Winding Up Of A Private Limited Company
Liquidation is the process where a firm's assets and liabilities are terminated, realized and subsequently distributed. In many cases, the firm ceases to exist. Members of the firm sometimes voluntarily initiate the liquidation process. Other times it is compelled by a creditor's petition to the courts for failure to uphold contractual payments.
Voluntary Winding Up
When the members or the creditors without the intervention of Tribunal wind up a company, it is called as voluntary winding up. The entire process is done without court supervision. When the winding up is complete, the relevant documents are filed before the court for obtaining the order of dissolution. A voluntary winding up may be done by the members or the creditors.
Voluntary winding up/ liquidation actually falls into two subcategories:
a) Those with a declaration of solvency; and
b) Those without
An otherwise solvent company might determine that, through liquidation, it is able to pay its debts within a specified period. Its directors can then issue a formal declaration of solvency and its shareholders can lead the appointment of a liquidator. This is sometimes called a '"members' voluntary liquidation." Shareholders may elect to initiate liquidation without the directors having issued a declaration. In these cases, the liquidator is appointed by the company's directors, not the shareholders.
To avoid moral hazard in a lending relationship, a creditor need to be able to recoup some value if a borrowers fails to repay a loan. Debtor companies are disciplined by the threat of bankruptcy and liquidation, much like an individual borrower who pledges an asset as:
S.270 of the Act prescribe the below mentioned three ways, in which a company may be wound up.
A. Winding up by the court.
B. Voluntary winding up:
* Member’s Voluntary winding up
* Creditor’s Voluntary winding up
C. Winding up subject to supervision of the court
Petition for Winding Up, S.272
A petition for winding up of a company shall be presented to the Tribunal by the following authorized persons incorporated under this Act of 2013:
Ø The Company;
Ø Any creditor or creditors, including any contingent or prospective creditor or creditors;
Ø Any contributory or contributories;
Ø All or any of the persons specifies in the above clauses together;
Ø The Registrar
Ø Any person authorized by Central Government in that behalf; or
Ø In a case falling under clause (c) of sub-section (1) of Section 271, by the Central or State Government
Modes of Voluntary Winding Up, Section 304
It may take place by:-
By passing an ordinary resolution in the general meeting if
(i) The period fixed for the duration of the company by the articles has expired; or
(ii) Some event on the happening of which company is to be dissolved, has happened.
By passing a special resolution to wind up voluntarily for any reason whatsoever.
Within 14 days of passing the resolution, whether ordinary or special, it must be advertised in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company.
Commencement of Voluntary Winding Up, S.308
It shall be deemed to commence on the date of passing of the resolution for voluntary winding up under section 4.
It is possible in the case of solvent companies which are capable of paying their liabilities in full. There are two conditions for such winding up:-
A declaration of solvency must be made by a majority of directors, or all of them if they are two in number. It will state that the company will be able to pay its debts in full in a specified period not exceeding three years from commencement of winding up. It shall be made five weeks preceding the date of resolution for winding up and filed with the Registrar. It shall be accompanied by a copy of the report of auditors on Profit & Loss Account and Balance Sheet, and also a statement of assets and liabilities up to the latest practicable date; and
Shareholders must pass an ordinary or special resolution for winding up of the company.
The provisions applicable to members' voluntary winding up are as follows:-
# Appointment of liquidator and fixation of his remuneration by the General Meeting.
# Cessation of Board's power on appointment of liquidator except so far as may have been sanctioned by the General Meeting, or the liquidator.
# Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator by the general meeting subject to an arrangement with the creditors.
# Sending the notice of appointment of liquidator to the Registrar.
# Power of liquidator to accept shares or like interest as a consideration for the sale of business of the company provided special resolution has been passed to this effect.
# Duty of liquidator to call creditors' meeting in case of insolvency of the company and place a statement of assets and liabilities before them.
