of the company.

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Dividned, Accounts, Audit
and Winding Up 20.2 MEANING OF WINDING UP
The “winding up” or “liquidation” is a process of bringing about an end to the
life of a company. In the words of Gower “winding up of a company is the
process whereby its life is ended and its property administered for the benefit
of its creditors and members. An administrator, called a liquidator, is appointed
and he takes control of the company, collects its assets, pays its debts and
liabilities and finally distributes the surplus among the members in accordance
with their rights.
Even a solvent company may be wound up. After winding up, a company is
“Dissolved formally and will not have any assets or liabilities. The legal personality
of the company shall come to an end.
When a company is unable to pay its debts, its liquidation will be under newly
passed. “Insolvency and bankruptcy code 2016”. The code relates to insolvency,
liquidation, voluntary liquidation or bankruptcy. The Company shall thus be
wound up either under Companies Act, 2013 or liquidated under Insolvency
and Bankruptcy Code 2016, as applicable.
Difference between Winding up and Dissolution
Winding and dissolution of the company are not the same thing. A company
is not dissolved immediately on the commencement of winding up proceedings.
Winding up is the prior stage and dissolution is the next. On dissolution, the
name of the company is struck off by the Registrar from the Registrar of
Companies i.e., it ceases to exist. While on winding up the Company’s name
is not stuck off from the register. The legal entity of a company remains even
after the commencement of winding up and it can be sued in a court of law.
Dissolution is the final stage of the Company’s winding up process. But a
company can be dissolved without winding up under certain circumstances such
as when it merges with another company. In winding up the assets of the company
are sold and the proceeds are utilized in paying off the debts and other liabilities
of the company. It is the first stage of terminating the life of a company. While
the dissolution is the next stage and after this company ceases to exist. The
winding up proceedings are carried out by a liquidator of the company while
in case of dissolution no such proceedings are carried out. Creditors can prove
their debts in the winding up but not in the dissolution of the company.

