SCHOOL OF MANAGEMENT STUDIES

UNIT – 5 COMPANY LAW - SCOB1402

UNIT 5 WINDING-UP OF A COMPANY
Compulsory Winding up by Court – Official Liquidator – Statement of Affairs – Contributors –
Voluntary Winding Up – Winding Up subject to Supervision of Court – Consequences -
Defunct Company- NCLT - Principles of Corporate Governance.

WINDING UP OF THE COMPANIES

MEANING

Winding up of a company is a process of putting to an end to the life of a company. It is a

proceeding by means of which a company is dissolved and in the course of such dissolution its
assets are collected, its members, if necessary, pay off its debts out of assets of the company or
from contribution. If any surplus is left, it is distributed among the members in accordance
with their rights.
DEFINITION

According to Prof. Gower, winding up of a company is the process whereby its life is ended
and its property administered for the benefit of its creditors and members. An administrator,
called liquidator, is appointed and he takes control of the company, collects its assets, pay its
debts and finally distributes any surplus among the members in accordance with their rights.

MODES OF WINDING UP

I. COMPULSORY WINDING UP BY THE COURT

A company may be wound up by an order of the court. This is called compulsory winding
up. Sec.433 lays down the following grounds for the winding up of a company by the court;
1. If the company has by a special resolution resolved that it may be wound up by the court.
2. If the company makes a default in delivering the statutory report to the registrar or in
holding the statutory meeting, the court may order winding up of the company either on the
petition of the registrar or on the petition of the contributory
3. Where a company does not commence its business within a year from its incorporation, or
suspends its business for a whole year, the court may order for its winding up.
4. Where the number of members is reduced below 7 in the case of a public company and
below 2 in case of a private company, the court may order the winding up of the company.
5. The court may order for the winding up of a company if it is unable to pay its debts.

6. The last ground on which the court can order the winding up of a company is when the
court is of the opinion that is just and equitable that the company should be wound up.
Petition for winding up

The following persons can file a petition

1. The company
2. Any creditors or creditor including any contingent prospective creditor or creditors
3. Any contributory or contributories
4. All or any of the aforesaid parties, together or separately
5. The Registrar
6. Any person authorized by the Central Government under section 243

II. VOLUNTARY WINDING UP

The object of a voluntary winding up is that the company and its creditors are left to settle
their affairs without going to the court, but they may apply to the court for any directions or
orders if and when necessary. This form of winding up is by far the most common and the
most popular form.

TYPES OF VOLUNTARY WINDING UP

i. Members voluntary winding up

Section 488 provides that where it is proposed to wind up a company voluntarily, the
directors or a majority of them, may, at a meeting of the Board, make a declaration verified
by an affidavit that the company has no debts or that it will be able to pay its debts in full
within a period not exceeding 3 years from the commencement of winding up as may be
specified in the declaration. Where such a declaration is duly made and delivered, the
winding up following shall be called members voluntary winding up.
 ii. Creditors Voluntary winding up

Where the declaration of solvency is not made the winding up is referred to as creditors’
voluntary winding up. The provisions for creditors’ voluntary winding up are similar to those
applicable to the members’ voluntary winding up except that in the former, it is the creditors
who appoint the liquidator, fix the remuneration and generally conduct the winding up.

DISTINCTION

[Link]. MEMBER’S VOLUNTARY CREDITORS VOLUNTARY

WINDING UP WINDING UP
1 Only meeting of members is called Meeting of the members and creditors is
Called.
2 No committee of inspection is Committee of inspection is appointed
appointed
3 Declaration of solvency is made by No such declaration is made
the directors
The liquidator is appointed The liquidator is appointed by the creditors
4 and remuneration is fixed by the and remuneration is fixed by the committees
company itself of inspection
Such winding up takes place only Such winding up takes place only when the
5 when the company is in a position to company is not in a position to pay its debts
pay its debts

III. WINDING UP SUBJECT TO SUPERVISION OF COURT

At any time after a company has passed a resolution for voluntary winding up the court may
make an order that the voluntary winding up will continue, but subject to the supervision of
the court and with such liberty for creditors, contributories and others to apply to the court on
such terms and conditions as the court thinks fit. A petition for the continuance of a
voluntary winding up subject to the supervision of the court must be deemed to be a petition
for winding up by the court. The court may appoint or remove a liquidator on the application
of the Registrar.

LIQUIDATOR

An administrator, called liquidator, is appointed and he takes control of the company, collects
its assets, pay its debts and finally distributes any surplus among the members in accordance
with their rights.
Sec.449, on winding up order made, the official liquidator by virtue of his office becomes the
liquidator of the company.
Fees to the Central Government sec.451 (2), where the official liquidator becomes or acts as
liquidator, there shall be paid to the central government out of the assets of the company such
fees as may be prescribed.
Provisional Liquidator sec.450

The court may appoint official liquidator as liquidator provisionally. He has same powers and
duties as liquidator in a winding up. Appointment of a provisional liquidator is a drastic
measure. Should not be restored to except in special circumstances i.e., in cases of urgency.

