Liquidation or winding up of a company means that the company is being dissolved, and its life has come to an end. The mechanism for winding up is available under the Companies Act, 2013 and under the new Insolvency and Bankruptcy Code passed in 2016. The IB Code is a welcome legislative change to the old policy framework for insolvency and corporate rehabilitation.
Liquidation Process and Purpose
When a company is being dissolved and the winding-up process is initiated, the value of the company’s assets is first realised.
- The liquidation of the company’s assets is done for the benefit of the creditors and the shareholders.
- The assets are used to pay off any outstanding debts.
- Once the debts of the company have been cleared, any balance amount is paid to the shareholders of the company in proportion to the stocks held by them.
- During the liquidation process, a liquidator is appointed to administer/manage the liquidation of the company. He/she is in charge of rounding up the assets of the company, paying the corporate debts and then distributing the surplus, if any, to the shareholders according to the percentage of their rights. After which the company is dissolved and ceases to exist.
- Under the IBC, the tribunal will appoint a company liquidator (or provisional company liquidator) from among the professionals who have registered themselves as insolvency professionals under the IBC.
Difference Between Winding-up and Dissolution
It is to be understood that winding up and dissolution of the company are two different terms. While winding-up is the process of liquidation, dissolution is the end of the liquidation process. Depending on the type of winding-up, the legal recourse is available either under the Companies Act or the Insolvency and Bankruptcy Code, 2016.
It is important to note that during the winding-up process, the company is still a legal entity, and can enter into contracts or be sued under the provision of the Indian laws. When a company is dissolved, the entity ceases to exist and has no legal identity. The company’s name will be removed from the books of the RoC (Registrar of Companies).
|S. No.||Winding Up||Dissolution|
Winding up is one of the methods by which dissolution of a company is brought about.
Dissolution is the end result of winding up.
The legal entity of the company continues to exist at the commencement of the winding up process.
Dissolution brings an end to the legal entity of the company. After dissolution, the company ceases to exist.
A company may be allowed to continue its business during the period of winding up as long as it is necessary for beneficial winding up of the company.
The company ceases to exist on its dissolution and can no longer continue its business activities.
Modes to Wind-up a Company
The Insolvency & Bankruptcy Code of 2016 brought out a comprehensive mechanism for insolvency proceedings of companies, LLCs, LLPs and partnership firms. While other modes of liquidation are covered under the Code, the primary aim of the Code was to initiate a resolution process in an event that a company is not able to pay its debts.
After the introduction, the Code of 2016, ‘winding-up’ can either mean winding up under the Companies Act, 2013 (compulsory winding up by the tribunal on the basis of five grounds) or can mean liquidation under the 2016 Insolvency & Bankruptcy Code.
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Voluntary Winding Up
Before the Insolvency and Bankruptcy, Code 2016 was introduced, voluntary winding up was governed under the 1956 Companies Act since the provision in the 2013 Act was never notified (by the Official Gazette).
After the IB Code was introduced, the provisions under the two Acts were completely omitted through a government notification in 2016 and 2017.
Under the provision of the Code, a company cannot be wound-up merely on its inability to pay its creditors, which is counteract to the provisions of the earlier company laws.
Also, the code omitted the section for voluntary winding up under the Act. A new set of regulations called the Insolvency and Bankruptcy (Voluntary Liquidation Process) Regulations was introduced in 2017, which is to be read with Section 59 of the IB Code. Voluntary winding up can only be initiated by a company, which has no outstanding debts or has not been a financial defaulter.
Compulsory Winding Up
Compulsory winding-up, where a company may be liquated by the NCLT has been described in Section 271 of the 2013 Act (as amended). Under the section, the company can be wound-up though a petition to the National Company Law Tribunal.
Such a petition can be filed on the following grounds:
- Evidence that the company threatens the sovereignty, national security, and integrity of the country in relation to public orders, morality, and decency.
- The company’s objectives and activities are fraudulent and unlawful, or that the management is guilty of fraud, misappropriation or misconduct; leading the tribunal to conclude that the only recourse is to wind up the company.
- In cases where the company defaults to submit the financial statement with the RoC for the immediately preceding financial years.
- Any other grounds which leads the Tribunal to conclude that the existence of the company is detrimental, and should be wound up.
Procedure for Liquidation under the IBC
Here are the various steps for the liquidation of a corporate entity under the provision of the Insolvency and Bankruptcy Code.
Filing of Application: Either the company or a financial (or operational) creditor can make an application the National Company Law Tribunal to allow the company (Corporate Debtor) to initiate the Corporate Insolvency Resolution Process (CIRP). For the company to be admitted as a corporate debtor under the CIRP, the creditors should necessarily show that the company has accumulated debts that exceed an INR 1,00,000 (apart from various other proofs to be submitted by them under the provision of the Act). Based on the application, the NCLT can either admit the company to initiate the CIRP or reject the application.
Interim Resolution Professional (IRP): Once the CIRP is initiated, the company’s management and board of directors are suspended, and the IRP takes over. Also, a temporary prohibition of the company’s activities sets in, until CIRP lasts. This prohibits activities like transfer of assets and recovery of asset or property, etc.
Committee of Creditors (CoC): The Interim Resolution Professional will then call all the creditors of the company (corporate debtor) to come forward with their claim. He/she will classify the claims, and form the CoC within thirty days of the corporate debtor being admitted into the CIRP. Once the CoC is formed a Resolution Professional is appointed, this could either be the same person as the IRP or a different person.
Resolution Plan: A Resolution Plan is to be submitted to the CoC within 180 days (can be extended by the NCLT) from the commencement of the CIRP, this plan must be approved by the creditors who cumulatively hold 75% of the company’s debt. The previous management, a third party or the creditors can submit the resolution plan, and the Resolution Professional will ensure that the clauses of the resolution plan meet the norms of the IBC. If the plan is approved and is sanctioned by the NCLT, it becomes binding by all the stakeholders involved in the CIRP such as the shareholders, employees, creditors, and guarantors of the company.
Mandatory Liquidation: If the resolution plan has not been passed, the NCLT will order the liquidation of the company, and a liquidator will be appointed by the CoC to mobilise the assets of the company. The money recovered from the assets will be paid off in accordance with the payment priority set under section 53 of the Insolvency and Bankruptcy Code, 2016.
The liquidator/resolution professional will have to give the court a complete account of how the finances of the company were handled. After favourable inspection, the court will pronounce the company as dissolved. Even after dissolution, the name of the company cannot be registered by another for a period of two years.
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