Winding Up of a Company in India

Over 17,600 companies were closed till January 26 alone in India. Shutting down a business in India happens more often than you'd expect, whether because of loss of capital, evolving markets, or moving on to new opportunities. However, the process of closing a company is anything but easy.

For small business owners and individuals in India, understanding the formal process of closing a company is crucial. This procedure, known as winding up, ensures a legal and orderly conclusion to a company's existence. It protects the interests of all parties involved, from creditors to employees and shareholders.

The process can seem overwhelming. It involves filing the correct documents, understanding complex legal provisions, and ensuring full compliance with the Companies Act, 2013.

What is the Winding Up of a Company?

Winding up represents the formal process of bringing a company's business operations to a close. It signifies the lawful end of a corporate entity's life. The process involves several key actions:

• Stopping all business activities
• Selling the company's assets
• Settling debts with creditors
• Distributing any remaining assets among shareholders.

In India, the Companies Act, 2013, and the Insolvency and Bankruptcy Code (IBC), 2016, primarily govern this entire procedure. A professional, referred to as a liquidator, is appointed to oversee and manage this complex process.

Throughout the winding-up process, the company retains its legal identity and can continue to participate in legal proceedings.

Modes of Winding Up of a Company

Indian law offers different ways to close a company, depending on its situation and financial condition:

• Compulsory Winding Up (By the Tribunal)

This occurs when a court or tribunal mandates the company's closure. In India, the power to wind up a company lies with the National Company Law Tribunal (NCLT), as explained in Section 271 of the Companies Act, 2013. The process typically begins with a formal petition filed before the NCLT.

Here’s who can file such a petition:

• Company
• Its creditors or shareholders (known as contributories)
• Registrar of Companies (ROC)
• The Central or State Government (in case of public interest)

The grounds include the company's inability to pay its debts. This is presumed if a creditor's demand for payment (exceeding ₹1 lakh) remains unsettled for 21 days. Other grounds include:

• Fraudulent conduct of affairs
• Acting against India's sovereignty or integrity
• Failing to file financial statements or annual returns for five consecutive years
• Just and equitable reasons as determined by the Tribunal.

If the NCLT finds a valid case, it admits the petition and appoints an official liquidator.

• Voluntary Winding Up

Voluntary winding up is initiated by the company's members (shareholders) or creditors, without direct court intervention. This self-initiated procedure typically begins with the company passing a special resolution in a general meeting.

There are two distinct forms of voluntary winding up:

• Members' Voluntary Winding Up: This method is chosen when the company is solvent and fully capable of paying all its debts.
• Creditors' Voluntary Winding Up: This happens when a company cannot pay all its debts and is declared insolvent.

A solvent company capable of paying its debts can use the voluntary winding-up process with minimal court involvement. However, if a company is insolvent and cannot pay its debts, the process requires stronger creditor protections, leading to a compulsory winding up or a creditors’ voluntary winding up.

Key Aspects of Winding Up of a Company

The winding-up process includes several important elements to ensure it’s done legally and in an organized way.

• A liquidator plays a key role in the process. Their job is to manage the entire closure. This includes converting assets into cash, paying off debts, and distributing leftover funds to shareholders.
• The liquidator’s appointment depends on the type of winding up: in voluntary cases, members or creditors appoint one; in compulsory cases, the court does.
• A strict order of payment is followed when settling liabilities. This prioritizes secured creditors (like banks), then employees (for unpaid salaries and benefits), followed by government dues (like taxes).
• Only after these obligations are fulfilled, any leftover money is distributed to shareholders. This hierarchy helps protect the rights of those most at risk during closure.

Difference Between Winding Up, Dissolution & Liquidation of a Company

These terms are often used interchangeably, but they represent distinct stages in the process of closing a company.

Governing Laws For Winding Up a Company

The winding up of companies in India is primarily governed by two key legislative frameworks:

• The Companies Act, 2013

This Act provides a comprehensive structure for winding up procedures, particularly under Chapter XX (Sections 270 to 365). It outlines provisions for both compulsory winding up by the Tribunal and, historically, voluntary winding up.

However, after the enforcement of the Insolvency and Bankruptcy Code (IBC), 2016, most provisions related to voluntary winding up under the Companies Act have been omitted or made inapplicable. As of now, only winding up by the Tribunal continues to be governed under the Companies Act, 2013 (specifically under Section 271 and onwards).

• The Insolvency and Bankruptcy Code (IBC), 2016

With its enactment, the IBC, particularly Section 59, now largely governs voluntary liquidation for corporate persons. The IBC focuses on making the resolution process faster and more efficient. It also covers compulsory liquidation procedures, especially when a company is unable to pay its debts.