# Liquidator's duty to convene a General Meeting at the end of each year.
# Liquidator's duty to make an account of winding up and lay the same before the final meeting.
Reasons for winding up
Company is unable to pay debts when:
a) The company on demand of the creditor a sum within 21 days of receipt of the demand notice is unable to provide adequate security or is unable to restructure the debt or compound the debt to reasonable satisfaction of the creditor.
b) If the execution decree in favor of the creditor is returned unsatisfied.
c) If the tribunal is satisfied by the incapacity of the tribunal to pay debts
Procedure For Voluntary Winding Up
1. Conduct a Board meeting with 2 directors and thereby pass a resolution with a declaration given by directors that they are of the opinion that company has no debt or it will be able to pay its debt after utilizing all the proceeds from the sale of its assets.
2. Issues notices in writing for calling a general meeting proposing the resolution along with the explanatory statement.
3. In General Meeting, pass the ordinary resolution for winding up by ordinary majority or special resolution by 3/4th majority. The winding up shall start from the date of passing the resolution.
4. Conduct a meeting of creditors after passing the resolution, if majority creditors are of the view that winding up is beneficial for all the parties.
5. Within 10days of passing the resolution, file a notice with registrar for appointment of liquidator.
6. Within 14days of passing such resolution, give a notice of the resolution in the official gazette and also advertise in the newspaper.
7. Within 30days of general meeting, file certified copies of ordinary or special resolution passed in general meeting.
8. Wind up the affairs of the company and prepare the liquidators account and get the same audited.
9. Conduct a General Meeting of the company.
10. In that meeting, pass a special resolution for disposal of books and all necessary documents of the company, when the affairs of the company are totally wound up and it is about to dissolve.
11. Within 15days of final general meeting of the company, submit a copy of accounts and file an application to the tribunal for passing an order for discussion.
12. If the tribunal is of the opinion that the accounts are in order and all the necessary compliances have been fulfilled, the tribunal shall pass an order for dissolving the company within 60 days of receiving such application.
13. The appointed liquidator would then file a copy of order with the registrar.
14. Once the order passed by the tribunal is received, the registrar will then publish a notice in the Official Gazette declaring that the company is dissolved.
Petition by the Directors
Where the directors present a petition, they must petition in their own names rather than in the name of the company and, in the absence of a formal board resolution, they must act unanimously. However, if the majority of directors at a board meeting have resolved that the company should be wound up, an individual director may present a petition on behalf of them all
Effect of Winding Up, S. 309
The company from the commencement of winding up ceases to on its business except as far as required for the beneficial winding up its business. Provided that, corporate powers and corporate state of the company shall continue until it is dissolved.
Declaration of Solvency, S.305
In case of a proposed voluntary winding up, majority of its directors but not less than two directors, shall at a Board meeting make a declaration verified by an affidavit that they have made full inquiry into the affairs of the company and they have formed an opinion that the company has no debt or whether it will be able to pay its debts in full from the proceeds of assets sold in voluntary firm.
Conditions for declaration of Solvency:
This declaration shall have effect only if it:
a) Is made within five weeks immediately preceding the date of the passing of the resolution for winding up the company and it is delivered to the Registrar for registration before that date;
b) Contains a declaration that the company is not being wound to defraud any person or persons;
c) Is accompanied by a copy of the report of the auditors of the company prepared in accordance with the provisions of this Act, on the profit and loss account of the company for the period commencing from the date up to which the last such account was prepared and ending with the latest practicable date immediately before the making of the declaration and that balance sheet of the company made out as on that date which would also contain a statement of assets and liabilities of the company on that date; and
d) Accompanies any assets of the company, by a report of the valuation of the assets of the company prepared by a registered evaluator.
Where the company is wound up in pursuance of a resolution passed within a period of 5 weeks after making of the declaration, but its debts are not paid or provided in full, it shall be presumed, until the contrary is shown, that the director or directors did not have reasonable grounds for his or their opinion while making declaration of solvency.
