Abstract
With the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) in India, the winding up law for companies has seen a major change. While the Companies Act, 2013 remains applicable for the winding up of companies on some statutory grounds, the IBC has become the core legislation for corporate insolvency and liquidation. This article looks into the law of winding up in India in terms of the concept and its legal regime, differentiates between winding up, dissolution and insolvency and then goes on to discuss the different methods of winding up under the present regime of laws. It further explains the process of winding up with respect to NCLT, appointment of liquidator, verifying the claim and asset distribution, as well as the dissolution of the company. Further, judicial decisions that have interpreted the just and equitable ground for winding up have been discussed and the change in judicial outlook from liquidation to corporate rescue has been highlighted. In conclusion, the effect of the IBC on the regime of corporate insolvency and its drawbacks have been pointed out and it has been found that the present regime is an efficient one in comparison to the previous one.
Keywords
Winding Up, Companies Act, 2013, Insolvency and Bankruptcy Code, 2016, National Company Law Tribunal (NCLT).
Introduction
Winding up is the legal process by which a company comes to an end of its business activities, clears its liabilities, realizes its assets, and distributes any balance remaining among its shareholders.[1] This is where the company enters into a closure process, whereby a liquidator is appointed to realize the company’s assets and discharge all its obligations. The laws regarding winding up in India are covered under either the Companies Act 2013 or the Insolvency and Bankruptcy Code, 2016 (IBC).[2]
Winding up and dissolution are two different processes. Winding up is the process through which a company comes to an end while dissolution takes place after winding up of the company. After a company has been dissolved, it comes to an end legally and is struck off the list of companies.
Winding up is also different from insolvency. Insolvency refers to the situation of being unable to repay debt and liabilities as and when due or where the company’s liabilities outweigh its assets. Although a firm can be insolvent, insolvency need not necessarily lead to winding up. In the IBC, an insolvent firm will get an initial chance of resolving its problem through the Corporate Insolvency Resolution Process (CIRP).[3] Winding up and liquidation will usually happen only if there is a failure of resolving or if it is impossible.
This means that while insolvency concerns the financial state of a company, winding up is the process of shutting down the firm and dissolution is the legal end-result.
Legal Framework
There has been a major shift in the legal framework concerning the winding up of companies in India following the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). While previously the Companies Act, 2013 had provisions for winding up by the Tribunal and voluntary winding up, following the introduction and amendments to the IBC, majority of the cases concerning the winding up of insolvent companies fall within the purview of the IBC, except in some specific cases where Companies Act applies.
Sections 270 to 303 in the Companies Act, 2013, contain provisions pertaining to the winding up of companies through the Tribunal.[4] Due to the amendments made in the Insolvency and Bankruptcy Code, the grounds pertaining to insolvency have been removed from the Companies Act and placed in the IBC.[5] Currently, there are several grounds for winding up of a company by the NCLT including passing a special resolution for winding up, working against the sovereignty and integrity of India, conducting fraudulent or illegal business, failing to file the accounts for five consecutive years, and other similar grounds.
The Insolvency and Bankruptcy Code, 2016 has become the central legislation that governs financially distressed corporations. In case the company fails to meet its liabilities, then Corporate Insolvency Resolution Process (CIRP) is undertaken in front of NCLT. The central purpose of the IBC is to revive the distressed entity and not close down the entity. If no resolution plan is finalized in the specified time limit, then NCLT can direct to initiate the process of winding up the entity under the provisions of IBC and it will supersede the earlier process of winding up in case of insolvency.
Therefore, it can be said that both the IBC and Companies Act, 2013 have different purposes though they work in tandem. While the Companies Act, 2013 governs the winding up of the company on the basis of specific statutory and equitable grounds, the Insolvency and Bankruptcy Code deals with the whole process of insolvency resolution and liquidation.
Methods of Winding Up
The legislation in India concerning winding up provides for different methods through which the company can be dissolved. After the passing of the Insolvency and Bankruptcy Code, 2016 (IBC), there have been major changes in the legislation. Currently, winding up takes place through an order of NCLT under the Companies Act, 2013, while voluntary winding up falls within the jurisdiction of IBC.
Winding Up by the Tribunal (Compulsory Winding Up)
The winding up of the company by the Tribunal, otherwise referred to as compulsory winding up, is provided for in Section 271 of the Companies Act, 2013. The National Company Law Tribunal (NCLT) may order the winding up of the company on certain statutory grounds. These include when the company passes a special resolution for winding up by the Tribunal; the company acts against the sovereignty and integrity of India or against public order; the company carries on its business fraudulently or for any unlawful purpose; the company has defaulted in the filing of financial statements and annual returns for five consecutive financial years; or when the NCLT considers it to be just and equitable to wind up the company.