Winding up a company, while signifying an end, offers several advantages, particularly when a business is no longer viable or has served its purpose.

[caption id="attachment_11500" align="alignnone" width="2560"] benefits of winding up a company in india[/caption]

• Relief from Debts and Liabilities

Once the liquidation process is completed, the company’s directors and administrators are no longer responsible for settling debts or dealing with creditors.

This allows them to move forward with a fresh start, free from previous financial stress.

• Protection from Legal Trouble

Choosing voluntary winding up can help a company avoid possible legal action from courts or regulatory bodies due to ongoing non-compliance or financial issues.

This proactive decision lets directors shift focus to new business ideas without worrying about old legal problems.

• Cost Savings Over Time

Keeping an inactive or non-operational company still comes with regular costs, such as filing fees and audit expenses.

Liquidation puts an end to these yearly costs, helping save money in the long run.

Often, the expenses involved in winding up are covered by selling off company assets, making it more affordable than continuous compliance.

• End of Contractual Obligations

During the winding-up process, certain long-term agreements—like leases—can be canceled.

This helps the company stop paying for contracts it no longer needs.

• Fair Treatment of Creditors

Liquidation follows a set process that ensures creditors are notified and their claims are handled in a fair and transparent manner.

Creditors can assess the situation based on official credit statements and prepare for any shortfalls.

• Provides a Strategic Business Exit

Winding up a company that is inactive or not profitable can be a strategic move.

It reduces legal and financial pressure, giving directors and shareholders a chance to explore fresh opportunities without being tied to past obligations.

Consequences of Winding Up a Company in India

While winding up offers benefits, it also carries significant disadvantages for the company and its stakeholders.

• Loss of Legal Identity

Once a company is dissolved, it loses its legal status and is no longer recognized as a separate legal entity.

It cannot sign contracts, enter into civil transactions, or take part in legal proceedings.

• Asset Liquidation and Debt Settlement

The main goal of liquidation is to sell the company’s assets and use the proceeds to pay off debts. Creditors are paid first, including employees and government dues.

Shareholders receive money only if there’s anything left after all debts are cleared. If the company’s assets are not enough, creditors may get only a part of what they are owed.

• Reputational Risks

If the company is wound up due to a creditor’s petition, it can signal financial distress or insolvency. This may harm the company's creditworthiness and public reputation.

It could also lead to loss of customers and defaulting on other obligations, worsening the financial situation.

• Legal Restrictions and Consequences

Once a winding-up petition is filed, the company cannot sell or transfer assets without court approval.

Directors may face legal action if they commit fraud or attempt to hide assets during the process.

• Tax Responsibilities

All pending tax dues, such as income tax and GST, must be cleared during the winding-up process.

The liquidator may need a tax clearance certificate before the company can be officially closed.

• Directors’ Personal Liability

In most cases, directors are not personally responsible for the company’s debts unless they:

• Engaged in fraud,
• Breached their legal duties, or
• Violated specific statutory rules.

The Supreme Court has clarified that directors' liability usually begins after a winding-up order is issued. If fraud is found, directors can be held personally responsible for the company's losses.

According to Section 272 of the Companies Act, 2013, a petition for winding up can be presented to the Tribunal by:

• The company itself: A company can decide to be wound up by the Tribunal through a special resolution.
• Any contributory(s): Shareholders, even those holding fully paid-up shares, can file a petition. This is possible even if the company has no assets or surplus assets for distribution.
• All or any of the persons specified above: A combination of the company, contributories, or others can jointly file.
• The Registrar of Companies (ROC): The ROC can present a petition, especially if the company has defaulted in filing financial statements or annual returns for five consecutive years. The ROC typically needs prior sanction from the Central Government, and the company must be given a chance to respond.
• Any person authorized by the Central Government: The Central Government can authorize individuals to file a winding-up petition.
• The Central Government or a State Government: This applies if the company's actions are against India's sovereignty, integrity, security, public order, morality, or friendly relations with foreign states.

This broad range of petitioners ensures that various stakeholders, including regulatory bodies, have the means to initiate a winding-up process when necessary.

The specific documents required depend on the mode of winding up, but a general set of documents is common.

General Documents

The following documents are generally required for closing a company in India:

• Incorporation Certificate of the company.
• Company PAN.
• Director's PAN.
• Audited Financial Statements of the previous two years or since incorporation.
• Statement of Company Affairs for assets and liabilities.