Punishment for Wrong Declaration
Any director of a company making declaration under this section without having reasonable grounds for the opinion that the company will in future pay the debts in full from the proceeds of assets sold in voluntary winding up shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years or with fine which shall not be less than fifty thousand rupees but which shall not be less than 50,000/- but which may extend to 3,00,00/- rupees or with both.
Meeting of Creditors, S.306
The Company shall along with the calling of meeting of the company at which the resolution for the voluntary winding up is to be proposed, cause a meetings of its creditors either on same or on the next day. The company shall cause a notice of the meeting to be sent by registered post to the creditors with the notice of the meeting of the company.
The Board of Directors of the company shall-
a) Cause to be presented a full statement of the position of the affairs of the company together with a list of creditors of the company, if any, copy of declaration under S.305 and the estimated amount of the claims before such meeting; and
b) Appoint one of the directors to preside at the meeting
Where 2/3rds of the creditors of the company opine that-
a) It is in interest of all parties that the company be wound up voluntarily, the company shall be wound up voluntarily; or
b) The company may not be able to pay for its debts in full from the proceeds of assets sold in voluntary winding up and pass a resolution that it shall be in the interest of all parties if the company is wound up by Tribunal, the company shall within 14days thereafter file an application before the Tribunal.
The notice of any resolution passed at the meeting of creditors shall be given by the company to the Registrar within 10days of the passing thereof.
If a Company contravenes the provisions of this section, the company shall be punishable with fine of maximum 50,000/- up to 2, 00,000/-. The director of the company in default shall be punishable with imprisonment for a term which may extend to 6 months or a fine minimum of 50,000/- extendable to 2,00,000/-.
Publication of Resolution to Wind up Voluntarily, S.307
Where a company has passed a resolution for voluntary winding up by the creditors, it shall within 14days of passing of the resolution give notice of the resolution by advertisement in the Official Gazette and also in a newspaper which is in circulation in the district where the registered office or the principal office of the company is situated.
If the company contravenes, the company and every officer of the company in default shall be punishable with fine, which may extend to 50,000/- for every day during which such default continues.
Definition, S.2 (23)
“Company Liquidator”, as far as it relates to the winding up of a company, means a person appointed by—
(a) The Tribunal in case of winding up by the Tribunal; or
(b) The company or creditors in case of voluntary winding up,
As a Company Liquidator from a panel of professionals maintained by the Central Government under sub-section (2) of section 275;
The Company in its general meeting, where a resolution of voluntary resolution for winding up is passed appoints a Company Liquidator from the panel prepared by the Central Government for Winding up the affairs and assets of the company and recommends the fee to be paid to the company liquidator.
When the creditors pass a resolution under sub-section (3) of S.306, the appointment of Company Liquidator shall be effective once approved by the majority of creditors in value of the company. Where the majority does not approve, creditors shall appoint another Company Liquidator. A suitable resolution shall be passed regarding fee of the liquidator by the creditors appointing him.
On Appointment, Company Liquidator shall file a declaration within seven days of the date of appointment disclosing conflict of interest or lack of independence in respect of his appointment, if any, with the company and the creditors and such obligation shall continue throughout the term of its appointment.
A member from the panel of the professional firms of chartered accountants, advocates, company secretaries, cost and work accountants which the central government may constitute. Body corporate approved by central government. Whole time or part-time officer appointed by the central government.
The company may remove the company liquidator where his appointment has been made by the company, by the creditors, where appointment is approved by such creditors.
Where he is sought to be removed, he shall be given a notice in writing stating the grounds of removal from his office by the company or the creditors, as the case may be.
Filling of Vacancy, S.311
Where 3/4th of the members of the company or 3/4th of the creditors in value, as per the case, after consideration of the reply, if any, filed by the company liquidator, in their meeting decides to remove the Company Liquidator, he shall vacate his office.
If vacancy occurs by death, resignation, removal or otherwise in the office of any Company Liquidator, the company or the creditors, who appointed company liquidator may fill the vacancy.
