Winding up of Company: an overview

Preamble
Winding up is a process by means of which the affairs of a company are wound up in a manner to dissolve the
company and put an end to the life of a Company. In the process of winding up, the companys assets and
properties are administered for the benefit of the members and creditors of the Company. The administrator,
called liquidator, realises its assets, pays its debts and finally distributes the surplus, if any, among the
members/creditors, in accordance with their right as provided in the article of the Company.
In other words, winding up is a legal process to dissolve the business of a company. The term Winding Up and
liquidation are used interchangeably. However, there are various means of winding up, i.e., by way of members
voluntary up, creditors winding up, winding up by the tribunal etc.
In this article we have dealt with practical aspects in relation to members voluntary winding up.
Provisions of Winding up
Section 425 to Section 520 of the Companies Act, 1956 (Act, 1956) (corresponds to Section 270 to Section 365
of the Companies Act, 2013) read with Companies Court Rule, 1959 (hereinafter referred to as CCR, 1959),
deals with the provisions of winding up. Since the provisions of the Companies Act, 2013 has not yet come into
force, the provisions of the Act, 1956 still governs the proceedings of winding up.
Modes of Winding Up
The Act, 1956 provides for the following three types of winding up:
1. Winding up by the order of the Tribunal or Compulsory winding up (Sec 433 to Sec 483)
2. Voluntary winding up (Sec 484 to Sec 520)
3. Subject to the supervision of the Court.
Grounds on which winding up may take place

In case of Compulsory winding up

The winding up of a company by the order of court is called compulsory winding up. Section 433 of the Act, 1956
envisaged the following circumstances under which the affairs of a company wound up by the Tribunal:
1. If the company, of its own, passes a Special Resolution that it should be wound up by the court, and presents a
petition to the court for same.
2. If the company makes any default in filing the statutory report with the registrar of companies or in holding the
statutory meeting within the prescribed time
3. If the company does not commence business within one year from the date of its incorporation or suspends
its business for a whole year
4. If the number of members falls below seven in the case of a public company, and below two in the case of a
private company.
5. If the company is unable to pay its debts
6. If the court is of the opinion that it is just and equitable that the company be wound up.

7. If the company has made default in filing its Balance sheet and Profit and Loss account or annual return for
any five consecutive financial year.
8. If the company has acted against the sovereignty or integrity of India, the security of the state or friendly
relation with foreign state etc,
9. If the tribunal is of the opinion that the Company should be wound up under circumstances mentioned under
Section 424G (sick company).

In case of Voluntary winding up

Winding up the affairs of a company either by its members or by its creditors, without any interference of court it is
called voluntary winding up of a company. Section 484 of the Act, 1956 lays down the following circumstances
under which a Company may wound up voluntarily:
1. By passing Ordinary Resolution: When the period fixed for the duration of the Company by its Article has
expired or the event, if any, on the occurrence of which the Article provides that the Company is to be dissolve,
the Company may wound up voluntarily by passing a Ordinary resolution in the General Meeting.
2. By passing Special Resolution: The members of the company may, at any time by passing a Special
Resolution, wound up the affairs of the Company voluntarily. No reasons need to be given when majority of the
members decided to wind up the Company.
Difference between Compulsory and Voluntary winding up
The following are difference between Compulsory and Voluntary winding up:
Compulsory winding Up

Voluntary winding Up

1.

Compulsory winding up of a
company is brought about by an
order of the court.

Voluntary winding up is brought about either by the members

or by the creditors of the company without the intervention of
the court

2.

In case of Compulsory winding up,

the liquidator is appointed by the
Court.

In case of Voluntary winding up, the liquidator is appointed

either by the members or by the members and creditors, both.

Appointment of liquidator:
Liquidator is an officer appointed by the creditors of the company (in case of Creditors Voluntary Winding up) or
by the members of the Company (in case of Members Voluntary Winding up), when the company goes into
winding up or liquidation voluntarily. A company may appoint an insolvency practitioner (CA, CS or Lawyer) to
whom it wishes to act as a liquidator for the purpose of voluntary winding up. However, the Official liquidator is
appointed by the Central Government as per section 448 of the Act, 1956 who shall be attached to the High Court
of the state for the purpose of conducting liquidation proceeding or say winding up proceeding of those companies
which are ordered to be wound up by the Tribunal. Functionally the Official Liquidator is under the supervision and
control of the High Court but administratively is under the control of the Central Government through the Regional
Director.

Types of Voluntary winding up

A company may wind up its affairs voluntarily in any of the following two manners:

1. Members voluntary winding up: Winding up the affairs of the company voluntarily under the supervision of
members whereby declaration of solvency is made by the Board and the same has been filed with the Registrar.

2. Creditors voluntary winding up: Winding up the affairs of the Company when declaration of solvency is not
made by the directors and the Creditors of the Company control and supervise the entire process.

Process of Members Voluntary Winding Up

Precondition for members voluntary winding up is the solvency of the company, since cash will be require for
disposal of the liabilities, if any, and for the payment of various expenses during the proceeding of the process.
The entire process along with estimated timelines of members voluntary winding up is discussed in the table
below:
Section

Steps under Companies Act, 1956

Sec 488

Convene a board meeting (BM) for:

1. Approving voluntary winding up of the Company
2. Approving appointment of liquidator and his
remuneration and
3. Fixing date and time for the general meeting.