It must be noted that failure to pay the debt is not a reason anymore for filing of a case under Section 271.[6] These matters are now filed under the provisions of the Insolvency and Bankruptcy Code, 2016 wherein a creditor or even the company may file for CIRP. When the resolution process fails, the company enters into the liquidation process.
Voluntary Winding-Up
The term voluntary winding-up means the dissolution of a solvent company by itself. Prior to the IBC, the law relating to voluntary winding-up was provided under the Companies Act, 2013. But now the provision related to voluntary winding-up has been excluded from the Insolvency and Bankruptcy Code, 2016.
Now, the voluntary winding-up of a corporate person is governed by Section 59 of the Insolvency and Bankruptcy Code, 2016. A company can undergo voluntary winding-up upon declaring solvency, meaning that it is capable of meeting all its obligations and that it has taken such an action not with an intention to defraud anyone. The voluntary winding-up is then approved by the members of the company through special resolution and the company appoints a liquidator who sells off the assets and settles the liabilities before distributing the surplus among the stakeholders.
History
Before the implementation of the Insolvency and Bankruptcy Code, 2016, the Companies Act, 2013 had provisions for voluntary winding up.[7] The purpose behind this provision was to make it possible for solvent firms to be wound up without the involvement of the Tribunal. Nevertheless, there were inconsistencies because several statutes regulated insolvency and liquidation.
To achieve the aim of establishing one insolvency law, the IBC made an alteration to the Companies Act by moving the provisions of voluntary winding up into section 59 of the IBC. As a result, the Companies Act is now responsible for compulsory winding up based on specific statutory grounds, whereas the IBC takes care of insolvency and liquidation, including voluntary liquidation.
Procedure for Winding Up
The process of winding up is undertaken with the objective that the affairs of a company be wound up in a systematic and transparent way. In accordance with the provisions of the Companies Act, 2013, the process is monitored by the National Company Law Tribunal (NCLT). The process of liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC) is also a structured process with statutory safeguards.
1. Filing of Petition
The process of winding up is initiated through the filing of a petition before the National Company Law Tribunal (NCLT) with an application for a winding up order under Section 272 of the Companies Act, 2013. A petition can be filed by:
- The company itself;
- Any contributory (a member who is obliged to pay towards the assets of the company);
- Registrar of Companies (ROC) provided there is a prior approval of the Central Government in certain cases;
- Any person who has been empowered by the Central Government; or
The Central Government or the State Government in those cases where the matter concerns issues relating to sovereignty, integrity, security of the State, public order, decency and morality.
2. Functions of the NCLT and the Appointment of the Liquidator
Having taken into account the application and listened to the parties, the NCLT can either accept or reject the application. In case it finds that there is a sufficient reason, it can direct the liquidation of the company. The liquidator of the company is appointed by the NCLT itself.[8] The liquidator is an independent officer of the NCLT and is supposed to take charge of the property of the company, examine its records, and conduct the process of liquidation.
3. Statement of Affairs, Public Announcement, and Verification of Claims
After making the winding-up order, the directors along with other officers of the company have to make the Statement of Affairs, giving particulars of the company’s assets, liabilities, creditors, debtors, securities, etc.[9] Then comes the public announcement by the liquidator inviting claims from the creditors and others during the stipulated time period.[10] Thereafter, the liquidator verifies those claims through relevant documentation and admission or rejection takes place.
4. Realisation and Distribution of Assets
After the claims have been established, the liquidator will realise the assets of the firm by selling off the movable and immovable properties of the firm. These proceeds will be distributed as per the statutory order of priority.[11] First comes the expenses and costs involved in the liquidation process, followed by the payment of secured creditors and workmen’s dues, salaries of the employees, unsecured creditors, and lastly, if there is any surplus left, the shareholders.
5. Dissolution of the Company
Once the liquidator has realised the assets, paid off all the debts and settled all the claims, he sends his report to the NCLT. Upon being satisfied that the process of winding up has been carried out according to law, the NCLT passes an order for dissolution of the company.[12] From the date on which the order for dissolution is passed, the company no longer exists as a separate legal entity, and it is taken off the Register of Companies maintained by the Registrar of Companies.
Important Judgments on Winding Up
There have been many important judgments in respect of the interpretation of the provisions of winding up, especially in regard to just and equitable ground. It is well-established by the courts that winding up is an extraordinary remedy and it can only be done if it is just, necessary, and there are no other effective alternatives available.
1. Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla (1976)
This judgment of the Supreme Court of India is the most important one in regard to the just and equitable ground of winding up. In this case, it has been held that the process of winding up can only be considered a remedy of last resort, and should not be allowed just because there is some dispute amongst the shareholders. It has been held that the just and equitable provision gives wide judicial discretion, but the discretion should be used with caution. The court held that where there are alternative remedies such as oppression and mismanagement, the tribunal will not order winding up. It has also been held that the principle of partnership firm can be applied to private company only under very rare circumstances.[13]
2. Loch v. John Blackwood Ltd. (1924)
In this important case by the Privy Council, it was ruled that the words “just and equitable” are not to be understood in their narrow sense. It can be used where there is gross want of probity on the part of management which results in the total lack of confidence in the minds of the shareholders.[14]
3. Re Yenidje Tobacco Co. Ltd. (1916)
This English case laid down the rule that when there is an absolute deadlock between the shareholders and the directors resulting in the impossibility of managing the business of the company, then even a company operating as a partnership can be wound up. The doctrine of “quasi-partnership company” has been accepted by Indian courts as well.[15]
6. NCLT and Approach After IBC
After the implementation of the Insolvency and Bankruptcy Code 2016, the approach of the National Company Law Tribunal (NCLT) has been to treat winding up as not being the primary remedy for financially troubled companies. The NCLT always gives preference to revival via the Corporate Insolvency Resolution Process (CIRP) and takes a decision on winding up only if there is no practical way to implement such a process or in cases where statutory grounds exist under the Companies Act.
There have been several changes in the Indian legal regime concerning the process of winding up of companies following the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). Previously, the Companies Act, 2013 used to regulate both compulsory and voluntary winding up. But now the emphasis is more on the revitalization of companies facing financial difficulty than just shutting them down as there has been an emergence of the Corporate Insolvency Resolution Process (CIRP).
Thus, the process of winding up on the grounds of insolvency has been replaced by CIRP with only liquidation as an alternative where the former fails to bring about any revival of the company. It is a more advanced and commercial method that aims at maximization of the assets, protection of the rights of creditors, retaining jobs and boosting the confidence of the corporate world.
Conclusion
There have been several changes in the Indian legal regime concerning the process of winding up of companies following the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). Previously, the Companies Act, 2013 used to regulate both compulsory and voluntary winding up. But now the emphasis is more on the revitalization of companies facing financial difficulty than just shutting them down as there has been an emergence of the Corporate Insolvency Resolution Process (CIRP).
Thus, the process of winding up on the grounds of insolvency has been replaced by CIRP with only liquidation as an alternative where the former fails to bring about any revival of the company. It is a more advanced and commercial method that aims at maximization of the assets, protection of the rights of creditors, retaining jobs and boosting the confidence of the corporate world.
Despite the aforementioned reforms, there still are some difficulties. The delay in the resolution process, high loads before the NCLT and difficulties with asset realization have an impact on the effectiveness of the insolvency mechanism. Also, in some cases, the cooperation of the Companies Act, 2013 and the IBC faces the problem of procedural complexity which requires constant interpretation by the courts.
In general, the shift from the Companies Act to the IBC can be considered as an important reform of Indian corporate law. While the Companies Act will govern the process of winding up of the company on limited statutory grounds, the IBC will become the main law in relation to the corporate financial distress. Having appropriate institutions and timely implementation, the existing system is more able to balance the interests of the creditors, the company, the employees and the economy in order to promote responsible corporate.
References
[1] Companies Act, 2013, ss. 270-303.
[2] Insolvency and Bankruptcy Code, 2016.
[3] Insolvency and Bankruptcy Code, 2016, ss. 7,9,10 and 33.
[4] Companies Act, 2013, ss. 270-303.
[5] Companies (Amendment) Act,2017.
[6] Insolvency and Bankruptcy Code, 2016; Companies (Amendment) Act, 2017.
[7] Companies Act, 2013(provisions omitted by the Companies (Amendment) Act, 2017).
[8] Companies Act, 2013, ss. 275-277.
[9] Companies Act, 2013, ss. 274 & 281.
[10] Companies Act, 2013, Companies (Winding Up) Rules, 2020.
[11] Insolvency and Bankruptcy Code,2016, s. 53.
[12] Companies Act, 2013, s. 302.
[13] Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976)3 SCC 259.
[14] Loch v. John Blackwood Ltd, 1924 AC 783 (PC).
[15] Re Yenidje Tobacco Co. Ltd, (1916) 2 Ch 426.
