Unit 6:- Winding up of a Company

6.1 Sick Companies
6.2 Winding up
6.2.1 Compulsory winding up 

6.2.2 Voluntary winding up
6.3 Liability of past members
6.4 Liquidators: Role and their powers

 

6.1 Sick Companies

Sections 253 to 269 (Note: Largely replaced by IBC, 2016)

Introduction & Definition

A Sick Company is an industrial company that has accumulated losses equal to or exceeding its entire net worth. Under the 2013 Act, the focus shifted from “Sickness” to “Insolvency and Bankruptcy.”

Statutory Provisions

  • Insolvency and Bankruptcy Code (IBC), 2016: Currently governs the revival of sick companies through the Corporate Insolvency Resolution Process (CIRP).
  • Section 253: Earlier provided for the determination of sickness by the Tribunal.

Essential Ingredients

  • The company fails to pay its debts.
  • The failure is persistent and not temporary.
  • There is a possibility of revival through a resolution plan; if not, it proceeds to liquidation.

6.2 Winding Up

Sections 270 to 365

6.2.1 Compulsory Winding Up (By the Tribunal)

Section 271 provides the grounds on which the NCLT may order a company to be wound up:

  • Special Resolution: The company has resolved by special resolution to be wound up by the Tribunal.
  • Sovereignty & Integrity: The company has acted against the interests of the sovereignty of India or public order.
  • Fraudulent Conduct: The affairs of the company have been conducted in a fraudulent manner.
  • Default in Financial Statements: Default in filing financial statements for the last 5 consecutive financial years.
  • Just and Equitable: The Tribunal is of the opinion that it is just and equitable that the company should be wound up.

6.2.2 Voluntary Winding Up

Note: Under the Companies Act 2013, “Voluntary Winding Up” has been omitted and is now governed by Section 59 of the IBC, 2016.

  • Conditions: The company must be able to pay its debts in full (Declaration of Solvency).
  • Procedure: Requires a Special Resolution by the members in a General Meeting.

6.3 Liability of Past Members

Section 285

Introduction & Definition

When a company is being wound up, every present and past member is liable to contribute to the assets of the company to pay off debts.

Statutory Rules for Past Members (List B Contributories)

A past member (who ceased to be a member within one year before the commencement of winding up) is liable ONLY IF:

  • They ceased to be a member within 1 year prior to the start of winding up.
  • The debt was contracted before they ceased to be a member.
  • The present members (List A) are unable to satisfy the contributions required.

Legal Exceptions/Provisos

  • A past member is not liable for debts contracted after they left the company.
  • Their liability is limited to the amount unpaid on the shares they held.

6.4 Liquidators: Role and Powers

Sections 275 to 291

Introduction & Definition

A Company Liquidator is an officer appointed to conduct the winding-up proceedings. They act as a bridge between the company’s assets and its creditors.

Powers of the Liquidator (Section 290)

  • To institute or defend suits: Any legal proceedings in the name of the company.
  • To carry on business: Only as far as necessary for the beneficial winding up.
  • To sell property: Sell movable and immovable property by public auction or private contract.
  • To raise money: Raise funds on the security of the company’s assets.
  • To settle claims: Invite and verify claims from creditors.

Role & Duties

  • Fiduciary Position: They must act honestly and impartially.
  • Submission of Reports: Provide periodic reports to the Tribunal/Members on the progress of liquidation.
  • Distribution of Assets: Ensure that assets are distributed according to the “Waterfall Mechanism” (Secured creditors first, then workers, then others).

Comparison Table: Compulsory vs. Voluntary Winding Up

Feature

Compulsory Winding Up

Voluntary Winding Up

Initiated By

Creditors, Contributories, or Govt.

Members of the Company.

Authority

Ordered by the NCLT.

Approved by Shareholders (Special Resolution).

Grounds

Fraud, Default, or Just & Equitable.

Expiry of duration or Solvency.

Liquidator

Appointed by the Tribunal.

Appointed by the Company/Creditors.

Exam-Style Conclusion

Winding up is the ultimate remedy for a corporate entity that has outlived its purpose or failed its obligations. For the exam, emphasize that while the Tribunal oversees compulsory liquidation, the Insolvency and Bankruptcy Code (IBC) has now become the primary procedural law for corporate exits in India.

 

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