Faqs

What is liquidation?

Liquidation is the process by which a company is shut down and the claims of and against the company are settled and the company is dissolved as its name is struck from the register maintained by the Registrar of the Companies.

Why is it required?

A company can only be dissolved as per the provisions of The Companies Act 1956. Company weather private or public is considered a separate legal entity for all purposes and continues in existence even after the demise of its members/shareholders and therefore unlike a proprietorship or a partnership firm, a company incorporated under the Companies Act cannot be dissolved without following the procedure prescribed in the Companies Act.

What is the benefit of this statutory procedure of winding up?

There are various people and entities which deal with a company and have claims over it, many of them are people like workers and small investors who cannot press their claim upon a corporate entity which works through its directors and whose shareholders are protected by the concept of limited liability and corporate veil. The process of liquidation ensures that claims of this vulnerable section are not only decided but also decided on priority?

Who is the official liquidator?

Official liquidator is a whole time officer appointed by the central government. Though the office of the official liquidator is involved in both the modes of winding up, it is the process of winding up by Court (U/s 433 of the companies act.) in which the office of the official liquidator assists the court, which is the company court at the High Court.

How is winding up of a company initiated?

The process of winding up is initiated by filing a petition for winding up before the company court at the High Court in Form 45, Form 46 or Form 47 of the Companies (Court) Rules 1959. See Rule 95 of the CC Rules.

On what grounds can a winding up petition be filed?

As per section 433 of the Companies Act, a winding up petition can be filed on one of the following grounds?

Upon a special resolution being passed.
If legally required reports are not made to the registrar.
If it suspends business for one whole year.
If Number of required members is reduced
If it is unable to pay its debt
If it acts against the interest of the country.

Who can file a winding up petition

Section 439 of the companies act. A winding up petition can be filed by the company, a creditor, a contributory, the concerned ROC, and in special cases by government.

On what ground is a winding up petition usually filed?

The most common ground for filing a winding up petition is under section 433 (e), which is when a company is unable to pay its debts.

What is the meaning of a company being unable to pay its debts?

As per section 433(e) a company is considered to be unable to pay its debts; when a debt of Rs. Five hundred or more is owed by the company to a person and the company fails to pay the said sum despite receiving a demand from him at its registered office by registered post or when a creditor of the company obtains a decree in his favour and the summons issued for the execution of it are returned unsatisfied.

Requirements while filing a winding up petition.

Copy of the petition should be furnished to every contributory and in case of a petition by a contingent or prospective creditor the petition shall be accompanied with an application U/s 439(8) for the leave of the Court.

Can a petition for winding up be withdrawn once presented to the court?

It can be done only with the leave of the court and in case the winding up petition has been advertised, the application for withdrawal cannot be heard at any time before the date fixed in the advertisement for the hearing of the petition.

What is the duty of the company in case winding up petition is filed.

The concerned company has to file a statement of its affairs SOA both when it has itself filed the winding up petition and when it is opposing the petition and has filed an affidavit in opposition.

What can the Court do upon hearing a winding up petition?

Upon hearing the petition the court can dismiss it, adjourn it, make an interim order as its thinks fit or make an order for winding up of the company.

What interim order is commonly made?

The court after the admission of the winding up petition, upon an application of a creditor if it deems fit can appoint official Liquidator as the provisional Liquidator setting out the restrictions or limitations if any on its powers which are otherwise be same as that of the official liquidator. See section 450 Companies Act, rule 106, Form No. 51 of The Companies (Court) Rules 1959

What is the consequence of a winding up order being made.?

Upon the making of a winding up order the official Liquidator becomes the Liquidator of the company and the registrar of the high court sends two certified copies of the winding up order to the Official Liquidator. A winding up order is made in Form No. 52. The order contains a note stating that it will be the duty of the persons liable to make the company's statement of affairs to attend on the Official Liquidator at the time and place appointed by him. The order is to be published in one newspaper each in both English and the regional language having circulation in the area of business of the company. The publication is as per Form No. 53. For details see Effect of Winding Up.

What is the status of the company and its assets upon the passing of the order of winding up?