Sec
488(1)

Declaration of solvency (DoS) duly verified by an affidavit

is to be provided by the directors at the BM of the
company.
DoS shall be accompanied by
* Audited balance sheet and P/L Account
* Statement of companies Assets and liabilities

Sec
488(2)

Filing of the above declaration along with

i) Audited balance sheet for the period ending
practicable date before the date of declaration along with
the auditors report,

Required
Form

Time frame

X day

Form 149
in GNL2

On (X) day

after X and before (X+5

weeks)

ii) A statement of assets and liabilities alongwith the

auditors report thereon
with the Registrar of Companies within 5 weeks
immediately preceding the date of passing SR in the
general meeting

Sending of notice of EGM to all the members, directors

say (Y) day

Sec 490

Holding of EGM and passing SR therein

1.for winding up and
2. for appointment of liquidator (fixing his remuneration
too)

Y+35

Sec
493(1)
and (2)

The Company shall give notice of appointment of

liquidator to the registrar (within 10 days of appointment)

Form 152 Within (Y+35+10)

in Form
GNL 2

Sec 485

Publishing of notice of resolution for winding up by

advertisement in official gazette and also in the
newspaper circulating in the district where the RO of the
Company is situated. (within 14 days of passing SR)

Within (Y+35+14)

Sec
488(2),
Rule
127 of
CCR,
1959

Company to submit to the liquidator a statement of

companys affair duly verified by an affidavit (within 21
days of commencement of winding up)

Form 57
along
with Form
58

Within (Y+35+21)

Sec 485

Filing the Special resolution passed in aforementioned

GM with the RoC within 30 days of passing the same.

MGT
14

Within (Y+35+30)

Sec 516
and
Rule
315 of
the
CCR,
1959

The liquidator has to file the notice of his appointment

with the ROC in Form 152 and publish the same in the
official gazette in Form 151 and also to give notice of his
appointment to the IT Officer.(No prescribed format,
letter would be sufficient)

Form 151
and Form
152

Within (Y+35+7)

Rules
124 to
134 and
312 to
361 of
CCR,
1959

Liquidator to ensure disposal and realization of assets at

fair value and payment of liabilities are made and that
share capital is returned to the shareholders

Sec
497(1)
(a)

As soon as the affairs of the Company is fully wound up,

the liquidator shall prepare accounts of winding up and
get the same audited

Form 156

Within (Y+35+30+15)

Sec
497(1)
(b)

Give advertisement in newspaper specifying date, time

and place and object of the final general meeting.

Form 155

Within (Y+35+30+15+7)

Sec
497(1)

Hold General Meeting for the purpose of laying

liquidators accounts and pass SR therein for disposal of
books and papers of company

Within (Y+35+30)

Within
(Y+35+30+15+7+21)

Liquidator to attend the meeting and place the accounts

prepared after necessary disposal, payments.
Sec
497(3)

within one week of the final general meeting,

1.liquidator to file the copies of the accounts with the
RoC and the Official Liquidator and also file respective
forms applicable

Form 157
for
accounts
in GNL2

Within
(Y+35+30+15+7+21+7)

Sec
497(5)

Special resolution passed in the Final GM to be filed with

the RoC

Sec
497(5)

The registrar on receiving the accounts and return shall

forthwith register them.

Sec
497(6)

The official liquidator on receiving the accounts and

return shall make a scrutiny of the books and affairs of
the Company and make a report to the tribunal that the
affairs of the company have not been conducted in a
manner prejudicial to the interest of members, then from
the date of submission of the report to the tribunal, the
company shall be deemed to be dissolved.

Sec
497(6B)

On receipt of the report of official liquidator, tribunal may

make order that the company shall stand dissolved.

MGT
14

Within
(Y+35+30+15+7+21+30)

However, there are differences between members voluntarily winding up and creditors voluntarily winding up.
Only solvent company can opt for members voluntarily winding up, therefore the process requires filing of
Declaration of Solvency by the directors of the company and once the company has appointed liquidator, the
power of Board of directors, Managing director and manager shall cease to exist. Whereas, Creditors voluntary
winding up is resorted to by the insolvent companies. It requires the holding of meetings of creditors besides those
of the members right from the beginning of the process of voluntary winding up. It is the creditors who get the right
to appoint liquidator and hence, the entire process of winding up takes place under the supervision and control of
the Creditors of the Company.
Thus, the entire windingup process are greatly affected by the facts and circumstances of a particular case.
Foreign capital contribution
In case the company has any capital contribution from a foreign entity the same will also have to be refunded at
the time of winding up. At the time of distribution of assets to such foreign entity, compliances with RBI need to be
ensured. AD Category1 banks have been allowed to remit winding up proceeds of the Companies in India which
are under liquidation, subject to payment of applicable taxes. Liquidation may be subject to any order of winding up
issued by the court or the official liquidator in case of voluntary winding up under the provisions of the Act, 1956.
AD Category I banks shall allow the remittance provided the applicant submits the following documents:
i. No objection or Tax clearance certificate from Income Tax Department for the remittance.
ii. Auditors certificate confirming that all liabilities in India have been either fully paid or adequately provided for.
iii. Auditors certificate to the effect that the winding up is in accordance with the provisions of the Companies Act.
iv. In case of winding up otherwise than by a court, an auditors certificate to the effect that there is no legal
proceedings pending in any court in India against the applicant or the company under under liquidation and
there is no legal impediment in permitting the remittance.
Winding up and dissolution
Many get confused between winding up, dissolution and insolvency. But the fact is that winding up and insolvency
are two different phases. Even a solvent Company can wind up its affairs, with the approval of the members of the
Company. Further, there are differences between winding up and dissolution also. Winding up is a process that
leads to dissolution. During winding up, the assets and liabilities of the Companies are disposed off by the
liquidator so that at the end, the company shall not have any assets or liabilities. Whereas, when the

affairs of the company are fully wound up, dissolution takes place. On dissolution, the name of the Company
gets struck off the register of the Companies and its legal status as a corporation disappears.