Winding up, the company’s 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. The Ministry of Corporate Affairs (“MCA”) vide Notification dated 15.12.2016 notified the sections of Companies Act, 2013 dealing with amalgamation, compromise, arrangement, liquidation and winding up.
An overview of Winding up provisions under Companies Act, 1956 and Companies Act, 2013 is presented in tabular form With the notification dated 15.12.2016, the burden of the High Court with respect to winding up is almost entirely shifted to the Tribunal. It is imperative to note that Voluntary winding up and winding up proceedings relating to inability to pay debts is now governed by the Insolvency and Bankruptcy code, 2016
The term “winding-up” was not defined under the Companies Act, 2013 (“the Act”). With notification of the Insolvency and Bankruptcy Code, 2016 (“the Code”) with effect from 15th November, 2016, the Act stands amended in accordance with Schedule XI of the Code. The aforesaid Schedule XI of the code now defines the term “winding up” by introducing a new section 2(94) of the Act as “winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.” Thus, winding-up proceeding will be governed by the Act as well as the Code.
Subsequent to the notification of section 255 of the Code, the Ministry of Corporate Affairs (“MCA”) has notified provisions of Chapter XX of the Act which relate to winding up of Companies on any ground other than inability to pay debts i.e., on any circumstances mentioned under section 271(a) to (e) of the Act.
Section 271 (1) (a) of the Act dealt with the Winding up by Tribunal on account of inability to pay debts. The aforesaid section has been omitted by section 255 0f the Code and is now dealt with in accordance with provisions of section 7 to 9 of the Code, being initiation of corporate insolvency resolution process by financial and operational creditors.
In case there is “default” in payment of debt by corporate person, an application for initiation of corporate insolvency resolution process can be made to the adjudicating authority (the Tribunal). As per the Code, the term “default” means non-repayment of a debt, whether whole or in part, which has become due and payable by a corporate person. This would imply that, under the code, insolvency proceeding can be instituted even against a financially solvent company having made default in payment of debts. Once the Application for initiation of corporate insolvency resolution process is made and the same is accepted by the Tribunal, an Insolvency Professional is appointed for conducting the corporate insolvency resolution process. The process is required to be completed within 180 days from the date of admission of Application by the Tribunal, on failure of which, Tribunal may pass an order for liquidation of the corporate person in relation to whom the Application was made.
| Sr. No. | Particulars | Provisions under Companies Act, 1956 | Provisions under Companies Act, 2013 |
|---|---|---|---|
| 1. | Provisions of Winding up | Section 425 to Section 520, Section 582 to 590 read with Company Court Rules, 1959 | Section 270 to Section 365, read with Insolvency and Bankruptcy Code, 2016 and Companies Act, 1956 [ in case of Voluntary winding up of Companies pending before High Court as on date of commencement of Companies (Transfer of Pending Proceedings) Rules, 2016] |
| 2. | Modes of Winding up | Section 425: A. Compulsory Winding up by Court B. Voluntary Winding up, classified into (a) Member’s Voluntary Winding up (b) Creditor’s Voluntary Winding up C. Voluntary Winding up subject to the supervision of Court |
Section 270: Winding up of Company: A. by the National Company Law Tribunal (“Tribunal”) B. Voluntary |
| 3. | Circumstances under which Company may be wound up | Section 433 i) by Special Resolution ii) default in delivering Statutory Report to Registrar of Companies iii) default in holding Statutory Meeting iv) failure to commence business within 1 year from date of incorporation of Company v) Number of members reduced below the required limits vi) inability to pay debts vii) As per Court’s opinion on just and equitable grounds viii) default in filing financial statements or annual returns for 5 consecutive financial years ix) Company having acted against sovereignty and integrity of India x) Winding up as per section 424G |
Section 271 i) Petition under section 272 ii) inability to pay debts iii) Company having acted against sovereignty and integrity of India iv) Winding up subject to Chapter XIX (Sick Companies) v) On Application made by Registrar or person authorized by Central Government, Tribunal is of opinion that affairs of Company is conducted in fraudulent manner vi) default in filing financial statements or annual returns for 5 consecutive financial years vii) As per Tribunal’s opinion on just and equitable grounds |
| 4. | Clarification on inability to pay debts | Section 434 (1) Company is indebted to pay to Creditor (by assignment or otherwise) a sum exceeding Rs. 500 | Section 272(2) Company is indebted to pay to Creditor (by assignment or otherwise) a sum exceeding Rs.1,00,000 |
| 5. | Time limit for passing of Winding up order | No such provision | Section 273 (1) Tribunal shall pass the order of Winding up within ninety days from date of presentation of the Petition |
| 6. | Appointment of Liquidator | Section 448 An Official Liquidator is appointed for the purposes of winding up | Section 275 A Company Liquidator is appointed for the purpose of winding up |
| 7. | Intimation of Winding up order to Liquidator and ROC | Section 444 Intimation of order of Winding up to be made to Official Liquidator & ROC within two weeks from the date of passing of the order |
Section 277 Intimation of order of Winding up to be made to Official Liquidator & ROC within seven days from the date of passing of the order |
| 8. | Submission of Report by Liquidator | Section 455 Where the Company has made a winding up order, the Official Liquidator shall within six months from the date of order, submit to the Tribunal a report containing particulars as mentioned under sub section (1) (a) to (c) of section 455 |
Section 281 Where the Company has made a winding up order, the Company Liquidator shall within sixty days from the date of order, submit to the Tribunal a report containing particulars as mentioned under sub section (1) (a) to (k) of section 281 |
| 9. | Committee of Inspection / Advisory Committee | Section 464 & 465 Committee of Inspection is appointed to act with Liquidator |
Section 287 Advisory Committee is appointed to advise Company Liquidator and submit report to the Tribunal. |
| 10. | Default by Liquidator | Section 481 Fine + Five Hundred Rupees for every day till default continues |
Section 302 Fine + Five Thousand Rupees for every day till default continues |