When a winding up order is made, the liquidator or the provisional liquidator is required to take into his custody or under his control all the books of accounts, registered office property, effects and claims to which the company appears to be entitled.

What is the status of the company and its assets upon the passing of the order of winding up?

What are the duties of the directors and officers of the company upon a winding up order being made.

The directors and all other officers can be required by the official liquidator to submit a statement of affairs of the company in a prescribed form verified by an affidavit containing the particulars regarding assets of the company, by issuing a notice as per Form No. 55 debts of the company, names and addresses of the creditors, debts due to the company any other information as may be required. For details see SOA. The directors and officers of the company are also required to ensure that the books of accounts of the company are completed and audited up to date of the winding up order made by the Court.

What is the format for the statement of affairs.

The statement of affairs is to be filed as per Form No. 57 in duplicate and an affidavit of concurrence should be in Form No. 58

What is the time limit for filing the SOA?

The statement of affairs has to be filed within a period of 21 days of the appointment of the Provisional Liquidator or the passing of the order of winding up.

Can the time limit for filing the statement of affairs be extended?

Yes, the same can be extended as a person required to submit a statement of affairs under section 454 can apply to the Official Liquidator who may give a written certificate extending time in Form No. 59, and if an extension of time is not granted by the Official Liquidator one can apply to the Court. See Rule 128.

Can the creditors of the company obtain the copies of the SOA?

All creditors subject to payment of fee are entitled to or obtain an extract of the statement of affairs filed by the directors or officers of the company.

What are the consequences of not filing the SOA or of not completing the books of the company are not having them audited?

Non-filing of SOA is an offence U/s 454(5) punishable by imprisonment for a term up to two years or with fine. Non-completion or failure to have the books of accounts audited is an offence punishable U/s 446A of the Companies Act punishable by imprisonment for term of one year or fine.

Can the requirement of filing statement of affairs be waived?

Yes, an application for dispensing with the requirement of filing the SOA can be made U/Rule 133 supported by a report of the Official Liquidator showing the special circumstances for waiving the filing of the SOA.

Does the making or concurring in the SOA put an end to all the obligations of the person making?

No. U/Rule 131 the person making or concurring in the SOA is required to attend on the Official Liquidator to answer all such question as may be put to him and give all such information as may be required of him by the Official Liquidator in relation to the SOA.

Are the officials of the company required to give any other information?

Yes. The U/Rule 130 Official Liquidator can hold personal interviews with any person who is or has been officer of the company for the purpose of investigating the affairs of the company

What do I need to know if I am involved in litigation with a company under liquidation?

As per section 446(1), no suit or legal proceeding shall be commenced or if already commenced shall not be proceeded with against the company without the leave of the Company Court. Therefore in order to avoid any complications later it is advisable the a litigant should approach the Company Court once the appointment of provisional liquidator or liquidator in the company is discovered and obtain a leave to commence or proceed against the company in liquidation U/s 446(1) of the Companies Act.

What do I need to know if I am involved in business transactions with a company under liquidation?

If you are involved in business transactions with a company under liquidation you need to relook at the transaction entered into between you and the company in the period of one year prior to winding up to determine if transactions entered into by you are in the category of void or invalid transaction enumerated in sections 531 to 537 of The Companies Act or weather contractual relationship with the company has been disclaimed by the Liquidator U/s 535 of the Companies Act. For details see Effect of winding up on transactions.

What are the powers of PL?

The provisional liquidator has the same powers as the liquidator unless some limitation or restriction is placed upon it's powers by the Company Court. See Section 450(3) of the Companies Act. Powers of the Liquidator.

What is the controls over the powers of the PL/OL

The powers of the liquidator are subject to the control of the company court section 457(1), 457(3) and proviso to section 458.

Can the directors of the company in liquidation enter into a compromise with the creditor who has filed the winding up petition and resolve the matter?

No. It is not sufficient to settle the matter with the person filing the winding up petition alone, the company has to settle all the creditors, as the Court can replace the creditor who has filed the petition with another creditor and proceed with the process of Liquidation.

In case the majority of the creditors are willing to settle their claim will the liquidation proceeding go on merely because one small creditor is not willing to settle its claim?

