Within the company world, companies are formed to do business and earn money. Still, circumstances arise where a company becomes not needed or even appropriate and must close its books in a lawful and orderly manner. Winding up by the tribunal means ceasing company operations, liquidating assets, discharge debts and distributing almost all remaining property to shareholders.
The Companies Act, 2013 is the principal law governing Companies in India and also covers winding up by the tribunal for a business. This procedure is called compulsory winding up by tribunal when set up by an external party like a creditor and is done under the supervision of a judicial body called National Company Law Tribunal (NCLT).
Grounds for Winding Up by Tribunal
On receipt of petition for winding up, National Company Law Tribunal may order the winding up of a company for the reasons outlined in the Companies Act, 2013. Those grounds include:
- Inability to pay off debts: If the company doesn’t pay its debts promptly, creditors can petition NCLT for winding up and after receipt of petition for winding up NCLT may order winding up by the tribunal.
- Conduct disproportionately detrimental to public interest: In case the company violates public order, decency, morality, diplomatic relations or national security with other nations, the NCLT could order its winding up.
- Fraudulent or unlawful conduct: In case the company has been managing its affairs fraudulently or unlawfully, the NCLT might order its winding up.
- Default in filing financial statements: After 5 financial years without filing of non filed financial statements or annual returns the NCLT could order the company winding up.
- Or order under various other laws : In case a tribunal has ordered the company to be wound up under yet another law, the NCLT might also order its winding up.
- Just and equitable grounds: In case the NCLT believes that wounding the company is just and equitable, it may order its winding up.
Initiation of the Winding Up Process
A company is generally wound up by tribunal upon filing a petition with the NCLT. The following entities might file such a petition:
- The Registrar of Companies.
- The Central Government or even a State Government.
- A creditor or creditors.
- A contributory or a group of contributories (shareholders)
- Any person authorised by the Central Government.
In the event it gets the petition for winding up, the NCLT could take the following actions:
- Admit the petition and order winding up of the company.
- In case the petition is found unworthy, dismiss it.
- Any other order it deems fit, which includes appointing a provisional liquidator or directions to the company or its creditors.
Appointment of Liquidators
If the NCLT accepts the petition and orders the winding up of the business, it creates a provisional liquidator to control the company’s affairs and liabilities till a business liquidator is appointed. The provisional liquidator acquires the company’s assets, controls its operations and performs other duties as the NCLT directs.
Then the NCLT selects a company liquidator to conduct the actual winding up of a company by tribunal. The company liquidator takes over the business assets and also can make the required distributions to creditors and shareholders in compliance with the Companies Act, 2013.
Powers & Duties of the Liquidator
The company liquidator has the following broad powers and duties during winding up:
- An investigation into the company’s activities.
- Realising the company assets and properties.
- Settlement of the list of contributories (shareholders) and liabilities.
- Examining under oath the promoters, directors along with other personnel of the company.
- Arresting and also seizing the property of individuals that owe the company money or have misapplied its funds.
- Proper books and records of the winding up process.
- The debts of the company shall be paid off in descending priority.
- Any surplus assets distributed among the shareholders after all liabilities are resolved.
- Submitting periodic reports to the NCLT and also to the creditors/members of the company.
The NCLT might also appoint an advisory committee to help the company liquidator in winding up the process, particularly in matters involving complicated financial or complex problems.
Distribution of Assets & Dissolution
Throughout the winding up procedure the company liquidator is obliged to pay creditors their claims and distribute the company’s assets in accordance with the Companies Act, 2013 priority. The order of priority is:
- Costs & expenses of winding up.
- Workmen’s dues, and secured creditors.
- Unsecured creditors.
- The preference shareholders.
- Equity shareholders.
Following realisation of all assets, discharge of debts and distribution of surplus to shareholders, the company liquidator files a final report together with the NCLT. If satisfied with the report and winding up procedure, the NCLT orders the company’s dissolution along with its legal existence ends.
Challenges & Concerns with Winding up by Tribunal
While winding up a company by tribunal offers an orderly and fair means of winding up a company’s operations, it is not without difficulty and worries. The key issues for tribunals in winding up include:
1. Delays: The time taken in winding up by the tribunal can be high because of case backlog, insufficient infrastructure & manpower and intricacy of problems.
2. Valuation of assets: It can be tough to correctly value a company’s assets – particularly intangible assets or assets in various countries.
3. Conflicts amongst stakeholders: Disputes and conflicts among creditors, shareholders, workers and the government could occur concerning priority, distribution, and claims of assets.
4. Fraud & malpractice danger : There is a danger of fraud, mismanagement and negligence by the liquidator or the company which includes syphoning of money, falsifying data, or collusion with interested parties.
5. Resources insufficient: The tribunals might not have resources, support and expertise to deal with the winding up process efficiently and effectively, particularly in complicated circumstances.
Final Thoughts
A winding up of a company by tribunal under the Companies Act, 2013, is an essential procedure to make certain the orderly cessation of commerce by the business and the equal distribution of its assets to shareholders and creditors. The process strives to be equitable and transparent, though it isn’t free of challenges, and the tribunals would be key to its effective implementation.
Following the requirements of the Companies Act, 2013 (according to the concepts of fairness, accountability and transparency), the tribunals can conduct the winding up process and also offer a just resolution to all involved.
FAQs
1. What provisions of Indian law pertains to winding up a company by tribunal?
The principal law governing winding up of a company by tribunal in India is the Companies Act, 2013,. The appropriate provisions will be in Sections 271 to 303 of the Act. These sections describe the grounds for winding up, how you can file a petition, who would be the liquidators, their powers and responsibilities, division of property and the company dissolution.
2. What is the process involved in winding up by the tribunal in India?
The method for winding up a company by tribunal involves the following steps:
a) Petition for winding up filed by authorised persons (creditors, shareholders, or government) with the NCLT.
b) The NCLT admits the petition and orders winding up of the company or even dismisses the petition in case it is unfounded.
c) The NCLT appoints a provisional liquidator to handle the company’s affairs and finances.
d) The NCLT employs a business liquidator to conduct the actual winding up.
e) The company liquidator sells company assets, pays creditors claims and distributes remaining assets amongst shareholders in the prescribed order of priority.
f) The company liquidator files a final report together with the NCLT.
g) The NCLT orders the company dissolution if satisfied with winding up process.
3. What are the circumstances under which a tribunal may order the winding up of a company?
The Companies Act, 2013 describes the grounds in which a tribunal can order the winding up of a business :
a) The company can not pay its debts.
b) The company’s actions harm public interest, national security or friendly relationships with foreign states.
c) The company has been doing business unlawfully or fraudulently.
d) The firm has failed to submit its financial statements or yearly returns for 5 successive years.
e) Any other law has ordered the company to be wound up by a tribunal.
f) The tribunal believes that wounding up the company is just and equitable.
4. Can creditors or shareholders initiate the winding up process through tribunal intervention?
Yes, both creditors and shareholders can initiate the process of the winding up by filing a petition with the National Company Law Tribunal.
5. What are alternatives to tribunal-led winding up for financially troubled companies in India?
While winding up by tribunal is a procedure obligatory on the part of third parties, the Companies Act, 2013 also allows voluntary winding up on company’s very own initiative. Also the 2016 Insolvency and Bankruptcy Code provided for the Resolution of economically stressed businesses with the Corporate Insolvency resolution Process (CIRP). This process attempts to revive viable companies and maximise their assets as an alternative to winding up in certain instances.
