Winding Up: The Modern Map

Voluntary liquidation, under the Insolvency and Bankruptcy Code, 2016. Governed by section 59 of the Code, and dealt with in [Voluntary Liquidation under the Insolvency and Bankruptcy Code].

And a third process that is not winding up at all, though students often place it here: the corporate insolvency resolution process under Chapter II of the Code, which is what happens when a company defaults on a debt. It aims at a resolution plan, and liquidation under the Code follows only if the plan fails.

So the correct answer to "on what ground may a company that cannot pay its debts be wound up under the Companies Act, 2013" is that it may not. That ground was deleted, and the creditor's route is the Code.

Section 270 as it now stands

The provisions of Part I shall apply to the winding up of a company by the Tribunal under this Act.

That is the whole section. Before the substitution it read that a company may be wound up either by the Tribunal or voluntarily, and it was the roof over both. With voluntary winding up gone, the section does nothing but point at Part I.

A student who quotes the old section 270 for the proposition that there are two modes of winding up under the Companies Act is quoting a repealed provision.

The five grounds: section 271

A company may, on a petition under section 272, be wound up by the Tribunal:

• (a) if the company has, by special resolution, resolved that it be wound up by the Tribunal;
• (b) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
• (c) if, on an application by the Registrar or any other person authorised by the Central Government by notification, the Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent manner, or the company was formed for a fraudulent and unlawful purpose, or the persons concerned in its formation or the management of its affairs have been guilty of fraud, misfeasance or misconduct in connection with it, and that it is proper that the company be wound up;
• (d) 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
• (e) if the Tribunal is of opinion that it is just and equitable that the company should be wound up.

Five grounds, and it is worth naming what each is for.

Clause (a) is the members' own decision, and note that it needs a special resolution, and that the result is a Tribunal winding up, not a voluntary one. This is the survivor of what used to be voluntary winding up inside the Companies Act.

Clause (b) is the public interest ground in its sharpest form. The words follow the language of the reasonable restrictions on freedom of speech in the Constitution, and they cover a company used against the State.

Clause (c) is the fraud ground, and it has a gatekeeper. Only the Registrar or a person authorised by the Central Government may apply, and the Tribunal must be satisfied not only of the fraud but that it is proper that the company be wound up.

Clause (d) is the dormant company ground. Five consecutive financial years of default in filing financial statements or annual returns. Compare section 248, under which the Registrar may simply strike the name off the register, which is the cheaper route to the same end and is dealt with in [Registered Valuers, and Removal of a Company's Name from the Register].

Clause (e) is the just and equitable ground, the oldest of them, and the one that connects this chapter to section 242(1)(b): the Tribunal grants relief against oppression precisely where the facts would justify a just and equitable winding up but a winding up would unfairly prejudice the applicants.

Voluntary liquidation under the Code: section 59

Section 59(1). A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings.

Note the condition. No default. A company in default cannot use this route; its creditors' route is the resolution process.

Section 59(2). The liquidation shall meet such conditions and procedural requirements, and be completed within such period, which shall not be more than one year, as may be specified.

Section 59(3): the conditions for a company.

• (a) a declaration from a majority of the directors, verified by affidavit, stating (i) that they have made a full inquiry into the affairs and have formed the opinion that the company has no debt, or that it will be able to pay its debts in full from the proceeds of the assets to be sold; and (ii) that the company is not being liquidated to defraud any person;
• (b) accompanied by (i) audited financial statements and a record of business operations for the previous two years or since incorporation, whichever is later, and (ii) a report of the valuation of the assets by a registered valuer, if any;
• (c) within four weeks of that declaration, either (i) a special resolution of the members requiring voluntary liquidation and appointing an insolvency professional as liquidator, or (ii) a resolution of the members requiring liquidation on the expiry of the period of duration fixed by the articles or on the occurrence of an event on which the articles provide for dissolution, and appointing such a liquidator.

The proviso: the creditors have a say. Where the company owes any debt, creditors representing two-thirds in value of the debt must approve the resolution within seven days of it.

Section 59(4) and (5). The company shall inform the Registrar of Companies and the Board within seven days of the resolution or of the creditors' subsequent approval; and, subject to that approval, the proceedings are deemed to have commenced from the date of the resolution.

Sections 59(5A) to (5C): termination. After commencement but before the dissolution application is filed, the proceeding terminates if the members pass a special resolution to terminate it, creditors representing two-thirds in value approve within seven days where there is debt, and other specified conditions are met; the liquidator informs the Board and the Registrar within seven days; and the proceeding is deemed terminated from the date of that intimation, which ends the liquidator's term.

Section 59(7), (8) and (9): the end. Where the affairs have been completely wound up and the assets completely liquidated, the liquidator applies to the Adjudicating Authority for dissolution; the Authority orders that the corporate debtor shall be dissolved from the date of the order; and a copy of the order is forwarded within fourteen days to the authority with which the corporate person is registered.

A worked example

Titwala Trading Limited has stopped trading. Its directors want it brought to an end. Three different routes are possible, and choosing the right one is the whole question.

It can pay everybody. Its assets exceed its debts. So a majority of its directors may make the declaration verified by affidavit under section 59(3)(a) that they have made a full inquiry and the company will be able to pay its debts in full from the proceeds of the assets, and that it is not being liquidated to defraud any person, annexing the audited financial statements for the previous two years and a registered valuer's report. Within four weeks, the members pass a special resolution to liquidate voluntarily and appoint an insolvency professional as liquidator; and because the company owes debt, creditors representing two-thirds in value must approve within seven days. The company informs the Registrar and the Board within seven days, and the liquidation is deemed to have commenced on the date of the resolution. When everything is realised and distributed, the liquidator applies to the National Company Law Tribunal, which orders dissolution, and a copy goes to the Registrar within fourteen days.

