Primer

FAQs on winding up
Sikha Bansal and Niddhi Parmar
parmar@vinodkothari.com

Vinod Kothari & Company

Corporate Law Services Group
corplaw@vinodkothari.com

January 5, 2017

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Disclaimer:
This write up is intended to initiate academic debate on a pertinent question. It is not intended
to be a professional advice and should not be relied upon for real life facts.
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1. What is winding up?

The term winding up was neither defined under the Act, 1956 nor under the Act,
2013. In layman language, the term was understood as a process of selling all the
assets, paying off creditors, distributing the remaining assets, if any and thereafter
dissolving the business. However, section 255 of the Code read with 11 th Schedule
provides for insertion of new definition of winding up as follows:

(94A) "winding up" means winding up under this Act or liquidation under the
Insolvency and Bankruptcy Code, 2016, as applicable."

Subsequent, to insertion of new definition, winding up can either be dealt under the
Code or under the Act, 2013.

2. Is winding up same as liquidation and dissolution?

Commonly, the expression winding up and liquidation are used interchangeably;

however, there exist a line of difference between the two expressions. Winding up is
a process of ending all the business affairs of the company and liquidation is referred
to selling off the assets of the company. The Code has used the expression
liquidation, while the Act, 2013 and previous corporate laws are more comfortable in
using the expression winding up.

The expression dissolution brings end to the process of winding up/ liquidation.
When the affairs of the company have been completely wound up, the liquidator
shall make an application to the Tribunal for dissolution of the company. The
dissolution order is a death certificate for the company.

3. What are the various ways in which a company may be wound up?

The company can be wound up under any of the following modes -

Resolution and Winding up in case of a default Chapter II and III of this Code
Winding up on any of the grounds listed in section 271, as amended by the Code
Section 271 of Companies Act
Voluntary winding up (other than summary winding up process below) Chapter
V of this Code.
Summary winding up of companies having assets upto Rs 1 crore sections 361-
365 of Companies Act, 2013
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Winding up of unregistered companies including partnership firms and foreign

companies sections 375 and 376 of Companies Act, 2013
Dissolution without winding up by merger section 232 (3) (d) of the Companies
Act, 2013
Removal of the name of a defunct company from register of members section
248 of the Companies Act, 2013
In case of financial service providers, until explicit provisions are enacted, either
the Companies Act 2013, and/or the relevant special laws, will continue to
prevail.

4. What all laws do I have to refer to for winding up a company?

Winding up is being dealt under the Code and Act, 2013. The provisions dealing with
voluntary winding up i.e., sections 304 to 323 has been omitted. Therefore the
company will have to refer the following laws in case of winding up:

Winding up by the Tribunal under the Companies Act, 2013

Winding up due to inability to pay under the Code;
Voluntary winding up for corporate persons under the Code
Voluntary winding up for other than corporate persons under the Companies
Act, 1956 or any special law, if any.

5. Which authority takes care of winding up proceedings?

Under the Act, 2013 - the application shall be filed before the Tribunal. Tribunal
referred under the Act, 2013 shall mean National Company Law Tribunal constituted
under section 408 of the Act, 2013. (Section 2 (90) of the Act, 2013).

Under the Code the application under part II of the Code shall be filed before the
Adjudicating Authority. The term Adjudicating Authority shall mean National
Company Law Tribunal constituted under section 408 of the Act, 2013. (Section 5 (1)
of the Code).

6. I have heard that winding provisions have been entirely shifted from the
Companies Act to the Bankruptcy Code. Is it true? If not, what is the difference
between winding up under the Companies Act, 2013 and winding up under the
Bankruptcy Code?
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The question is partially correct. Only voluntary winding up (i.e., sections 304 to 323
of the Act, 2013) has been shifted from the Act, 2013 to the Code (i.e., section 59 of
the Code). Winding up by the Tribunal shall still be dealt under the Act, 2013. In a
nutshell

If the company is being would up due to triggering of any of the circumstance

mentioned under section 271 (the text of the said section has been substituted
by section 255 read with 11th Schedule of the Code) of the Act, 2013
application shall be made under the Act, 2013 and sections 271 to 303 shall
apply;
If the company is being wound up due to inability to pay application shall be
made under sections 7, 9 or 10 of the Code. Provisions of Part II of the Code shall
apply;
If the company goes for voluntary winding up application shall be made under
section 59 of the Code.

7. I have a partnership firm. Do I need to get concerned of the winding up provisions

of the Companies Act, 2013 or the Bankruptcy Code?

As discussed in question 7, provisions of the Act, 2013 are applicable only to a

company. Part III of the Code provides for insolvency resolution and bankruptcy for
individuals and partnership firms.

Partnership firms where registered or not under section 59 of the Indian Partnership
Act, 1932 shall get covered under the ambit of Part III of the Code and thus, the
provisions of Part III shall apply to a partnership firm.

8. I am a member of a co-operative society? Are the winding up provisions relevant to

the society?

Yes. Section 42 of the Co-operative Societies Act, 1912 deals with winding up
provisions.

Voluntary Winding up

9. What about voluntary winding up? Are the provisions of the Companies Act, 2013
applicable?
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The voluntary winding up provisions was never enforced and has been omitted
pursuant to section 255 of the Code read with 11 th Schedule. The voluntary winding
up provisions has been shifted from the Act, 2013 to the Code. Section 59 of the
Code deals with voluntary winding up of the corporate persons.