Powers and Duties, S.314
The Company Liquidator shall perform the following functions and duties as may be determined timely by the company or the creditors.
Ø Settle the list of contributories, which shall be the prima facie evidence of the liability of the persons named therein to be contributories.
Ø Call General Meetings of the company to obtain the situation of the company by ordinary or by special resolution, as the case may require, or for any other purpose considered as necessary by him.
Ø Maintain proper and regular books of account in the prescribed form and manner and the same shall be inspected by the members and creditors authorized by the Central Government.
Ø Prepare quarterly statement of accounts and file them duly audited within 30days from the close of each quarter with the Registrar. In case of failure, the company liquidator shall be punished with fine extendable to Rs.50, 000/- for every day until the failure continues.
Ø Pay debts of the company and adjust rights of the contributories among themselves.
Ø Observe due care and diligence in discharge of his duties.
If the Company Liquidator fails to comply, he shall be punished with fine up to Rs. 10, 00,000/- except if he fails to pay the debt and adjust the rights of the contributories.
Powers to accept shares etc., as consideration for sale of company property, S.319
When a company is being voluntarily winding up and its business and property is to be sold to another, the Company liquidator of the transferor company may with a special resolution of company through a specific or general authority may:
Ø Receive as a compensation partly or completely for the transfer of or sale of shares, policies, or other like interest in the transferee company, for distribution among the members of the transferor company; or
Ø Enter into any arrangement where the members of the company may instead of receiving cash, shares, policies or other like interest or in addition thereto, participate in the profits of, or receive any other benefit from, the transferee company. Such arrangement shall be entered into with the consent of the secured creditors.
Transfer, sale or any such arrangement made in pursuance of this section shall be binding on the members of the transferor company.
If a member of the transferor company who voted against the special resolution may express his dissent in writing addressed to the company liquidator within seven days, requiring him to either-
Ø Abstain from carrying the resolution into effect; or
Ø Purchase his interest at a price to be determined by agreement or by the registered valuer.
If a Company Liquidator elects to purchase interest of the member, purchase money raised by him may be determined in a special resolution shall be paid before the company is dissolved
Exercise of Certain Powers Subject to Sanction, S.343
The company Liquidator may exercise following powers with the sanction of the Tribunal is the Tribunal is winding up the company and with a special sanction of a resolution of the company and prior approval of the Tribunal, in case of a voluntary winding up:
Ø Make full Payment to any class of creditors;
Ø Make any compromise or arrangement with creditors or persons claiming to be creditors, or having or alleging them to have any claim, present or future, certain or contingent, against the company, or where the company is rendered liable.
Ø Compromise any call or liability to call, debt and liability capable of resulting in a debt and any claim, present or future, certain or contingent, ascertained or sounding only in damages, subsisting or alleged to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company and all questions in any way relating to or affecting assets or liabilities or winding up of the company, on such terms may be agreed and take any security for the discharge of any such call, debt, liability or claim and give a complete discharge in respect thereof.
In case of winding up by the Tribunal, the Central Government may, under such circumstances make rules for to enable the Company Liquidator to exercise any of the above referred powers subject to such conditions, limitations, restrictions.
Any creditor or contributory may apply in the manner prescribed to the Tribunal concerning exercise of the above-mentioned powers of the official liquidator under this section. The Tribunal shall after giving a reasonable opportunity to such applicant and the company liquidator, pass such orders as it may think fit.
Deposit monies into scheduled bank, S.350
Every Company liquidator under this section is duty bound to deposit monies received by him in his official capacity in a scheduled bank to the credit of a special bank account opened by him in that behalf. If the Tribunal considers the opening of such account advantageous for the creditors or contributories or the company, it may permit the account to be opened in such other bank specified by it.
If any Company Liquidator retains a sum exceeding more than 5,000/- or as prescribed by the tribunal for more than 10 days, unless he explains his reason for retention, he shall:
Ø Pay interest on the amount so retained in excess, at the rate of 12% p/a and also pay such penalty as may be determined by the Tribunal;
Ø Be liable to pay any expenses occasioned by reason of his default; and
Ø Also, be liable to have all or such part of his remuneration, as the Tribunal may consider just and proper, disallowed, or may also be removed from his office.
