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Winding up of a Company

The liquidation of the Company’s assets, which are collected and sold out to satisfy the obligations accumulated, is referred to as winding up. When an organization is winded up, the debts, expenditures, and charges are 1st paid off and spread among the shareholders. When an organization is subject to liquidation, it dissolves officially and ceases to exist.

Winding up is the legal method of closing down a firm and ceasing all operations. After the Closing of the Company, its existence ends, and therefore the assets are subject to superintendence to ensure that the stakeholders’ interests aren't jeopardized.

Benefits of Winding Up of a Company

The following advantages for winding up a company:

(1) Correct technique and Procedure Followed by winding up Process- By following the Proper procedure associated with the winding up of an organization, there would be compliance with the respective laws and acts.

(2) There's no legal proceeding on the Company- Through this process; directors would have an opportunity to give their own opinions and suggestions associated with saving the corporation. If the recommendations are proper procedure would be followed, and also the company and its Directors can avoid any legal proceedings from the tribunal or the court. Through this, the corporation can change its specialization in taking up business opportunities.

(3) Minimum Cost is needed in the procedure of liquidation

(4) Creditors Protection- Creditors would be safeguarded if proper procedures were allowed to be utilized. Through this method of winding up an organization, proper procedures are followed. Creditors are ranked based on the strategy of priority that is utilized by a particular company or business. Hence the statements that are provided by creditors before would be safeguarded. Their rights through such processes would be safeguarded.

(5) Any kind of Lease Agreements would be canceled- If there are any varieties of lease agreements entered into by the corporate, then all such agreements and contracts would be canceled as a result of the liquidation.

Grounds for Winding up :

The followings are the grounds for winding up a company: -

(1) If the tribunal thinks that the corporation is unable to pay debts. The inability to pay debts is construed in sec 271(2) of the CA 2013.

(2) If the company has taken a special resolution to wind up the affairs of the company.

(3) If the corporation has acted against the sovereignty and integrity of India and goes against the state, friendly relations with foreign countries.

(4) If the tribunal has thought that it will wind up the corporation as a result of it being a sick company under chapter 19.

(5) If the tribunal thinks that the company has done something fraudulently or for an unlawful purpose. This clause will be activated by the registrar or any individual who goes to complain regarding the affairs of the company.

(6) If the company has frequently defrauded and faulted in filing the annual returns.

(7) If the tribunal thinks that it's just and equitable for the corporation to wind up.

Compulsory Winding Up & Procedure: 

Petition Filed for Winding Up of a Corporation:

(1) A petition to the tribunal for the winding up of a company shall be conferred by—

(a) The company;

(b) Any contributory or contributories;

(c) All or any of the persons laid out in clauses (a) and (b);

(d) The Registrar;

(e) Person authorized by the Central Government on this behalf; or

(f) In a case falling under clause (b) of section 271, by the Central Government or a State Government.

(2) A contributory shall be entitled to send a petition for the winding up of a corporation, notwithstanding that he may be the holder of fully paid-up shares, or that the corporate may have no assets or don't have any surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of that he's a contributory or some of them were either originally assigned to him or held by him, and registered in his name, for a minimum of six months throughout the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder.

(3) The Registrar shall be entitled to send a petition for winding up

(4) A petition sent by the corporation for winding up before the tribunal shall be admitted only if accompanied by a statement of affairs in such kind and such manner as may be prescribed.

(5) a copy of the petition created under this section shall also be filed with the Registrar and Registrar shall, without prejudice to the other provisions, also need to submit his views to the trial within 60 days of receipt of such appeal.

Voluntary Winding Up Under Section 59 of The Insolvency & Bankruptcy Code, 2016

A Private Ltd. is tied with several rules and compliances, if you do not carry any business and therefore the company is simply sitting there, withstanding the test of time, the corporate is accumulating all the non-compliances that should be complied with, if you want to close the company in the future.

What Are The Methods Of Closing A Private Limited Company?

1. Removal of the Name of Company from the registrar of the company under fast track exit scheme

2. Voluntary Winding-up

1. FAST TRACK EXIT under Section 248 Of The Companies Act, 2013

Closure below this route is ruled by the provisions of Section 248 of the Companies Act, 2013 read with Rule 4 of companies(Removal of Name of companies from the Registrar of Companies) Rules, 2016.

The following companies given below can be closed through this route,

  • A defunct company may be a company that has nil assets and liabilities and didn't start a business within one year of incorporation.
  •  A dormant company which is a company that's not carrying on any business or operation for a period of 2 immediately preceding financial years or has not filed financial statements and annual returns throughout the last 2 financial years
  •  A company whose subscribers haven't paid the subscription amount and a declaration to this effect has not been filed within one hundred eighty days of its incorporation. (Subscription amount is nothing, however the consideration against that equity shares has been assigned.)

For closure of the company below this route, the company has to make an application to the registrar in form STK-2.

It has to be noted that, the closure of a company below this route is a lot easier and takes much less time if the company has complied with all the statutory rules.

The following conditions should be completed for filing form STK-2,

The company should have filed form AOC-4/AOC-4 XBRL and form MGT-7 up to the end of the FY in which the company ceased to carry on its business operations.

The company must have filed INC – 20A.

DIR – 3KYC in respect of all the Directors must be filed.

What do you need to file with e Form STK-2 or do documents need to attach in STK-2?

  • Indemnity bond duly notarized by each director in Form STK 3.
  • A statement of accounts containing assets and liabilities of the company created up to a day, less than thirty days before the date of application, and certified by a CA.
  • An affidavit in type STK 4 by each director of the corporation.
  • A copy of the special resolution duly certified by each of the directors of the company or consent of 75% of the members of the corporate in terms of paid-up share capital as on the date of application.