Duties of Liquidator

1. Proceedings in winding up sec.451 (1)

2. reports Sec.455 (1)

3. Additional reports

4. custody of company property sec.456

5. exercise and control of liquidators power sec.460

6. directors from the court

7. proper books sec.461

8. appointment of committee of inspection sec.464

9. pending liquidation sec.551

Powers of liquidator

Powers of liquidator in winding up are divisible into 3 main groups;

1. With the sanction of the court sec.457 (1)

2. without the sanction of the court sec.457 (2)

3. with the leave of the court in case of onerous contracts sec.535

Liabilities of liquidator

Liquidator of company liable for negligence

1. If he distributes its assets without making due provision for liabilities or
contingent claims of which he has notice
2. it he applies the company’s assets in paying a doubtful claim without taking
proper legal advice or direction from the court
3. if there is breach of any of his statutory duties, in such case he is liable in
damages to a creditor or a contributory for injury to him
A liquidator is a trustee for the company’s funds and property in his hand for the creditors.
Liquidator is not trustee for the property in the assets invested in the company and when he
makes contracts he does so in the company’s name.

STATEMENT OF AFFAIRS

When the liquidator has been appointed, a Statement of Affairs of the company is to be made
to him in the prescribed form, verified by an affidavit, and containing particulars regarding
the assets, liabilities, names and addresses of the creditors, etc. The statement shall be
verified by a Director and the Manager Secretary or other chief officer of the company. The
Statement of Affairs is required in both compulsory and voluntary winding up—Section 454
and 511 A.

Statement of Affairs contains:

(i) The assets of the company (showing separately cash in hand, Cash at Bank and negotiable
securities);

(ii) Names, addresses, occupation of its creditors (showing separately the secured and
unsecured debts);

(iii) Its debts and liabilities;

(iv) In case of secured debts particulars of the securities held by the creditors, their value and
dates on which they were given.

(v) The debts due to the company and names and addresses of persons from whom they are
due and the amount likely to be realised.

(vi) And any such further information as may be required by the official liquidators [Sec.
454(1)].

According to Sec. 455 the officers liquidator must, after the receipts of the statement, within
6 months (or such extended time as may be allowed by the court) of the order, submit to the
court a preliminary report as to the amount of capital issued, subscribed and paid-up and the
estimated amounts of the company’s assets and liabilities if the company has failed, the
causes of its failure and whether, in his opinion, any further enquiry is desirable.

CONTRIBUTORIES

According to Sec. 428 of the Companies Act, the term ‘contributory’ means every person
liable to contribute to the assets of a company in the event of its being wound-up. It includes
the holder of any shares which are fully paid up. It is to be noted that a holder of fully paid
shares is not placed on the list of contributories, as he is no longer liable to make any
contribution to the assets of the company, except at his own desire, or in cases where surplus
assets are likely to be available for distribution (Re. Aidall Ltd. 1933).

Persons Liable as Contributories:

The following persons are liable as contributories:

(a) Past and Present Members:

Needless to mention here that a member of a limited company shall be liable to contribute the
unpaid amount of shares on which he is a contributory, or the amount he has guaranteed to
pay in the event of winding up. A past member is also liable to contribute if he ceased to be a
member within one year before the commencement of winding up and the present members
fail to meet their liabilities.

(b) Legal representatives of a Deceased Member:

The legal representatives of a deceased member shall be liable to contribute to the assets of
the company if a contributory dies either before or after he has been placed on the list of
contributories.

(c) The Officials Assignee or Receiver of a Contributory:

When a contributory is adjudged insolvent, his assignees in insolvency must be the

contributories (Sec. 431).

(d) Liquidator of a Body Corporate:

Sec. 432 states that if a Body Corporate which is a contributory is ordered to be wound up, its
liquidator shall be the contributory.

(e) Directors/Managers whose Liabilities are unlimited:

Sec. 427 provides that when a Limited Company is wound up, any director or manager, past
or present, whose liabilities are unlimited must be liable as if he were a member of an
unlimited company which requires a court’s order. But he shall not be liable if he has ceased
to hold office for a year or more before the commencement of winding up.

Settlement of List of Contributories:

Sec. 467(1) lays down that as soon as may be after making a winding up order, the court shall
settle a list of contributories, with power to rectify the register of members in all cases where
rectification is required in pursuance of this Act.

Where it appears to the court that it will not be necessary to make calls on, or adjusts the
right of contributories, the court may dispense with the settlement of the list of contributories.
Sec. 467(2) states that in settling the list of contributories, the court shall distinguish between
those who are contributories in their own right and those who are contributories as being
representatives or liable for debt or others.

Lists of Contributories:

It includes List A and List B.

List A:

It includes the present member of the company, i.e., members whose names appear on the
company’s Register of Members at the time of winding up i.e., members at the
commencement of winding up.

Needless to mention that the liability of the present member (i.e., List A contributory) is
limited:

(i) In case of a company limited by a guarantee, the contribution shall be limited to the
guarantee.

(ii) In case of a company limited by shares, they shall not be required to pay exceeding the
amount, if any, unpaid on the shares in respect of which he is liable to contribute.