20.3 MODES OF WINDING UP

Winding up by the Tribunal
Winding up may be ordered by the Tribunal in following cases, which are grounds
for compulsory winding up:
a) If a company has, by special resolution, resolved that the company be
wound up by the Tribunal;
b) If the company has acted against the interest of sovereignty and integrity
of India, the security of state, friendly relations with foreign states, public
order, decency or morality;
c) If on an application made by Registrar or any other person authorised by
the Central Government by notification under the Act, the Tribunal is of
360 the opinion that the affairs have been conducted in a fraudulent manner
 or the Company was formed for fraudulent and unlawful purpose or the Winding Up
persons concerned in the formation or management of its affair have been
guilty of fraud, misfeasance or misconduct in connection therewith and that
it is proper that the company be wound up;
d) If the company has made default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive
financial years; or
e) If the company is unable to pay it debts.
e) If the Tribunal is of the opinion that it is just and equitable that the company
should be wound up (Section 271)
20.3.1 Winding Up by Special Resolution
The Company may by a special resolution resolved that the company to be
wound up by the Tribunal. The Tribunal has to examine whether the resolution
is in the interest of the company or is not opposed to public interest. If not,
the winding up may not be ordered. The company can file a petition before
the Tribunal for winding up even without passing a special resolution (Section
272). A company whose name is not in the register of companies is not entitled
to file a winding up petition.
20.3.2 Company Acting against the Sovereignty and Integrity
of India, Security of the State, the Friendly Relations
with Foreign States, Public Order, Decency and
Morality.
If the company acting against the interest of sovereignty and integrity of India,
the security of state, the friendly relations with foreign states, public order,
decency and morality, the petition on this ground shall be made by Central or
a State Government to the Tribunal. The words ‘decency’ and ‘morality’ have
not been defined in the Act.
20.3.3 Affairs being Conducted in a Fraudulent or Unlawful
Manner
The Registrar or any other person authorised by the Central Government may
make an application to the Tribunal for winding up on this ground. The Tribunal
may order winding up on the following grounds.
i) The affairs of the company are being conducted in a fraudulent manner;
or
ii) The Company was formed for fraudulent or unlawful purpose; or
iii) The persons concerned in the formation of the company or management
of its affairs have been guilty of fraud, misfeasance or misconduct in
connection therewith.
It may be noted, besides above provision, Central Government may directly
file a petition for winding up in case of inspector’s, report on investigation.
20.3.4 Default in Filing Financial Statements or Annual
Returns with to the Registrar
The company has to file two separate documents (a) financial statements and
(b) annual return to the Registrar.
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Dividned, Accounts, Audit The default in not filing these documents should have been for immediately
and Winding Up preceding five consecutive financial years, only then winding up may be ordered.
If default is for two or three or four years, this provision cannot be invoked.
Again, it may be noted that winding up may be ordered if the default relates
to either non-filing of financial statements or annual returns. It is not necessary
that the default has to be for both financial statements and annual return. The
default has to be in respect of immediately preceding five consecutive financial
years. It means that default in the earlier year is not a ground for winding up
under the clause.
20.3.5 Inability to Pay its Debts
A company shall be deemed to be unable to pay its debts,
a) if a creditor by assignment or otherwise, to whom the company is indebted
for an amount exceeding one lakh rupees then due, has served on the
company, by causing it to be delivered at its registered office, by registered
post or otherwise, a demand requiring the company to pay the amount so
due and the company has failed to pay the sum within twenty-one days
after the receipt of such demand or to provide adequate security or re-
structure or compound the debt to the reasonable satisfaction of the creditor;
b) if any execution or other process issued on a decree or order of any court
or tribunal in favour of a creditor of the company is returned unsatisfied
in whole or in part; or
c) if it is proved to the satisfaction of the Tribunal that the company is unable
to pay its debts, and in determining whether a company is unable to pay
its debts, the Tribunal shall take into account the contingent and prospective
liabilities of the company.
20.3.6 Just and Equitable
These words have not been defined in the Act. The power under this clause,
according to A. Ramaiya, should be used only “when there is a strong ground
because companies as far as possible, should be left to self governance and
self determination through the wishes of majority of shareholders”. The Tribunal
should not make an order on this ground for winding up, if there is any other
remedy available. It is a remedy of last resort.
The following grounds, based on leading cases, have been held as “Just and
Equitable”.
a) Loss of Substratum: It means sole purpose or main objects, for which
company was formed, cannot be achieved e.g. it fails to obtain a patent
for invention on the assumption that it will be granted or it fails to acquire
the business which the company was formed to purchase or fails to build
a building on ground that local authority did not grant permission. In re,
Kailtal and General Mills Co. Ltd (1955) 31 Comp. Cons. 46], the
Court laid down the following test to determine as to whether the substratum
of the company has disappeared:
a) Where the subject matter of the company has gone; or
b) The object for which it was incorporated has substantially failed; or
c) It is impossible to carry on the business of the company except at
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 loss which means that there is no reasonable hope that the object Winding Up
of trading at a profit can be attained or
d) The existing or probable assets are insufficient to meet the existing
liabilities.
b) Illegality of objects and fraud: If any company’s objects are illegal or
become illegal by change of law, it will be wound up by Tribunal. Similarly,
if a company is promoted in order to perpetrate a serious fraud or deception
on the person who are invited to subscribe for its shares, the Tribunal will
wind it up.
c) Deadlock in management: If a private company has only two members-
directors and the two are not on speaking terms. Tribunal will make a
winding up order, even though there is a provision in articles that one director
shall have a casting vote at board meetings or that the disputes shall be
settled by arbitration. If there is a loss of confidence in the Board of directors
or refusal by one of the three directors to attend meeting to make a quorum.
d) Bubble Company: If the company is just on paper and never carried
on its business.
e) Oppression: A winding up petition may lie where the majority shareholder
have adopted an aggressive policy towards minority under Section 241.
Also, any member of a company may complain that the affairs of the
company have been or are being conducted in a manner prejudicial to
public interest or oppressive to him and other members. Under section
242 (1b) the Tribunal can order winding up on “just and equitable” ground.
f) Other: If the number of members fall below the statutory minimum, its
winding up can be ordered on “just and equitable ground’. Similarly, if
company is not following democratic principles of fairness or lacking in
commercial morality or where directors making charges against each other
the Tribunal can order winding up of the company.
Who can file Petition?
The following can file petition to the Tribunal for winding up of a company.
1) The Company; or
2) The contributory or contributories i.e., persons who are liable to contribute
to the assets of the company; or
3) The Registrar; or
4) The Central or State Government or any other person authorised by Central
Government; or
5) Any creditor or creditors;
6) No (1), (2) and (5) together