Companies that cannot file Form STK-2

• Sec 8(Not for Profit) Company

Any company, that at any time within the previous three months

  • has modified its name or shifted its RO from one State to a different
  • has created disposal for the value of property or rights held by it, immediately before the cessation of trade or otherwise carrying on of business, for the aim of disposal for gain within the normal course of business or otherwise carrying on of business.
  • has engaged in the other activity except for the one that is important or expedient for making an application under that section, or deciding whether to do so or consider  the affairs of the company or comply with any statutory requirement;
  • has created an application to the tribunal for the sanctioning of a compromise or arrangement and also the matter has not been finally concluded.
  • is being wound up under Chapter XX of this Act or under the Insolvency and Bankruptcy Code, 2016

2. Voluntary Winding Up Under Section 59 Of The Insolvency & Bankruptcy Code, 2016

Chapter XX of the Companies Act, 2013 lays down the procedure for winding up an organization. However, the eleventh schedule of the Insolvency and Bankruptcy Act, of 2016 omitted voluntary winding up, which was laid down under sec 304 to 325 of the 2013 act. As a substitute for the omitted provision, chapter V of IBC, 2016 offers most of the data on

The regulatory compliances for winding up and liquidation. Other compliances embrace provisions under the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017.

Under Chapter V (section 59) of the code, the procedure is as under:

1. Declaration: Since an entity cannot be liquidated without due consideration to its stakeholders, a declaration by the majority of the company’s directors is compulsory. The declaration shall be verified by an affidavit

They have made inquiries into the corporation's affairs and have formed an opinion that either the company has no debt or is ready to pay its debts from the yield of assets that may be sold out in the voluntary liquidation.

The corporation isn't being liquidated to defraud any person.

2. The subsequent documents shall accompany the declaration:

An audited financial statement and record of business operations of the corporate for the previous 2 years or for the period since its incorporation, whichever is later;

 A report on the valuation of the assets of the corporate prepared by a registered valuer. The declaration of solvency should be filed in form GNL-2 with the ROC.

3. Board meeting of directors: For appointing the liquidator, the board needs to determine an Insolvency Professional registered with the Insolvency and Bankruptcy Board of India (IBBI). Once the resolution is approved, the corporation shall advise the Registrar and IBBI of all of its remaining debts, if any, and arrange a general company meeting for succeeding steps.

4. Meeting of shareholders: The code makes it mandatory to pass a general resolution (for voluntary liquidation) or special resolution (end of a fixed time of the entity) by members in a shareholder’s meeting regarding commencing with the liquidation method before the appointment of the liquidator. If the organization is in debt, 2/3rd of the creditors should additionally approve the resolution within seven days of passing the resolution. This must be done within four weeks of the Declaration of insolvency.

5. Duties of the liquidator: The liquidator needs to file the resolutions to the ROC and IBBI. Henceforth, all powers of the board of Directors, KMP, and the company debtor’s partners cease. Powers are instead vested in the liquidator who takes charge of the method from that time.

Recent Amendments in Voluntary Liquidation Processes

The IBBI regulations generally pertain to the compliances a liquidator adheres to when dissolving an organization. Contrary to the act’s objective, it was recently discovered that some compliances in the act were the reason for a delay in the method. IBBI recently amended the rules to fast up the method of liquidation. Here we can explore the amendments passed in the last 2 years.

IBBI (Voluntary Liquidation Process) (Amendment) Rules, 2020

On the 2020 of 15th January, the 2017 regulations were amended by the IBBI (Voluntary Liquidation Process) Regulations, 2020. The first purpose behind this change was to include ‘unclaimed dividends and undistributed proceeds’ in the books of accounts and the procedure to be followed to balance the current liabilities and assets thereunder. As per the changes made under this amendment:

  • The liquidator needs to maintain the register of accounts.
  • The board shall maintain the company Voluntary Liquidation Account in the Public Accounts of India. If the liquidator fails to deposit, it shall be paid with interest at the rate of 12% p.a. from the due date of deposit till the date of deposit.
  • New forms, namely FORM-G and FORM-I are introduced to submit proof of deposit and clarify the nature of the deposit (FORM -G), and therefore the withdrawal from the company Voluntary Liquidation Account (FORM-I) through this amendment.

IBBI (Voluntary Liquidation Process) (Second Amendment) rules, 2020

On 5th August 2020, a second amendment was made to the voluntary liquidation method, concerning any regulations regarding the liquidator:

  • The amendment assumes that the chosen liquidator is a corporate professional eligible to be appointed as an independent director as per the companies act.
  • They should be free from all legal, personal, pecuniary, or professional relations or other points which may create a conflict of interest to the liquidation method.
  • The amended rules enable the corporation to exchange the present liquidator by appointing another insolvency professional replacement liquidator by a resolution of members/partners.

IBBI (Voluntary Liquidation Process) (Amendment) Rules, 2022

On 5th April 2022, IBBI notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Amendment) Rules, 2022 to hasten the method of liquidation. It introduced the below changes:

  • The liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims wherever no claim from creditors has been received until the last date. Earlier, the stipulated time was forty-five days.
  • The liquidator shall distribute proceeds from realization within thirty days from the receipt of the amount to the stakeholders. Earlier, the stipulated time was six months.
  • As mentioned earlier, the organization passes a general or special resolution to announce the liquidation method, followed by approval from the board and creditors if the entity owes a debt. During this case, the liquidator shall complete the liquidation method of the corporate person less than 270 days from the liquidation commencement date. In all other cases, the limit is ninety days from the commencement. The earlier stipulated time was twelve months in all cases. 
  • Since verifying documents in bulk causes unimportant delay, the change rules specify a compliance certificate that should be submitted, that summarizes the liquidator’s actions.