Winding Up by Tribunal

This article is an in-depth study of the compulsory winding up process of a company initiated by tribunal’s order. This article discusses the grounds, procedures, and effect of the Tribunal’s winding up order.
Estimated Reading Time: 9 minutes

Introduction

The process of winding up or liquidation of a company is the process by which the assets of company are collected and sold in order to pay its debt. Winding up is the last process that is conducted in the company before the company ceases to exist. A company can be wounded by two of the methods available that is by a tribunal and by a way of voluntary winding up. The company, after solving all its liability, has to distribute the excess among the shareholders and then formally dissolved or cease to exist.

Winding up by Tribunal under the Companies Act 2013

The Companies Act, 2013 (Act) provides for winding up of tribunal by two ways which is mentioned under section 270 of the Act. Section 270 defines that a company can be wounded up by the tribunal or voluntarily by the company itself.

Grounds for winding up by Tribunal

A company may be wound up by the tribunal-

  1. If the company is no able to pay its debts:
  2. If the company has resolved by special resolution that the company be wound up by the Tribunal;
  3. If the company has acted against the interests of the sovereignty and integrity of India, its security of the State, friendly relations with foreign States, public order, decency, or morality;
  4. If the Tribunal has ordered the winding up of the company under Chapter XIX i.e., in case of a sick company;
  5. If, on application by the Registrar or the Government, the Tribunal is of the opinion that the affairs of the company has been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance, or misconduct in connection therewith and that it is proper that the company be wound up;
  6. If the company has made a default in filing with the Registrar, its financial statements, or annual returns for immediately preceding five consecutive financial years; or
  7. If the Tribunal is of the opinion that it is just and equitable to wind up the company.

Changes made by Insolvency and Bankruptcy Code, 2016 (IBC)

Later the Act of 2013 was substituted by the Insolvency and Bankruptcy Code, 2016 (IBC) which bought the changes like

  1. The definition of company liquidator to also include liquidator under IBC.
  2. The removal of voluntary winding up provision from the Act & were added in IBC
  3. The companies who had made any such defaults cannot make an application for voluntary liquidation.
  4. Default defined under IBC meant non-payment of debt when whole or any part of the interest of amount of has been due and not repaid.
  5. Any petition for winding-up by the National Company Law Tribunal cannot be made under the Act. Under section 272 of the Act removed creditor from the entitlement of making an application to tribunal for winding up. As under IBC sufficient remedy is provided.

Statutory definition of winding up

Section 272 of the Companies Act 2013, defines Petition for Winding-up. The section defines the petition may be filed to the tribunal for winding up of the company by-

  1. The company
  2. Any creditor or creditors including any contingent or prospective creditor or creditors;
  3. Any contributory or contributories;
  4. All or any of the person in above clauses (a), (b) and (c) together;
  5. The Registrar;
  6. Any person authorised by the Central Government in that behalf; or
  7. In case the company has acted against the interests of the sovereignty and integrity of India, its security of the State, friendly relations with foreign States, public order, decency, or morality, by the Central Government or State Government.

The registrar may not present a petition on the ground that the company is unable to pay the debts owned by it. If it appears to him that from the financial condition of the company as disclosed in its balance sheet that the company is unable to pay its debts.

Powers of the Tribunal

Powers of the Tribunal is defined under section 273 of the Act. Which the defines that the tribunal on receipt of a petition of winding up, may pass orders such as –

  1. Dismiss it, with or without costs;
  2. make any interim order as it think fit;
  3. appoint a provisional liquidator of the company till the making of a winding up order;
  4. make an order for the winding up of the company with or without cost; or
  5. any other order as it think fit.

Such order has to be made under 90 days from date of presentation of petition. Tribunal shall give notice to the company before appointing a provisional liquidator and provide an opportunity to the company to make its representation.

Standing of affairs

When a petition is filed by a company then it is requiring submitting the statement of affairs of the companies with the petition to the tribunal. Under section 274 of the Act, direction is provided for filling statement of affairs. If the tribunal is satisfied that a prima facie case for winding is made out, then by passing an order would direct the company to file its objections along with a statement of its affairs within thirty days of the order in prescribed manner and form. If a company fails to file, the statement of affairs shall forfeit the right to oppose the petition further and such non-compliance will be considered a ground for punishment for the officers and directors of such company. The punishment being imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees, but which may extend to five lakh rupees, or with both.

Official liquidator

For the purpose of winding up of a company some personnel are appointed by the tribunal at the time of passing the order of winding up, shall appoint an official liquidator or a liquidator from the panel maintained as the company liquidator. The concept for company liquidator and third appointment is defined under section 275 of the Act. Such a liquidator is appointed by the panel maintained by the central government which includes the names of chartered accountants, advocates and company secretaries, cost accounts and such other professionals.  All the terms and conditions of the company liquidator for appointment in the company’s winding up process and the fees payable shall be specified by the tribunal on the basis of the task which are provided and for the experience, qualification, and size of company.