For Voluntary Winding Up (Under IBC, 2016)

For specific voluntary winding up, the following additional documents might be required:

• Declaration of Solvency: A statement from the majority of directors, verified by an affidavit, confirming the company's ability to pay its debts in full from asset proceeds.
• Report on Valuation of Assets: If the company has assets, this report must be prepared by a registered valuer.
• Special Resolution by Shareholders: A copy of the special resolution passed in a general meeting, resolving to liquidate the company voluntarily and appointing an Insolvency Professional as liquidator.
• MGT-14: Filed with the Registrar for the Board and special resolution.
• GNL-2: Filed with the Registrar for the Declaration of Solvency and Appointment of the Liquidator.
• Indemnity Bond (Form STK-3) and Affidavit (Form STK-4): Required for Fast Track Exit (STK-2) for defunct companies.
• Closure of Bank Account Certificate: From the bank.
• Last filed Income Tax Return.
• List of pending litigations, if any.

For Compulsory Winding Up (NCLT Petition)

The documents mentioned below would be required for the compulsory winding up of a company:

• Petition for Winding Up: Must be submitted in Form WIN 1 or WIN 2, in triplicate, accompanied by an affidavit in Form WIN 3.
• Statement of Affairs: Filed in Form WIN 4, containing information up to 30 days before the petition date, in duplicate, verified by an affidavit.

Ensuring all documents are accurate and complete is paramount to avoid delays and complications in the winding-up process.

The process for winding up a company varies significantly between voluntary and compulsory modes.

Process for Voluntary Liquidation of a Solvent Company (under IBC, 2016)

This process is self-initiated by the company, typically for solvent entities.

Step 1: Board Meeting & Declaration of Solvency

The Board of Directors must pass a resolution recommending voluntary liquidation and appointing a liquidator, followed by a special resolution by shareholders within 4 weeks.

A declaration of solvency must affirm that the company has no debt or will be able to pay off debts in full. A valuation report is optional unless assets need to be valued under applicable accounting standards.

Step 2: General Meeting – Passing Resolutions

Within four weeks of the Declaration of Solvency, the company holds a general meeting. Shareholders pass a special resolution to wind up the company voluntarily and appoint an Insolvency Professional as the liquidator.

If the company has debts, creditors who hold at least two-thirds of the total amount must approve the resolution within 7 days. The liquidation process officially begins from the date this resolution is passed.

Step 3: Notification to ROC and IBBI

The company must notify the Registrar of Companies (ROC) and the Insolvency and Bankruptcy Board of India (IBBI) within 7 days of passing the members' resolution (or creditors' approval, if required). This involves filing Form MGT-14 and Form GNL-2 with the ROC.

It’s also crucial to notify IBBI about the initiation of liquidation in Form A under the IBBI (Voluntary Liquidation Process) Regulations, 2017.

Step 4: Public Announcement by Liquidator

The appointed liquidator must make a public announcement within 5 days in Form A, calling for claims from stakeholders. It must be published in one English and one regional language newspaper, and on the company’s and IBBI’s websites.

Step 5: Asset Liquidation and Debt Settlement

The liquidator takes custody of assets, sells them, and collects any outstanding dues. They verify claims from creditors within 30 days of the last date for receipt of claims and prepare a list of stakeholders.

Proceeds are distributed to stakeholders within 30 days of receipt, after deducting liquidation costs.

Step 6: Final Report and Dissolution Application

Upon completing the liquidation, the liquidator prepares a final report, including audited accounts. This report is submitted to the Adjudicating Authority (NCLT), along with an application for dissolution.

The NCLT then passes an order dissolving the company. A copy of this order is forwarded to the ROC within 14 days.

Compulsory Winding Up Process (By the Tribunal)

This court-supervised process is typically initiated when a company is unable to meet its obligations or has acted unlawfully.

Step 1: Filing the Petition

An eligible petitioner (company, creditor, contributory, ROC, or government) files a formal petition with the NCLT bench having jurisdiction over the company's registered office. The petition must be in Form WIN 1 or WIN 2, accompanied by an affidavit in Form WIN 3.

A detailed statement of the company's affairs (Form WIN 4) must also be submitted within 30 days.

Step 2: NCLT Proceedings & Advertisement

The NCLT scrutinizes the petition. The petition must be advertised in an English and vernacular newspaper circulating in the state where the company's registered office is located.

It should be in Form WIN 6 and published at least 14 days before the hearing.

Step 3: Appointment of Provisional Liquidator

The Tribunal may appoint a provisional liquidator to take charge of the company's assets and affairs until a final winding-up order is made.

Step 4: Tribunal Hearing & Winding-Up Order

The NCLT hears the petition and may pass an order for winding up. The order for winding up is sent to the Company Liquidator and the ROC within 7 days.

Step 5: Liquidator Appointment & Duties

The Tribunal appoints an official liquidator to oversee and manage the winding-up process. The liquidator takes custody of all company assets and documents. They prepare a preliminary report within 60 days and investigate the company's affairs, reporting any fraud.

