Voluntary Winding Up Of A Company

Voluntary winding up of a company is a structured process initiated by the company’s shareholders or creditors to dissolve the company and distribute its assets equitably. Governed under the provisions of the Companies Act, 2013, this process provides a legal framework to ensure an orderly closure while safeguarding the interests of stakeholders. A company may opt for voluntary winding up due to various reasons, such as achieving its intended objectives, insolvency, inactivity, or a collective agreement among shareholders.

This blog delves into the intricacies of voluntary winding up, including its types—members’ voluntary winding up and creditors’ voluntary winding up—along with the essential legal provisions, documentation, and procedures required. Additionally, it explores key case laws and the circumstances under which a company can opt for voluntary dissolution.

Overview Of The Companies Act, 2013

The Companies Act, 2013, is the primary legislation governing the incorporation, operation, and winding up of companies in India. Its key objectives include improving corporate governance, enhancing transparency, and protecting the interests of various stakeholders, including shareholders, creditors, and employees.

What Is Voluntary Winding Up Of A Company

Voluntary winding up of a company is a process initiated by the company's shareholders or members to dissolve the company and distribute its assets. This decision is typically made when the company ceases to pursue its business objectives, has completed its intended purpose, or faces insolvency (though insolvency usually leads to compulsory winding up). The Companies Act, 2013, provides a detailed legal framework for voluntary winding up, outlining procedures to ensure a fair and transparent distribution of assets among stakeholders, including creditors and shareholders.

Voluntary Winding Up Mentioned Under Companies Act,2013

Below is an overview of the voluntary winding up process as per the Companies Act, 2013, before the transition to the new code which was detailed in Section 304 to 323 of the act.

Types Of Voluntary Winding Up

Voluntary winding up under the Companies Act, 2013, can be either a members' voluntary winding up (when the company is solvent) or a creditors' voluntary winding up (when the company is insolvent).

Members' Voluntary Winding Up

Members' voluntary winding up occurs when a company is solvent, meaning it can meet its liabilities. In this scenario, the winding up is initiated by the members (shareholders) passing a special resolution. However, a declaration of solvency, sworn by a majority of the directors, stating that the company can pay its debts in full within a specified period (not exceeding one year), is a crucial prerequisite for a members' voluntary winding up.

Creditors' Voluntary Winding Up

A creditors' voluntary winding up occurs when a company acknowledges its inability to pay its debts. While the process is initiated by the company passing a special resolution for winding up, a meeting of the creditors is also convened. The creditors then typically nominate a liquidator, and their involvement is crucial throughout the winding-up process to protect their interests. The resolution to wind up is not solely dependent on creditor approval, but their participation in the subsequent proceedings, especially regarding the appointment of the liquidator, is essential.

Documents Required For Voluntary Winding Up Of A Company

Documents required for the voluntary winding up of a company under the Companies Act, 2013, are as follows:

1. Declaration Of Solvency

This declaration, stating the company can pay its debts in full within a specified period (not exceeding one year), is made by a majority of the directors at a Board meeting. It's filed with the Registrar of Companies (ROC) before the general meeting where the resolution for winding up is passed. The specific form is INC-20A.

2. Special Resolution

A special resolution passed by the shareholders (75% majority) is required to approve the voluntary winding up. A copy of this resolution is filed with the ROC in Form MGT-14 within 30 days of its passing.

3. Appointment Of Liquidator

In a members' voluntary winding up, the liquidator is appointed by the shareholders in the general meeting where the winding up resolution is passed. In a creditors' voluntary winding up, the creditors nominate a liquidator, and the shareholders may also nominate one. If there's a difference, the creditors' nominee prevails. The appointment is notified to the ROC in Form INC-28 within 30 days of the appointment.

4. Advertisement of Resolution

The company must advertise the resolution for winding up in a newspaper circulating in the district where the company's registered office is situated and also upload it on the company's website (if any).

5. Liquidator's Report

The liquidator is required to submit progress reports to the ROC as required by the Act and rules, detailing the winding up progress, including asset realization and debt settlement.

6. Final Report And Accounts

After completing the winding up process, the liquidator must prepare a final report and accounts, which should be presented at a final meeting of the members.

7. Final Meeting

A final meeting of the members (in a members' voluntary winding up) or of the creditors (in a creditors' voluntary winding up) is held to present the final report and accounts.

8. Application To Tribunal For Dissolution (Form WIN-6)

After the final meeting, the liquidator makes an application to the Tribunal (National Company Law Tribunal - NCLT) for an order of dissolution of the company in Form WIN-6. It is the Tribunal which passes the order of dissolution and not the filing of form with ROC.

9. Order Of Dissolution

Upon the Tribunal passing the order of dissolution, the company is dissolved. The liquidator then files the order with the ROC.

