Winding Up of a Company

According to Section 2(94A) of the Companies Act, 2013, “winding up” means officially ending a business using the procedures set forth in the Act or by going through liquidation under the Insolvency and Bankruptcy Code, 2016. This procedure, which ends with the company’s dissolution, includes stopping regular business operations, selling assets, and paying off debts. In spite of this, the corporation retains its legal entity status throughout the winding-up process and until dissolution, enabling it to participate in legal proceedings within a Tribunal. Ensuring a smooth closure and asset distribution is the aim of winding up the business.

The Positive aspects of the Organisation’s Liquidation of the Business

• Directors and other firm employees are released from any obligation to or pressure from creditors following the completion of the liquidation procedure.
• Directors can ignore legal actions from courts or tribunals if the resolution is voluntarily approved, allowing them to concentrate on other business opportunities.
• Fees from asset sales contribute to the generally cheap expenses of liquidation.
• A company or other entity’s signed leases will be canceled together with its conditions upon liquidation. The revenues from the sale of assets will be subtracted from any penalty.
• Following a long-lasting legal struggle, creditors will profit from liquidation by obtaining a default payment according to the suggested credits submitted by all creditors.

Documents Needed for Company Liquidation in India

• PAN card for the company
• Closing statement for the bank account of the company
• An indemnity bond that has been notarized and signed by the directors
• Latest financial statement available for the company
• All of the company’s responsibilities and assets are listed in accounts that have been examined by a chartered accountant (CA).
• Evidence proving the resolution was passed by at least 3/4 of the board
• Application for name change of the firm.

Methods for Winding Up of a Company

A private limited business can be wound up in one of two ways. In this manner:

• Voluntary winding up of the company:
  A general meeting resolution or a special resolution can initiate the voluntary winding up of a firm. It is also possible to compel the winding up procedure by breaking the terms of the Memorandum of Association (MOA).
• Compulsory winding up of the Company:
  A particular resolution advocating for judicial intervention may be issued by the directors during the company’s board meeting in order to carry out the mandatory winding up of the company upon the order of a tribunal or a court. Likewise, should any official submit a petition with a court or tribunal, or should the corporation participate in any unlawful or fraudulent action, it must be dissolved.

Rules for a Company’s Liquidation

The 2013 Companies Act: –

According to the Companies Act of 2013, specific criteria determine when a company can be closed down. Here’s a breakdown of those instances:

Sections 7 and 9:

1. A special vote inside the corporation makes the decision.
2. The business violates India’s sovereignty and integrity.
3. If the tribunal has discovered any fraud or mischief.
4. The business failed to submit annual returns.
5. When the judiciary determines that closing the business is just and fair.

The 2016 Insolvency and Bankruptcy Code

The Bankruptcies Code of 2016 describes the steps involved in closing a business. Outlined below are the summarized steps involved:

Section 59: The voluntary liquidation of the corporation resembles to Section 271 of the Companies Act. In this part, a special resolution that the board members implemented wound up the firm.

Primary Reasons for Compulsory Winding Up of Companies

A private limited company is a legal entity established in line with the Companies Act. Thus, a company has to maintain regular compliance throughout its life cycle.

The liquidation procedure is used for non-functioning companies that wish to escape their compliance requirements. The following section discusses a few potential causes of company closure.

• The business passes a special resolution instructing the tribunal to wind up the enterprise;
• The business neglects to file a mandatory report with the registrar’s office; and
• The business fails to begin operations within a year of its formation.
• The number of employees in a private or public corporation has dropped below two or seven, respectively.
• The company cannot afford to pay its obligations.
• The court made a fair and reasonable judgment to dissolve the business.
• For five out of the last six fiscal years, the company has been unable to file its annual report or balance sheet.
• The company transgressed the integrity and sovereignty of the country.

Within three to six months, an online application for business closure must be submitted to the Ministry of Corporate Affairs. Directors risk fines, penalties, and disqualification from starting new businesses if they don’t comply on time. It is advisable to dissolve an inactive corporation in order to avoid fines or obligations in the future.

Implications of Winding up of a Company

These days, we’re talking about the five consequences of liquidating a company. A liquidator is chosen to auction off the business’s assets after it is declared insolvent. The designation of a liquidator produces several outcomes. Five of those consequences are what we’ll discuss today.

Immediate Relinquishment: – The first consequence is the most obvious, but before you go, you need to understand it. As soon as a liquidator is appointed, you lose all authority over the company and its assets.

Director disempowerment: – The directors may still hold that title, but they are no longer in command. The directors lose their ability to influence the company’s direction after the liquidator assumes control.

Bankruptcy acknowledgment: –If the need arises to appoint a liquidator, it signifies that the company is insolvent, indicating its inability to meet its financial obligations. The primary responsibility of a liquidator is to maximize the repayment of debts to the extent feasible within the company’s financial constraints.

Personal Guarantees: – Debts guaranteed by a director or another employee of the company must be repaid, even after the company’s bankruptcy. The personal guarantee remains in effect for these debts.

Industry Restrictions: –If your company declares bankruptcy in a specific industry, like construction, you’re restricted from working in that field for three years. It’s essential to understand industry regulations before filing for bankruptcy, as they differ depending on the sector.