20.4 PROCEDURE FOR WINDING UP

In brief, the following procedure is followed in winding up:
1) Filing of Petition: It is presented by the company to the Tribunal, along
with the statement of affairs. If it is filed by any other person, company
is allowed to file objections. 363
Dividned, Accounts, Audit Provisional Liquidator: At any time after presentation of winding up
and Winding Up petition and before the making of a winding-up order, the Tribunal may
appoint a provisional liquidator. Before making such appointment, however,
the Tribunal must give notice to the company so as to enable it to make
its representation in the matter unless, for reasons to be recorded in writing,
it thinks fit to dispense with such notice. The powers of the provisional
liquidator are the same as those of a liquidator unless limited by the Tribunal.
2) Company Liquidator: On a winding up order being made in respect of
a company, the Tribunal shall appoint official liquidator or liquidator. The
liquidator should be registered under insolvency and bankruptcy Code 2016.
A liquidator can be replaced or removed.
3) Winding up Committee: Within three months of winding up order, the
company liquidator shall make an application to form a winding up
committee to assist and monitor progress of winding up. A monthly report
along with the minutes of meeting of the winding up committee shall be
placed before the Tribunal by company liquidator, the convener.
The company liquidator must submit a preliminary report to the Tribunal
within sixty days from the winding up order.
4) Advisory Committee: The Tribunal may, at the time of making winding
up order of a company, or at any time thereafter direct to form an advisory
committee to act with company liquidator and to report to Tribunal on
such matters as Tribunal may direct. The maximum members of the
committee is twelve, being creditors and contributories. The committee has
the right to inspect books of accounts and other documents, assets and
properties of the company under liquidation at reasonable time. The quorum
is 1/3rd of total members or two whichever is higher.
The company liquidator shall chair the meetings of the Advisory Committee.
5) Dissolution of the Company
When the affair of a company have been completely wound up, the company
liquidator shall make an application to the Tribunal for dissolution of the
company.
Upon receipt of the report from the company liquidator or otherwise, the
Tribunal on forming an opinion that it is just and reasonable to order
dissolution, shall make an order for dissolution of the company. The
company shall be dissolved effective from the date of order.
When the company is dissolved, no suit or proceeding will lie against the
company because a dissolved company has no existence in the eyes of
law.
20.4.1 Preferential Payments
In the event of winding up certain payments are to rank in priority to others.
These are called preferential payments. Under section 326 the following shall
be paid in priority to other debts:
1) Workmen dues;
2) Where a secured creditor has realised a secured asset, so much of debts
due to such secured creditor, as could not be realised by him or the amount
of workmen’s portion in his security if payable, under law, whichever is
364 less, PariPassu with workmen’s dues.
 Under Section 327, order of priority subject to section 326 is given below: Winding Up

1) All revenues, taxes, cesses and rates due to the Central or a State
Government or to a local authority. The amount should have become
due and payable within twelve months before winding up order.
2) All wages or salary of an employee due for a period not exceeding
four months.
3) All accrued holiday remuneration becoming payable to an employee on
his termination or death.
4) All amount due in respect of contributions payable during twelve months
under Employees State Insurance Act.
5) All amounts in respect of any compensation payable under Workmen’s
Compensation Act.
6) All sums due to an employee from provident fund, a pension fund, a gratuity
fund or any other fund
7) Expenses of any investigation, held in pursuance of section 213 or 216
in so as they are payable by the company.
Thus the order of priority in paying off debts in winding up shall be follows:
a) workmen’s dues and debts due to secured creditors
b) Cost and expenses of winding up
c) Preferential debts
d) Floating charge
e) Unsecured Creditors
20.4.2 Contributory
A contributory is a person liable to contribute to the assets of a company in
the event of winding up and includes the holder of any shares which are fully
paid up (section 2(26). A holder of fully paid up shares shall have rights as
a contributory and no liability as a contributory.
The following persons shall be liable as a contributories on the winding up of
a company.
a) Present and Past Members: Every present and past member liable to
contribute to the assets of the company for payment of debts, liabilities
and costs of winding up and for adjustment of rights of the contributories
is a contributory. A past member shall be liable to contribute the amount
unpaid on the shares in respect of which he is a contributory or the amount
he has guaranteed to pay in the event of winding up. A past member shall
not be liable to contribute:
i) if he ceased to be a member for one year or more before
commencement of winding up; or
ii) in respect of any debt or liability contracted after he ceased to be
member; or
iv) the present members are able to the satisfy the contribution required.
b) A director and manager whose liability is unlimited except if he ceased
to hold office for a year or upward before commencement of winding up. 365
Dividned, Accounts, Audit A past director or manager shall not be liable for contribution if the debt
and Winding Up and liability of the company was contracted after he ceased to hold that
office.
c) Assignee of a contributory, legal representative of a deceased member,
liquidator of a company which is a member and Debtors are other
contributories.
d) Subscribers to the Memorandum: Subscribers to the Memorandum shall
be deemed as contributories for the amount unpaid on the shares they
agreed to subscribes for.