Removal and Replacement of Liquidator

The removal and replacement are also provided in the Code. Under section 276 of the Act, it is defined on a reasonable cause being represented and for reasons to be recorded in writing, the liquidator may be removed on the following grounds:

  1. misconduct;
  2. fraud or misfeasance;
  3. professional incompetence or failure to exercise due care and diligence in performance of the powers and functions;
  4. inability to act as provisional liquidator or as the case may be, Company Liquidator;
  5. conflict of interest or lack of independence during the term of his appointment that would justify removal.

Also, in event of death, resignation, or removal of such liquidator as the case maybe then the tribunal may send the following case of work to another company liquidator. If the tribunal is in believe that the company liquidator is responsible for any loss or damage to the company the tribunal may pass order for recovery of such loss from the liquidator.

Contents of Report

On the appointment of a Company Liquidator for the winding up of a company then such liquidator shall within 60 days from the order, submit a report defined under section 281 containing particulars like:

  1. the nature and details of the assets of the company including their location and value, stating separately the cash balance in hand and in the bank, if any, and the negotiable securities, if any, held by the company: Provided that the valuation of the assets shall be obtained from registered valuers for this purpose;
  2. amount of capital issued, subscribed and paid-up;
  3. the existing and contingent liabilities of the company including names, addresses and occupations of its creditors, stating separately the amount of secured and unsecured debts, and in the case of secured debts, particulars of the securities given, whether by the company or an officer thereof, their value and the dates on which they were given;
  4. the debts due to the company and the names, addresses and occupations of the persons from whom they are due and the amount likely to be realised on account thereof;
  5. guarantees, if any, extended by the company;
  6. list of contributories and dues, if any, payable by them and details of any unpaid call;
  7. details of trademarks and intellectual properties, if any, owned by the company;
  8. details of subsisting contracts, joint ventures, and collaborations, if any;
  9. details of holding and subsidiary companies, if any;
  10. details of legal cases filed by or against the company; and
  11. any other information which the Tribunal may direct, or the Company Liquidator may consider necessary to include.

The company liquidator in his opinion shall include all the necessary aspects of the company which deems fit to provide a representation of the company before the tribunal. The Company Liquidator shall also make a report on the viability of the business of the company or the steps which, in his opinion, are necessary for maximising the value of the assets of the company. The Company Liquidator may also, if he thinks fit, make any further report or reports.

Power and duties of Company Liquidator

The power and duties are defined under section 290 being –

  • to carry on the business of the company so far as may be necessary for the beneficial winding up of the company;
  • to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose, to use, when necessary, the company’s seal;
  • to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels;
  • to sell the whole of the undertaking of the company as a going concern;
  • to raise any money required on the security of the assets of the company;
  • to institute or defend any suit, prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company;
  • to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this Act;
  • to inspect the records and returns of the company on the files of the Registrar or any other authority;
  • to prove rank and claim in the insolvency of any contributory for any balance against his estate, and to receive dividends in the insolvency, in respect of that balance, as a separate debt due from the insolvent, and rateably with the other separate creditors;
  • to draw, accept, make, and endorse any negotiable instruments including cheque, bill of exchange, hundi, or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if such instruments had been drawn, accepted, made, or endorsed by or on behalf of the company in the course of its business;
  • to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities and for protection of the assets of the company, appoint an agent to do any business which the Company Liquidator is unable to do himself;
  • to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond, or instrument as may be necessary, — for winding up of the company; for distribution of assets; in discharge of his duties and obligations and functions as Company Liquidator; and
  • to apply to the Tribunal for such orders or directions as may be necessary for the winding up of the company.

Effect of winding-up order

Section 278 of the Act provides for the effect of winding-up order which provides that after such an order is passed then the company should work in favour of all the creditors and all contributories of the company as if it had been made out on the joint petition of creditors and contributories. For the guidance of the company liquidator the tribunal also directs that there shall be an advisory committee to provide time to time advise to the company liquidator and help to create a better report for the submission to the tribunal. The advisory committee is defined under section 287 of Act. Such an advisory committee have the power to inspect the books of accounts and other documents assets and other properties. In accordance and with the advice of the advisory committee the company liquidator have to submit periodical reports to the tribunal under section 288 of Act. Such report describes the progress of the winding-up of the company.

In order to create a fair and justified approach towards winding-up, an audit for company liquidator’s account is also defined under section 294. The section defines that the liquidator should also maintain proper and regular books of account including account of receipts and payments done by him. The tribunal may conduct such audits and the liquidator have to provide all such information asked by the tribunal at the time of such inspection.

Conclusion

Hence, winding up by Tribunal is a compulsory winding up which protects the rights of unpaid creditors of companies. It is a useful provision which promotes and protects fair business and transaction as provided under the Company Law in India.

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