It cannot pay everybody. Then section 59 is unavailable, because it requires that the corporate person has not committed any default, and the route is the corporate insolvency resolution process under the Code, at the instance of a financial or operational creditor or of the company itself.

Under the Companies Act. If instead the members simply want the Tribunal to wind it up, they may pass a special resolution and petition under section 271(a). And if the company has not filed its financial statements or annual returns for the last five consecutive financial years, the Registrar may seek a winding up under clause (d), though in practice he is more likely to strike the name off under section 248.

A case for the just and equitable ground. Suppose Titwala Trading was formed by two families to carry on one business, the business has failed, and the two sides no longer speak. Neither is guilty of oppression, so section 241 gives nothing; but the substratum of the company is gone and there is a complete deadlock. That is the classic case for section 271(e).

And a case for clause (c). If the Registrar finds that the company was formed for a fraudulent purpose and that those managing it have been guilty of fraud, he, or a person authorised by the Central Government, may apply; and the Tribunal must be satisfied both of the fraud and that it is proper that the company be wound up.

What nobody can do. A creditor owed fifty lakh rupees cannot petition under the Companies Act on the ground that the company is unable to pay its debts. That ground was deleted from section 271 on 15 November 2016, and his remedy is under the Code.

Distinctions that carry marks

What this does NOT mean

It does not mean there is no voluntary winding up in Indian law. It means there is none in the Companies Act; it is voluntary liquidation under section 59 of the Code.

It does not mean a company that cannot pay its debts cannot be wound up. It means it is not wound up under section 271; the Code applies.

It does not mean a members' winding up is voluntary. Under section 271(a) the members pass a special resolution and the Tribunal winds the company up.

It does not mean any person may petition on the fraud ground. Clause (c) is available only on an application by the Registrar or a person authorised by the Central Government by notification.

It does not mean five years of default is the only consequence of not filing. The Registrar may also strike the company's name off the register under section 248.

Quick revision

• 2(94A): winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.
• 270: Part I applies to winding up of a company by the Tribunal under this Act. The old section, which set out two modes, was substituted by the Code on 15 November 2016.
• 271, five grounds: (a) a special resolution that the company be wound up by the Tribunal; (b) acting against the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; (c) on the application of the Registrar or a person authorised by the Central Government, fraudulent conduct of the affairs, formation for a fraudulent and unlawful purpose, or fraud, misfeasance or misconduct by those concerned in the formation or management, and that it is proper that the company be wound up; (d) default in filing financial statements or annual returns for five immediately preceding consecutive financial years; (e) that it is just and equitable.
• Sections 304 to 323 are OMITTED: voluntary winding up is no longer in the Companies Act.
• Code, section 59: available to a corporate person that intends to liquidate voluntarily and has committed no default, to be completed within a period not exceeding one year as specified; needs a declaration by a majority of directors on affidavit of full inquiry, ability to pay debts in full and absence of intent to defraud, with two years' audited statements and a registered valuer's report; a special resolution within four weeks appointing an insolvency professional as liquidator, or a resolution on the expiry of the articles' period or an event of dissolution; approval of creditors representing two-thirds in value within seven days where there is debt; intimation to the Registrar and the Board within seven days; commencement deemed from the date of the resolution; termination by special resolution with the creditors' two-thirds approval before the dissolution application; and on completion, the liquidator applies for dissolution, the Adjudicating Authority orders it, and a copy goes to the registering authority within fourteen days.

Test yourself

1. On what grounds may a company be wound up by the Tribunal? That the company has by special resolution resolved to be wound up by the Tribunal; that it has acted against the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; that, on the application of the Registrar or a person authorised by the Central Government, the Tribunal is of opinion that its affairs have been conducted fraudulently, or it was formed for a fraudulent and unlawful purpose, or those concerned in its formation or management have been guilty of fraud, misfeasance or misconduct, and that it is proper to wind it up; that it has defaulted in filing financial statements or annual returns for five immediately preceding consecutive financial years; or that it is just and equitable: section 271.

2. Can a company be wound up under the Companies Act because it cannot pay its debts? No. That ground was removed from section 271 by the Insolvency and Bankruptcy Code, 2016, section 255 and the Eleventh Schedule, with effect from 15 November 2016. A company in default is dealt with under the Code.

3. Where is voluntary winding up now dealt with? In section 59 of the Insolvency and Bankruptcy Code, 2016, as voluntary liquidation. Sections 304 to 323 of the Companies Act, 2013 were omitted by the same Eleventh Schedule on the same date.

4. What must the directors declare before a voluntary liquidation? A majority of the directors, by declaration verified by affidavit, must state that they have made a full inquiry into the affairs and formed the opinion that the company has no debt or will be able to pay its debts in full from the proceeds of the assets to be sold, and that the company is not being liquidated to defraud any person, accompanied by audited financial statements and a record of business operations for the previous two years or since incorporation, whichever is later, and a registered valuer's report on the assets: section 59(3)(a) and (b).

5. What part do the creditors play in a voluntary liquidation? Where the company owes any debt, creditors representing two-thirds in value of the debt must approve the members' resolution within seven days of its passing: proviso to section 59(3). The same two-thirds approval is needed to terminate the proceeding under section 59(5A).

6. How does a voluntary liquidation end? When the affairs are completely wound up and the assets completely liquidated, the liquidator applies to the Adjudicating Authority for dissolution; the Authority orders that the corporate debtor be dissolved from the date of the order; and a copy is forwarded within fourteen days to the authority with which the corporate person is registered: section 59(7), (8) and (9).