20.5 REMOVAL OF THE NAME OF THE COMPANY

Once the affairs of the company are fully wound up, the official liquidator shall
submit a final report to the Central Government, with a copy to Tribunal. The
Cental Government shall order dissolution of the company and Registrar shall
strike off the name of the company from the register of companies and publish
a notification to this effect. The company will cease to be an artificial person
created by law.
Check Your Progress A
1) What is Winding Up?
.................................................................................................................
.................................................................................................................
.................................................................................................................
2) List the ‘Just and Equitable grounds’ of winding up?
.................................................................................................................
.................................................................................................................
.................................................................................................................
3) Who can file petition for winding up?
.................................................................................................................
.................................................................................................................
.................................................................................................................
4) Fill in the Blanks
i) A Company can be wound up under the Companies Act 2013 only
by ___________
ii) The Company can be wound up if it makes a default in filing with
the Registrar its financial statements and annual returns for immediately
preceding __________consecutive financial years.
iii) Within_____________ of winding up order the company liquidator
shall form a winding up committee time.
iv) Company liquidator has to make an application to the Tribunal for
constitution of a___________
v) When a company is dissolved by the Tribunal, it ceases to be
366 a_____________
 Winding Up
20.6 LET US SUM UP
Winding up of a company means a process whereby its legal personality is
ended. The process begins by a petition to Tribunal by specified mode. The
Tribunal appoints a Liquidator. He makes a list of creditors and assets. The
assets are sold and the money so realized is distributed among creditors. For
deficiency contributories are asked to pay for any amount due. After this process
he prepares a report submits it to the Tribunal. The Tribunal orders dissolution
of the company. The Tribunal has wide powers and may order winding upon
‘Just and equitable’ ground.
The petition may be filed by the company, contributories, Registrar, Central or
State Government or any person authorised by Central Government. The Tribunal
may allow liquidator to constitute a winding up committee to assist him as well
as advisory committee, consisting of creditors and contributories of not more
than twelve persons. The Liquidator has to make certain payment to rank in
priority to others. They are called “Preferential Payments”.

20.7 KEY WORDS

Winding Up: A process by which the life of a company comes to an end.
Dissolution: The company ceases to exit.
Liquidator: The person who helps the court to complete the liquidation
proceedings.
Just and equitable: Any ground which in the opinion of the court, is reasonable
and is in the interest of the concerned parties.

20.8 ANSWERS TO CHECK YOUR PROGRESS

(B) (i) Tribunal (ii) Five Consecutive years (iii) three months (iv) Advisory
committee and winding up committee (v) Legal person

20.9 TERMINAL QUESTIONS

1) What do you understand by winding up of a company ? How is it different
from dissolution of a company?
2) Discuss the winding up of a Company by the Tribunal.
3) Writes a Short notes on:
a) Advisory Committee
b) Preferential Payments
c) Winding Up Committee
4) Explain the ‘just and equitable grounds’ for winding up of a company.

Note: These questions will help you to understand the unit better.
Try to write answers for them but do not submit your answers to the
University. These are for your practice only.
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Dividned, Accounts, Audit
and Winding Up SUGGESTED READINGS
G. K. Kapoor and Sanjay Dhamija, Company Law, Taxmann.
Avtar Singh, Introduction to Company Law, Eastern Book Company.
Sharma J. P., An Easy Approach to Corporate Laws, Ane Books Pvt. Ltd.
New Delhi.
(Latest Edition of the book is recommended)

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