Note that the provisions of the Code are not applicable to financial services provider
(Refer. section 2 (7) and (17) of the Code). For persons other than corporate persons,
the provisions of the Act, 1956 or any special laws, if any shall apply.

10. I have heard that the voluntary winding up provisions of the Code has not been
enforced as yet, and on the other hand, you say that the voluntary winding up
provisions of the Companies Act, 2013 have been omitted? What recourse is
available then?

Till the time the provisions of the Code have not been enforced, the corresponding
provisions of the corporate laws shall apply. Therefore, for the sections of the Code
which are yet to come into effect, the corresponding provision i.e., the provisions of
the Act, 2013 shall apply. Notably, the provisions of the Act, 2013 have been
omitted; therefore, the provisions of the Act, 1956 shall continue to be in force.

11. When are the voluntary winding up provisions of the Code proposed to be
enforced?

Section 59 of the Code deals with voluntary winding up of the companies. Once the
said section comes into force, the corporate persons shall become eligible to file an
application under the Code.

12. Does the Code maintain long-established difference between members voluntary
winding up and creditors voluntary winding up?

No. While the Companies Act, 1956 provided that the directors may make a
declaration of solvency [section 488, Companies Act, 1956], the Companies Act, 2013
[section 305] says, the directors shall make a declaration of solvency. Additionally,
the 2013 Act makes the obtention of creditors resolution also necessary, and
provides that if the creditors are of the view that the company may not be able to
pay its debts in full, then the company shall file a petition for compulsory winding up
[section 306 (3) (b)].
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Thus, the process of creditors voluntary winding up came to an end, and the Indian
law now has only two options insolvent companies come for liquidation under
compulsory liquidation process, and solvent companies come for liquidation under
the voluntary liquidation process.

13. My company is a financial service provider within the meaning of the Bankruptcy
Code, and wishes to go ahead with voluntary winding up after a few months.
Should I follow the provisions of the Bankruptcy Code, once these are enforced?

No. The provisions of the Code apply to corporate persons. The term corporate
persons as defined under section 3 (7) of the Code excludes financial service provider
from its ambit. Therefore, financial service providers cannot file for voluntary
winding up applications under the Code. The recourse available with such entities is
to either file a petition under the provisions of the Act, 1956 or special laws, if any.

14. Who shall I file a voluntary winding up petition with High Court or NCLT?

Since voluntary winding up provisions under the Code are yet to be notified, the
applications shall be filed in accordance with the provisions of the Act, 1956 i.e.,
before the High Court.

15. Once the provisions of the Code are enforced, who will entertain the petitions
High Court or NCLT?

Such petitions shall be entertained by the NCLT.

16. If I file a voluntary winding up petition for my company today and the matter
remains pending till the enforcement of the Code, will I have to file fresh
application under the Code?

No. If the petition filed before the high Court remains pending as on April 1, 2017,
then such petitions shall still be entertained by the High Court as per the provisions
of the Act, 1956.

17. The directors of my company have filed declaration of solvency as on 1 st

December, 2016.
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Same as answer to question 18.

Winding up by the Court/NCLT

18. My company has passed special resolution for winding up. Which Act is applicable
and which authority shall I go to?

Such companies shall refer the provisions of the Act, 2013 and file an application
before the NCLT. Note that the provisions of the winding up by tribunal have been
notified and shall come into force w.e.f. December 15, 2016.

19. A company is unable to pay debts. Shall the company proceed as above under the
Companies Act, 2013?

Clause (a) of sub-section (1) of section 271 provided that a company can be wound
up by the tribunal if it is unable to pay its debts. However, the said clause has been
omitted pursuant to section 255 of the Code read with 11 th Schedule. Clause (a) of
section 271 (1) has been shifting from the Act, 2013 to the Code.

If the company is being wound up on the grounds of inability to pay company shall
make an application under section 7, 9 or 10 of the Code.

20. Since your answer to the above is no, what will happen to winding up proceedings
pending before the High Court under the Companies Act, 1956 on the ground of
inability to pay?

For the petitions which are pending before the High Court as on December 15, 2016
shall remain with the High Court under the provisions of the Act, 1956, if the petition
is served as required under Rule 26 of the Companies (Court) Rules. In all other
cases, winding up petitions shall be transferred to the NCLT under the Code.

21. So, where the winding up proceedings are pending before High Court on grounds
other than inability to pay, will such proceedings be transferred to NCLT under the
Companies Act, 2013?

No. If the winding up proceedings are pending before High Court on grounds other
than inability to pay and the petition as required under Rule 26 of the Companies
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(Court) Rules has not been served, only in such cases the proceedings shall be
transferred to NCLT under the Act, 2013.

22. In case proceedings are transferred to NCLT under the Bankruptcy Code, will I have
to go through insolvency professional?

When an application is filed under the Code, an application shall be filed stating the
name of resolution professional in the application. Only such insolvency professional
shall be appointed who are members of the insolvency professional agencies (note,
till date 3 IPAs has been registered with the Board) and is holding a valid certificates
from the Insolvency and Bankruptcy Board of India.

23. In case proceedings are transferred to NCLT under the Companies Act, 2013, will I
have to go through another liquidator?

If the liquidator appointed under the existing petition is a members of the insolvency
professional agencies and is holding a valid certificates from the Insolvency and
Bankruptcy Board of India may continue to act as liquidator, unless replaced by the
NCLT.

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