Notice of Appointment to Registrar, S.312
The company shall give notice to the registrar along with his name and particulars, of every vacancy occurring in the office of Company Liquidator and of the name of the Company Liquidator appointed to fill every such vacancy within 10days of such appointment or occurrence of vacancy If a company contravenes, the company and every officer of the company who is in default shall be punishable with fine which may extend to 500/- for every day during which default continues. .
Cesser of Boards Powers on his appointment, S.313
On the appointment of a Company Liquidator, all the powers of the Board of Directors and of the managing or whole time directors and manager, if any, shall cease, except for giving notice of such appointment of the Company Liquidator to the Registrar.
Submission of Reports on Progress of Winding Up, S.316
The Company Liquidator shall report quarterly on the progress of winding up of the company to the members and creditors and shall also call a meeting of the members and creditors whenever required but at least one meeting each of the creditors and members should call in every quarter and appraise them of the progress of the winding up of the company. If the Company liquidator fails to comply he shall be punished with a fine up to Rs.10, 00, 00/-.
Reports to the Tribunal to examine persons, S.317
If the Company liquidator feels that a fraud has been committed by person concerning the company, he shall immediately make a report to the Tribunal and the Tribunal shall, without prejudice to the process of winding up, order for investigation under S.210. On consideration of report of such investigation, the Tribunal may pass such order and give such directions under this Chapter as it may consider necessary including the direction that such person shall appear before the tribunal on a day appointed by it for that purpose. He shall be examined to promotion, formation, or conduct of the business of the company or as to his conduct and dealings as an officer.
Appointment of Committees, S.315
In absence of creditors of a company in its general meeting and where a meeting of creditor is held, they may appoint committees as considered appropriate to supervise the voluntary liquidation and assist the Company Liquidator in discharging his functions.
Final Meeting and Dissolution of Company, S.318
As the affairs of a Company are fully wound up, the Company Liquidator shall prepare a report of winding up showing that the property and assets of the company have been disposed and its debt fully discharged to the satisfaction of the creditors and then call a general meeting of the company for displaying the final winding up accounts.
The majority of members on being satisfied by the report of the company liquidator, they may pass a resolution for its dissolution.
Within 2 weeks after the meeting, the Company Liquidator shall-
Ø Send to the Registrar:
· A copy of the final winding up accounts of the company and shall make a return in respect of each meeting and of the date thereof;
· Copies of resolutions passed in the meetings; and
Ø File an application along with his report in a prescribed manner with the books and papers of the company relating to winding up, before the Tribunal for passing an order for dissolution of the company.
On satisfaction of the Tribunal that the report submitted by the Company Liquidator is just and fair, it shall pass an order for dissolution within 60 days. The Company Liquidator then shall file a copy with the registrar within 30 days. The Registrar on shall then forthwith publish a notice in the Official Gazette declaring the dissolution of the company.
If the company liquidator fails to fulfill his duties, he shall be punishable with a fine up to Rs. 1 Lac.
Distribution of Property of Company, S.320
The assets of the company shall, on its winding up, be applied in satisfaction of its liabilities pari passu and subject to such application, shall, unless the articles of the company otherwise mention, be distributed amongst the members as per the ratio of their rights and interests in the company.
Arrangement binding on company and creditors, S.321
Any arrangement except the one referred to in S.319 between the company and its creditors during the course of winding up shall bound them on a sanction by a special resolution of the company and acceded to by the creditors who hold three-fourths in value of the total amount due to all creditors of the company.
A creditor or contributory on completion of such arrangement may apply to tribunal and the tribunal may thereupon amend, vary, confirm or set aside the arrangement.