List B:

It includes the past members of the company i.e., those who have ceased to be members
within one year preceding the commencement of the winding up.

Liability of the Past Members:

A member in List B (i.e., a past member) is not liable to contribute:

(i) If he has ceased to be a member for one year or upwards before the commencement of the
winding up;

(ii) In respect of any debt or liability of the company contracted after he ceased to be a
member; and

(iii) Unless it appears to the court that the present members are unable to satisfy the
contributions required to be made by them.

Example:

Suppose Mr. X held 500 shares of P. Ltd. of Rs. 10 each. Rs. 8 per share paid up. He
transferred his shares on 30th November 1988 to Mr. Y. The company goes into liquidation
on 31st March 1989. A debt existing on 30th November remains unpaid. Hence, X can be
called upon to pay the debt subject to the maximum limit of Rs. 1,000 (i.e., 500 x Rs. 2) as
 his total liability was Rs. 2 per share.

Now, if Mr. X would transfer his shares, say, on 20th March 1989, he would have no
liability. Or, if Y has paid the amount due on the shares, Mr. X has no liabilities at all, i.e. he
is discharged. Similarly, if there are more than one member, each of them will have to pay
proportionately (subject to the maximum due on the shares).

NATIONAL COMPANY LAW APPELLATE TRIBUNAL

The National Company Law Tribunal is a quasi-judicial body in India that adjudicates issues
relating to Indian companies. The tribunal was established under the Companies Act 2013 and
was constituted on 1 June 2016 by the government of India on law relating to the insolvency
and the winding up of companies. The tribunal has sixteen benches.
All proceedings under the Companies Act, including proceedings
relating to arbitration, compromise, arrangements, reconstructions and the winding up of
companies shall be disposed off by the National Company Law Tribunal.

The NCLT bench is chaired by a Judicial member who is supposed to be a retired or a serving
High Court Judge and a Technical member who must be from the Indian Corporate Law
Service, ICLS Cadre.

The National Company Law Tribunal is the adjudicating authority for the insolvency resolution
process of companies and limited liability partnerships under the Insolvency and Bankruptcy
Code, 2016.
No criminal court shall have jurisdiction (the official powers to take legal decisions and
judgements) to entertain any suit or proceeding in respect of any matter which the Tribunal or
the Appellate Tribunal is empowered to determine by or under this Act or any other law for the
time being in force

Also no injunction shall be granted by any court or other authority in respect of any action taken
or to be taken in pursuance of any power conferred by or under this Act or any other law for the
time being in force, by the Tribunal or the Appellate Tribunal.
The National Company Law Tribunal has the power under the Companies Act to adjudicate
(make a formal judgement on a disputed matter) proceedings:
1. Initiated before the Company Law Board under the previous act (the Companies Act
1956).
2. Pending before the Board for Industrial and Financial Reconstruction, including those
pending under the Sick Industrial Companies (Special Provisions) Act, 1985.
3. Pending before the Appellate Authority for Industrial and Financial Reconstruction.
4. Pertaining to claims of oppression and mismanagement of a company, winding up of
companies and all other powers prescribed under the Companies Act.
NCLT is a quasi-judicial body in India that adjudicates disputes related to company law and
corporate governance under the Companies Act, 2013.

KEY FUNCTIONS OF NCLT

• Company Law Matters: Resolves disputes concerning company incorporation,

shareholder rights, and mismanagement.
• Insolvency & Bankruptcy Code (IBC), 2016: Handles corporate insolvency resolution
processes.
• Oppression & Mismanagement: Protects minority shareholders from oppressive actions
by the majority.
• Mergers & Amalgamations: Approves corporate restructuring, including mergers and
demergers.
• Investor Protection: Ensures fair treatment of stakeholders in corporate governance
matters.

POWERS OF NCLT

• Winding Up of Companies: Orders liquidation in case of financial distress or fraud.

• Fraudulent Practices: Investigates and penalizes fraudulent transactions.
• Class Action Suits: Allows groups of shareholders to file cases against companies.

PRINCIPLES OF CORPORATE GOVERNANCE

Corporate governance refers to the system of rules, practices, and processes by which a
company is directed and controlled.
Key Principles
1. Transparency: Companies must disclose financial and operational information accurately.
2. Accountability: Management should be accountable to stakeholders, including shareholders
and regulators.
3. Fairness: Equal treatment of all shareholders, including minority and foreign investors.
4. Responsibility: Directors and executives should act in the best interests of the company and
its stakeholders.
5. Ethical Conduct: Ensuring business is conducted with integrity, avoiding fraud and conflicts
of interest.
6. Compliance with Laws: Adhering to all legal and regulatory frameworks, including SEBI
guidelines.
7. Board Independence: Having a balanced and independent board to ensure unbiased decision-
making.

Role of NCLT in Corporate Governance

• Enforcing shareholder rights and legal compliance.
• Penalizing mismanagement and fraudulent activities.
• Facilitating corporate restructuring and dispute resolution.
• Strengthening investor confidence through fair and transparent decisions.