Step 6: Asset Realization and Creditor Settlement

The liquidator liquidates assets and calls upon creditors to prove their claims within 30 days of appointment. A list of creditors is filed with the Central Government within 30 days of the expiry of the claim. The liquidator then discharges dues according to priority.

Step 7: Final Report and Dissolution

After winding up the company's affairs, the liquidator makes an application to the NCLT for dissolution. If the NCLT finds the accounts in order, it passes a dissolution order, typically within 60 days of receiving the application. A copy of this order is forwarded to the ROC within 30 days. The ROC then formally dissolves the company by removing its name from the register.

Understanding the costs and potential penalties is crucial for any business owner considering winding up.

Cost of Winding Up of a Company in India

The cost of closing a company in India varies significantly based on the chosen method:

• Voluntary Striking Off (Fast Track Exit): This is generally the most affordable option for non-operational companies with no liabilities.

• • Government Filing Fees: ₹10,000 – ₹20,000 (Document Processing, Auditor’s Certificate, and more).
  • For Form STK-2: the fee is ₹10,000.
  • Professional Fees (CA/CS/Legal): ₹15,000 – ₹50,000.
• Compulsory Liquidation: This method is more expensive due to court involvement.
  • Court Fees: ₹50,000 – ₹1,00,000.
  • Professional Fees (Liquidators, Legal): ₹1,50,000 – ₹3,00,000.
• Insolvency and Bankruptcy Code (IBC) Liquidation: This is typically the most expensive, used when a company cannot pay its debts.
  • Insolvency Professional Fees: ₹2,00,000 – ₹5,00,000.
  • Government Fees: ₹1,00,000 – ₹2,00,000.

Other Miscellaneous Costs: These can include:

• Notary services: ₹5,000 – ₹10,000
• Publication fees for gazette notices: ₹10,000 – ₹15,000

Unexpected legal costs can vary significantly based on complexity.

Penalties for Not Winding Up an Inactive Company

Many directors mistakenly believe that "no operations mean no obligations" for inactive companies. This misconception can lead to severe financial and legal consequences.

• Penalties for Non-Compliance

Inactive companies are still required to file annual returns (MGT-7/MGT-7A) and financial statements (AOC-4). Failing to do so attracts significant penalties under Section 92(5) of the Companies Act, 2013.

• A penalty of ₹10,000 for the company and every officer in default.
• An additional ₹100 per day for continued non-compliance.
• A maximum penalty of ₹2,00,000 for the company and ₹50,000 per director.
• The ROC can also initiate legal proceedings, leading to further complications.

• Director Disqualification

If directors don’t file financial statements and annual returns for three years in a row, they can be disqualified for five years from becoming or continuing as a director in any company, as per Section 164(2)(a) of the Companies Act, 2013.

This means they cannot start new companies or be part of existing ones during that period.

• Legal Liabilities and Prosecution

Remaining registered but inactive exposes directors to laws dealing with Benami Transactions and Corruption. The government is serious about companies that have not filed returns, leading to suspicion from central agencies.

Prosecution of directors under the Companies Act for failing to meet statutory obligations is possible.

The duration of the winding-up process varies significantly based on the chosen method and the complexity of the company's affairs.

The timelines are estimates and can be impacted by factors such as the number of creditors, the complexity of assets, and any disputes among stakeholders.

Companies wind up for various reasons, ranging from financial distress to strategic business decisions.

• Inability to Pay Debts: This is one of the most common grounds, especially for compulsory winding up. If a company cannot meet its financial obligations, creditors may initiate winding-up proceedings.
• Special Resolution by the Company: The company's members may decide to wind up voluntarily by passing a special resolution. This can be due to strategic decisions, such as the completion of a specific project, a change in business focus, or a desire to exit the market.
• Fraudulent Conduct of Affairs: If the company's affairs have been conducted fraudulently, or if it was formed for an unlawful purpose, the Tribunal may order its winding up.
• Failure to File Financial Statements or Annual Returns: Defaulting on statutory filings with the Registrar of Companies for five consecutive financial years can lead to compulsory winding up by the Tribunal.
• Expiry of Duration or Occurrence of Event: If the company was formed for a fixed period or its Articles of Association specify dissolution upon a particular event, it can be wound up voluntarily when that condition is met.
• Commercially Unviable or Recurring Losses: A company may choose to wind up if it is consistently incurring losses and is no longer viable in the market. This prevents further financial burden.
• Disputes Among Promoters or Management: Internal conflicts can make continued operations impossible, leading to a decision to wind up.
• Regulatory Hurdles: New regulatory changes, non-compliance with laws, or inability to meet licensing requirements can prompt a voluntary winding up.

These reasons highlight that winding up is not always a sign of failure but can also be a strategic and responsible decision to conclude a business entity's life.