| 11. | Appeals | Section 482 Appeals shall lie to the same court to which, in the same manner in which, and subject to same conditions under which, appeals lie from any order or decision of the Court in cases within its ordinary jurisdiction |
Section 303 Appeal against such order shall be filed before such authority (now National Company Law Appellate Tribunal) to hear such appeals |
| 12. | Penalty for frauds by officers | Section 540 Imprisonment for a term which may extend to two years and also liable to fine. |
Section 337 Imprisonment for a term which shall not be less than a year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees |
| 13. | Provisions relating to Creditor’s voluntary Winding up | Section 499 to 509 governed provisions relating to Creditor’s voluntary Winding up | No such separate provisions. Governed by voluntary Winding up provisions (Section 306) |
| 14. | Appeal by Creditor | No provision | Section 364 Any creditor aggrieved by the decision of Liquidator for settlement of claims under section 363 may file an appeal before Central Government within 30 days from date of such decision |
| 15. | Winding up of Unregistered companies | High Court shall have authority to pass order relating to winding up of unregistered companies | Tribunal shall have authority to pass order relating to winding up of unregistered companies. (unregistered companies include LLP, society and cooperative society) |
| 16. | Onus for filing certified copy of order | The onus was on the person filing the application | The onus is on Company Liquidator |
Under the erstwhile regime, winding up Applications could be made on account of “inability to pay debts,” which means a situation where a company is commercially insolvent as been interpreted by the Andhra Pradesh High Court in case of Reliance Infocomm Limited v. Sheetal Refineries Private Limited.
Therefore, a remedy to initiate winding up proceedings against financially solvent companies that had defaulted in payment of debts was not available under the earlier regime. However, this is now feasible under the Code.
The provisions of Voluntary winding up provided under the Act stands omitted due to the notification of section 255 of the Code. However, these provisions now fall within the purview of section 59 of the Code which deals with deals with voluntary liquidation of corporate persons. MCA notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations 2017. (“The Regulations”)
A corporate person may initiate a voluntary liquidation proceeding if majority of the directors or designated partners of the corporate person make a declaration to the effect that (i) the corporate person has no debt or it will be able to pay its debts in full from the proceeds of the assets to be sold under the proposed liquidation, and (ii) the corporate person is not being liquidated to defraud any person. If the liquidator is of the opinion that the liquidation is being done to defraud a person or the corporate person will not be able to pay its debts in full from the proceeds of assets to be sold in the liquidation, he shall make an Application to the Adjudicating Authority to suspend the process of liquidation and pass any such orders as it deems fit.
The Regulations specify the manner and content of public announcement, receipt and verification of claims of stakeholders, reports and registers to be maintained, preserved and submitted by the liquidator, realisation of assets and distribution of proceeds to stakeholders, distribution of residual assets, and finally dissolution of corporate person. These oblige a liquidator to preserve a physical or an electronic copy of the reports, registers and books of account for at least eight years after the dissolution of the corporate person, either with himself or with an information utility
MCA issued the Companies (Transfer of Pending Proceedings) Rules, 2016 for clarifying the ambiguities relating to transfer of pending proceedings from a High Court to the Tribunal. The same can be summarized in the following manner:
All the proceedings pending before the High Courts on December 15, 2016, and the notice of which have not been served on the respondent, shall be transferred to the respective bench of the Tribunal exercising territorial jurisdiction over the concerned State and shall be dealt in accordance with the provision of the sections 7, 8 and 9 of the Code.
All the proceedings pending before the High Court on December, 2016, and the notice of which have not served on the respondent, shall be transferred to the respective bench of the Tribunal exercising territorial jurisdiction over the concerned State and shall be dealt in accordance with the Companies Act, 2013
Ashok Commercial Enterprises V. Parekh Aluminex Ltd. C.P. No. 136 of 2014, Bombay HC (Decided on 11th April, 2017) The Petitioner Company sought winding up of the Respondent Company on the ground that later was unable to pay its debts. Respondent requested the present petition to be transferred to National Company Law Tribunal (“NCLT”) in view of the amendment to the provisions of Insolvency and Bankruptcy Code, 2016 (“Bankruptcy Code”) and the notification dated 7th December, 2016, issued by the Central Govt. for transferring various proceedings pending before the High Court to NCLT. The issue was whether High Court had jurisdiction to hear proceedings for winding up petition after the enactment of Bankruptcy Code or the jurisdiction lies only with NCLT. The Court observed that Central Govt. on 7th December, 2016, by exercising powers conferred on it under Section 434(1) and (2) of the Companies Act, 2013, issued a Notification notifying “Companies (Transfer of Pending Proceedings) Rules, 2016” and stating that various proceedings pending before the High Courts would be transferred to NCLT.
The Court clarified that not all winding up proceedings should be transferred to NCLT. In cases where the service of notice of the company petition under Rule 26 of the Companies (Court) Rules, 1959 is not complied with before 15th December, 2016, such Petitions will stand transferred to NCLT. On the other hand, all other Company Petitions would continue to be heard and adjudicated upon only by the High Court. The Legislative intent is thus clear that two sets of winding up proceedings would be heard by two different forum i.e. one by NCLT and another by the High Court depending upon the date of service of Petition before or after 15th December 2016.
Thus, it was concluded that NCLT has jurisdiction over all winding up proceedings, including, inter alia, winding up on the ground of inability to pay debt, where such petition is served to a respondent after 15th December, 2016. For all other winding up petitions served before 15th December, 2016, High Court will continue to have jurisdiction.
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