Process Of Voluntary Winding Up

The process of Voluntary Winding Up is as follows:

1. Declaration Of Solvency (Members' Voluntary Winding Up Only)

In a members' voluntary winding up, a majority of the directors, at a board meeting, must make a declaration verified by an affidavit stating that the company has no debts or will be able to pay its debts in full within a period not exceeding one year from the commencement of the winding up. This declaration must be filed with the Registrar of Companies (ROC) along with a statement of the company's assets and liabilities. This declaration is not required for a creditors' voluntary winding up.

2. Passing Of Special Resolution

A special resolution (requiring 75% majority) must be passed by the shareholders in a general meeting to initiate the winding up. This resolution should state that the company is to be wound up voluntarily.

3. Appointment Of Liquidator

In a members' voluntary winding up, the company in its general meeting appoints one or more liquidators. In a creditors' voluntary winding up, the creditors and the company nominate liquidators, and if they nominate different persons, the creditors' nominee prevails.

4. Meeting Of Creditors (Creditors' Voluntary Winding Up Only)

If the declaration of solvency is not made (implying insolvency), it becomes a creditors' voluntary winding up. In this case, a meeting of creditors must be convened after the general meeting of the company to discuss the winding up process and appoint a liquidator (or confirm the company's nomination).

5. Liquidator's Duties

The liquidator's duties include taking control of the company's assets, realizing them, paying off creditors according to their priority, and distributing any surplus to the members in accordance with their rights. The liquidator is also responsible for maintaining proper books of accounts and submitting reports as required by the Act.

6. Final Meeting & Dissolution

Once the winding up is complete, the liquidator prepares an account of the winding up, which is presented to a final meeting of the members (in a members' voluntary winding up) or of the creditors and members (in a creditors' voluntary winding up). After the meeting, the liquidator files the account with the ROC and the National Company Law Tribunal (NCLT). The NCLT then passes an order for the dissolution of the company.

Circumstance In Which Company Can Be Wound Up Voluntarily

Here are the primary situations that allow a company to wind up voluntarily:

Passage Of A Special Resolution

A company may initiate voluntary winding up if its shareholders pass a special resolution during a general meeting. This resolution indicates the collective decision of the shareholders to dissolve the company.

Completion Of Objectives

A company can be wound up voluntarily when it has fulfilled its business objectives. Once the purpose for which the company was formed is achieved, winding up can be a logical next step.

Solvency Of The Company

Voluntary winding up is permissible when the company is solvent, meaning it can pay its debts in full. This ensures that creditors are settled before the company ceases operations.

Inactivity Or Dormancy

If a company has not conducted any business activities for an extended period, shareholders may choose to wind it up voluntarily. This is common for dormant companies that no longer serve a purpose.

Unanimous Agreement Among Shareholders

In cases where all shareholders agree on winding up the company, it can proceed with the voluntary winding up process. This unanimous consent demonstrates a clear intention to dissolve the company.

Case Laws

A few case laws on winding up of companies are:

Official Liquidator v. Dayanand (2008) 10 SCC 1

This landmark case clarifies the duties and responsibilities of the Official Liquidator, particularly regarding the protection of creditors' interests and the proper administration of assets during the winding-up process of a company, emphasizing the liquidator's fiduciary duty.

M/S.Shree Ram Mills Ltd vs M/S.Utility Premises (P) Ltd on 21 March, 2007

The Supreme Court clarified that the existence of disputes, including those potentially subject to arbitration or involving limitation issues, does not automatically bar the commencement or continuation of winding-up proceedings. The Court distinguished winding up from other legal proceedings like arbitration, stating that the winding-up process addresses the collective interests of creditors and other stakeholders, and its initiation is not contingent upon the resolution of individual disputes that might be more appropriately handled separately.

Conclusion

The process of voluntary winding up of a company is a crucial aspect of corporate governance, allowing businesses to dissolve in an orderly and transparent manner. Whether initiated by members or creditors, this process ensures that all legal obligations are fulfilled, creditors are paid, and assets are distributed fairly. The Companies Act, 2013, provides a detailed framework to guide companies through the winding-up process, making compliance and proper documentation essential for a seamless closure.

By understanding the key requirements, procedures, and responsibilities, stakeholders can navigate the complexities of voluntary winding up effectively. Whether a company is solvent and seeking closure after fulfilling its purpose or is insolvent and unable to continue operations, following the prescribed legal framework ensures that the interests of all parties are protected. This structured approach not only facilitates an equitable dissolution but also upholds the principles of fairness and accountability in the corporate ecosystem.

FAQs

A few FAQs on winding up of companies are:

Q1. How long does the voluntary winding-up process take?

The timeline for voluntary winding up varies based on the company's complexity, asset realization, and compliance with procedural requirements. On average, it may take several months to a year.

Q2. What happens to the company's liabilities during winding up?

All liabilities are settled using the company's assets before any distribution to shareholders. In creditors' voluntary winding up, creditor claims are prioritized.

Q3. Can a dormant company be voluntarily wound up?

Yes, a dormant company can opt for voluntary winding up, especially if it no longer serves a business purpose or incurs unnecessary expenses.