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Summary Procedure For Liquidation (Section 361)

Updated: Oct 18


Introduction

Chapter XX of the Companies Act, 2013 deals with the Winding-up of the company which is the process of ending a company's life and administering its assets for the benefit of its members and creditors is known as winding up. An administrator, known as a liquidator, is appointed to take control of the company, collect its assets, pay its debts, and then distribute any surplus among the members according to their rights.


Section 361: Summary procedure for liquidation

Section 361 of the Companies Act of 2013 establishes a summary procedure for the winding up of businesses. The Central Government appoints an Official Liquidator to carry out the liquidation proceedings. The summary procedure specifies a method for winding up that is not based on the inability to pay debts. The Companies (winding up) rules, 2020, have been published, and they detail the detailed procedure for summary winding up. From April 1, 2020, the Companies (Winding-Up) Rules will be in effect.


Modes of liquidation

  1. Inability to pay debts

  2. Grounds other than inability to pay debts

  3. Voluntary winding up (as per Section 59 of IBC with voluntary liquidation process regulations 2017)

Note: Point 1 & 2 is called compulsory winding up and hence the winding up will be done by the Tribunal.


Circumstances where the company is wound up by the Tribunal

  1. The company itself wants to be liquidated by the Tribunal.

  2. The company has acted against the sovereignty and integrity of India.

  3. The company has conducted fraudulent activities.

  4. Default in filing Financial Statement or annual returns for 5 years.

  5. Winding up on just and equitable grounds in the opinion of the tribunal.


Conditions for Summary Winding Up

The following conditions must be met by a company seeking to wind up or liquidate under Section 361: – The book value of the company's assets does not exceed Rs 1 crore; and – Any of the following conditions based on the most recent audited balance sheet:

  1. If a company has taken deposits, the total outstanding deposits must be less than Rs 25 lakh or

  2. If the company has outstanding loans, the total amount owed, including secured loans, does not exceed Rs 50 lakh; or

  3. The company's revenue ranges from Rs 50 crore to Rs 100 crore; or

  4. The company's paid-up share capital does not exceed Rs 1 crore.

Appointment of an Official Liquidator

The official liquidator will be appointed by the Central Government as the company's liquidator for the summary procedure. In contrast to winding up by the tribunal or voluntary winding up, the official liquidator only acts as the liquidator in a summary procedure. All assets, effects, and actionable claims belonging to the company must be taken into the custody of the official liquidator.


Report by the official liquidator

The official liquidator must submit a report to the Central Government within 30 days of his appointment, stating whether or not any fraud was committed in the promotion, formation, or management of the company's affairs. After further investigation, the Central Government may order the winding up to be carried out under Part I. (i.e. by the tribunal).


Procedure for Summary Liquidation

  1. Sale of assets and properties: After obtaining prior approval from the central government, the Official Liquidator will dispose of all of the company's assets or property. Every transaction requires the approval of the central government. The liquidator will receive the gross sale proceeds. The liquidator must pay any expenses incurred in connection with the sale out of the gross proceeds of the sale. The money obtained by the Official Liquidator must be deposited into the Reserve Bank of India's (RBI) public account, as specified in section 349, not later than the RBI's next working day.

  2. Payments to creditors: Within thirty days of his appointment, the Official Liquidator must summon the company's creditors to prove their claims against the company. Within thirty days of receiving the call from the liquidator, the claims must be filed in the prescribed manner. The creditors' proof of debt will be examined by the liquidator. The liquidator must file a list of creditors with the Central Government within 30 days after the deadline for filing claims has passed. The creditors' debts will then be discharged by the liquidator.


Powers of the Official Liquidator

The powers of the appointed Official Liquidator include:

i) will take custody or control of all assets, effects, and actionable claims to which the company is or appears to be entitled. This includes all assets owned by the company as well as all amounts owed to the company.

ii) A liquidator may appoint an agent or auctioneer as approved by the central government to carry out a sale of the company's assets and properties.


Duties of the Official Liquidator

Duties of the Official Liquidator include:

i) must conduct an investigation into the company's affairs and submit a report to the Central Government in the prescribed format.

ii) The report must state whether or not any fraud was committed in the promotion, formation, or management of the company's affairs.

iii)The report should also be made if the liquidator believes there was no fraud committed.

iv) If the Central Government is satisfied that a fraud was committed by the promoters, directors, or any other officer of a company after receiving the liquidator's report, it may direct further investigation into the firm's affairs and that a report will be submitted within a time frame that may be specified.


Winding-up Order

After reviewing the investigation report submitted by the Official Liquidator, the Central Government may order that the process of winding up be initiated in the same way that a company is wound up by the tribunal.


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