Voluntary winding up of company by member and creditors


Introduction

In this post we have discussed winding up by tribunal. Here we will discuss the winding up of company by creditor and members.

Objective outline for this post is as below(Two points about liquidator is common for both type of voluntary winding up) :

  • Circumstances under which voluntary winding up carried out
  • Voluntary winding up by members
    • Declaration of solvency
    • General procedure
    • Appointment/Removal of liquidator
  • Voluntary winding up by Creditors
    • Meeting of creditor
    • Publication or resolution
    • Appointment of liquidator by creditor
  • Consequences of appointment of liquidator
  • Power/Duties of liquidator
  • The End of Company-Section 318
Before going into winding process, let us understand the difference between winding process and dissolution of company.

Winding up is the process to sell off stock, pay off creditors, and distribute any remaining assets to partners or shareholders. It's process to realize the assets and distribute that to all the stakeholders.

Dissolution is generally the last step of winding  up. Company is dissolved when it ceases to be a company. Company as a corporate person comes to an end and we call it dissolution of company.

After the end of winding up process, Tribunal will pass an order of dissolution after which Company's name will be struck of from registrar of company.

To conclude this, winding up process and dissolution of company are related terms, but they are subtly different.

Voluntary winding up (Section 304)

Section 304 states the circumstances under which company can be winded up.

If company passes

  • General resolution for winding up in below cases:
    • Winding up after the expiry of the  period for it's duration. For example if company was established for 5 years and 5 years are over.
    • Winding up after occurrence of event. It's case wherein there is provision in Article that after happening certain event company should be winded up
  • Special resolution that company should be wound up voluntarily for any other reason
There are two types of voluntary winding up. First by members and other by it's creditors.

Voluntary winding up by it's members

Declaration of solvency

First step in initiating voluntary winding up is declaration of solvency.

Directors have to first make a declaration by affidavit that they have inquired into condition of company, and they think that company will be able to pay it's all debts.

Company should have enough money or asset to pay off the debts and that should be declared by it's Board of Directors.

Below are essential condition for valid declaration of solvency
  1. Such declaration should be made within preceding five weeks from the date of passing of resolution for voluntary winding up.
  2. Such declaration should contain that company is not being wound up to defraud any persons
  3. Such declaration should be accompanied by auditors reports on profit and loss as per provision of company act.
  4. Such declaration should be accompanied by valuation of assets of company
This is crucial for initiation for winding up process. If directors declares some wrong information then section 305 provides a punishment which include fine as well as imprisonment. Punishment is quite strict, from 3 years to 5 years and fine from 50000 Rs to 500000 Rs.

General Procedure of winding up

Process of winding up involves below steps

  1. File with the registrar the statutory declaration of solvency with affidavit. We discussed this above
  2. Pass a resolution by the members for voluntary winding up
  3. In the same meeting or subsequent meeting company will appoint the liquidator
  4. Remuneration of liquidator will fixed
  5. Transfer of power to liquidator
  6. Notice of appointment of liquidator should be given to registrar
  7. Liquidator will realize the assets and distribute the same to stakeholders.

Appointment/Removal of liquidator

Company can appoint a liquidator after passing of resolution of winding up. (Section 310)

Company also have power to remove or replace the liquidator. They are conferred with this power under section 311. But before removing, liquidator should be given a notice and also such notice should contain grounds of removal of liquidator

Company can also appoint new liquidator in case of resignation, death, removal or otherwise.

Section 312 cast a duty upon a company to give notice to registrar about liquidator and his details. It also provides a punishment if notice is not given to registrar of companies.

Voluntary winding up by Creditor

This is initiated when company is unable to pay it's full debt. In this case there is no need to file declaration of solvency by Directors as company don't have enough assets to pay off the debts.

First step in this is meeting of creditor.

Meeting of creditors

Provisions related to meeting of creditors are provided in Section 306. Company may call the meeting of creditors while passing the resolution for voluntary winding up.

When two third of creditors in value thinks that it's in the interest of all the parties that winding up should be started, the company shall be wound up voluntarily.

When such resolution(With 2/3 majority) is passed, notice of this resolution should be given to registrar within 10 days of passing .

Publication of voluntary winding up by creditors

If creditors have decided for winding up as per section 306, then within 14 days notice of such resolution should be given in official gazette and also in newspaper in the circulation of district where company have registered office.

This are mandatory provision and officer in default can be punished.

Appointment/removal of liquidator

Creditor have same power as that of company related to appointment/removal/replacement of liquidator. We have already discussed this above.

Consequences of appointment of liquidator

Section 313 states that Board will loose all the power and those powers will be transferred to liquidator. This include transfer of powers of directors as well as managers. Liquidator will be new boss once he is appointed after application for winding up.

Powers/Duties of liquidator

Section 314 enumerates the power and duties of liquidator in voluntary winding up of Company

Those powers and duties can be summarized as below

  • Company/Creditor as the case may be decides the functions and duties for liquidator. Liquidator needs to follow the functions/duties as stated by Company/Creditors
  • If liquidator needs a resolution for, he can call general meetings of the company
  • Liquidator has to maintain the books of accounts as asked by Company/Creditor/Government
  • Liquidator will prepare quarterly reports, he also have to get such reports audited within 30 days from the close of each quarter with registrar. If he fails to do so, he may be punished with 5000 Rs
  • Liquidator will act with due diligence.
  • Liquidator will settle the list of contributories. Shareholders are called as contributory once company goes into liquidation

Section also provides hefty fine in case company liquidator fails in duties cast upon him.Fine may extend to 10 Lakh Rs. (Except that quarterly report duty. There is already punishment for it)

Final Meeting and Dissolution of Company

Actually in the case of voluntary winding up by Members/Creditor also, Tribunal is the authority who orders dissolution. Before tribunal orders dissolution, final touch needs to be given by liquidator.

What is that final touch is described in section 318.

As soon as company is wound up, Liquidator needs to prepare report which will have details that properties are disposed off, debts are paid, members are satisfied, creditors are satisfied, all are happy.

After preparing such report, he needs to call a meeting of members/creditors as case may be.

In this meeting resolution needs to passed by majority of members that company should be wound up after considering the report. Members has to pass resolution initially for liquidation and later for dissolution under 318.

Within two weeks of such resolution, Liquidator has to send report to registrar including tons of documents.

Liquidator also needs to file an application for dissolution with Tribunal.

Tribunal needs to check if everything is fine, that process of winding up had been just and fair, then it has to pass an order withing 60 days of receiving an application.

Once Tribunal passes the order, that order needs to be submitted to registrar.  Registrar then will publish in official gazette that Company is dissolved.

And that is how company will come brought to an end by members/creditors








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