To apply to the Tribunal to have questions determined, S.322
The Company Liquidator, contributor or any creditor are authorized to apply to the tribunal to determine any question arising during winding of the company or to exercise the enforcing of calls, the staying of proceedings or any other matter, all or any of the powers which the Tribunal may exercise if it wounds up the company.
The company as prescribed shall forward a copy of an order staying the proceedings in winding up to the registrar. The registrar shall then make a minute in his books relating to the company.
They can also apply to the Tribunal for an order setting aside any attachment, distress or exaction enforced against the estate or effects of the company after the commencement of the winding up.
The Tribunal if considers such application to be just and fair may allow it on terms and conditions as deemed fit or may execute an order concerning the same.
Costs of Voluntary Winding up, S.323
The costs, charges and expenses properly incurred in the winding up, including the fee of the company liquidator, shall subject to the rights of the secured creditors, if any, payable out of the assets of the company in priority to all other claims.
Remedy For The Director
As there is only one director left as the other two have resigned from the Private Lt. Company, the company is De facto, not De jure. This implies that it is legally non- existent. Being a company handled by one director, it cannot be wound up. Thus, the Single Director may resort to an option of appointing an Alternate Director under S.161 of the Companies Act, 2013.
Alternate Director is someone appointed by the Board of Directors in a general meeting to act for a Director called the “original director” during his absence for a period of not less than three months from India. Generally, alternate Directors are appointed for a person who is Non-Resident Indian (NRI) or for foreign collaborators of a company.
Appointment, S.161 (1) – (4)
The Board of Directors may if authorized so by its articles or by a resolution passed by the company in general meeting, appoint any person as an alternate director nominated by the institution in pursuance of any law time being in force or any of any agreement or by the Central Government or the State Government by virtue of its share-holding in a government company, for a director during his absence fir a period not less than three months from the day the other director left the company.
He shall not hold any alternate dictatorship for any other director in the company.
A person shall not be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director of the company under the provisions of this act.
If the term of the office of original director is determined before he so returns to India, any provision for automatic re-appointment of retiring directors in default of another appointment shall apply to the original and not to the alternate director.
Mrs Madhu Ashok Kapur v/s Mr Rana Kapoor on 4 June, 2015
Bombay High Court
8.10 It provides that the Board could appoint an Alternate Director to act for another Director. This Alternate Director's name could be suggested by the Director or he could be otherwise appointed. This alternate appointment could be made for a period of at least three months during which the Director in question was absent from the state where the Board meetings were ordinarily held. The Alternate Director was to be nominated by a shareholder for whose representation the Director was appointed. The term "shareholder" is also defined and it means the holder of any share of the Company. This phrase seems to indicate that there is a certain class of shares, the holders of which are entitled to representation on the Board of Yes Bank.
8.11 It is normal in such cases to provide for vacancies in the offices of Directors
Naina D. Kamanivs Janson Engineering & Trading Pvt. ... on 18 August 2011
High Court of Judicature, Bombay
18.Defendant No.2 appointed Defendant No.12 as his alternate Director under the provisions of the Companies Act, 1956. The validity of the attendance of the Defendant No.12 shall be considered presently.
32. Hence the alternate Director would require to continue until the Director appointing him would have continued. In this case it would be permanently or until Defendant No.2 resigns or is removed is as Director or otherwise vacates office under provisions of the Companies Act.
Hemant D. Vakil and Ors. Vs Rdi Print and Publishing Pvt. Ltd. ... on 21 April, 1993
Equivalent citations: 1995 84 Comp Case 838 CLB
21. Shri Manohar Modi was appointed as an alternate director.
Oriental Metal Pressing Works v/s Bhaskar Kashinath Thankoor.. on 2 February, 1959
Equivalent citations: (1959) 61 BOMLR 1045
From the above-mentioned analysis, it is hereby concluded that, in India, under Companies Act, 2013, it is a settled principle of Law that, a Private Limited Company functioned by a single director stands incomplete, illegal and dysfunctional. The Act aides a single director of a private limited company by incorporating provisions for appointment of alternate director as described above.