No. When a compromise or arrangement is worked out between the company and its creditors, the Court on an application filed by the Liquidator order a meeting of the creditors fo the company U/s 391(1) and if the majority of 3/4th of creditors in value are willing to settle the matter the Court can pass an order sanctioning the scheme of arrangement.

What is the status of such a scheme of arrangement and how is enforced?

As per section 392 of the Companies Act, the Court can enforce a scheme passed U/s 391 as it is not merely a contract but has the force of law and operates against all.

What does the liquidator do with the assets of the companying liquidation?

The liquidator discovers, secures and brings to sale the assets of the company in liquidation in order to raise funds in order to settle the claims of the various claimants.

What are the other sources of funds available with the liquidator to settle the claims of the various claimants?

Apart from the proceeds realised from the sale of the assets of the company the liquidator can demand from the contributories/shareholders any unpaid amount on the shares subscribed by them.

Are the directors and the officers of the company liable to pay any amount towards the settlement of the claims?

No, the directors are not liable to contribute towards the payment of claims done by the liquidator apart from what may be recoverable from them as the balance of call money on the shares subscribed by them.

What are the liabilities of the directors and the officers of the company if they indulge in fraudulent activities to cheat the creditors and the public at large?

If in the course of the winding up of a company it appears that the business of the company has been carried out with intent to defraud the creditors or any other person, the Court upon an application by the Liquidator or any other person declare that such persons shall be personally liable for the debts and liabilities of the company in liquidation.

Does the government also provide any funds to the liquidator for the purpose of paying off the claims against the company or is there any insurance mechanism.?

No, the government does not contribute any fund towards the liquidation expenses and neither is there any insurance available for covering the claims which one may have against a company in Liquidation.

What can I do as a creditor to help the liquidator in the process of winding up?

Weather you are a creditor or an officer of a company you can give information about any assets of the company or about the recent transactions of the company involving transfer of any property of the company or application of company's funds and also about the whereabouts of the directors of the company to the office of the Official Liquidator as it would help the liquidator in the realisation of funds

Should I also inform the Liquidator about any criminal activity or crimes committed by the directors or the officers of the company?

No. Information about commission of crimes is to be given to the concerned police station.

How does the Liquidator sell the assets of the Company in Liquidation?

As per section 457(1) (c) the liquidator can with the sanction of the Court sell the property of the company either by public auction or by private contract. However the Official Liquidator sells the property of the Company by public auction only unless some special circumstances require sale by private contract.

How does the Liquidator fix a price for the assets of the company sold by it?

The liquidator before advertising the sale notice, gets the property/article to be sold valued by a qualified valuer/chartered engineer and there after fixes a reserve price for the sale and the reserve price fixed is published in the sale notice which is advertised in two newspapers one each in English and Hindi having circulation in the area where the assets of the company is located.

How does the liquidator identify the persons who may have a claim against the company?

The liquidator for this purpose takes into account the statement of affairs of the company and the books of the company, which are in its possession; additionally the liquidator also invites claims by publishing a claim notice in the newspaper. This advertisement in in Form No. 63.

Do workmen have a claim against the company with respect to their dues?

yes.

Where do the claims of the workmen stand in a company being wound up?

The claim of the workmen are the highest ranked and they have a first right to claim alongwith secured creditors.

Do the workmen have any charge over the property of the company in winding up?

Yes. The workmen have a charge over the property of the company in winding up which is on equal footing to that of the secured creditors.

What happens to the claims of the workmen if the secured creditor wants to sell off his security rather than proving his debt?

Official Liquidator has the right to enforce the equal charge of the workmen in case the secured creditor wants to sell off the security rather than proving his debt.

What happens to the surplus or amount left over after payment to all concerned?

The amount of surplus or the amount remaining after payment to all concerned is paid over to the Central Government.

Can the secured creditor claim interest after satisfaction of their claim? If yes, then at what stage?

Yes. After the payment to all others including, but not limited to the contributories, is made, the creditors have a opportunity to claim further interest @ 4% from the date of order of winding up till payment on the amount admitted by the Official Liquidator.

What happens to the amount left with the Official Liquidator after making all the payments to the creditors and other claimants?

The amount left with the Official Liquidator subsequent to satisfying the claims of the creditors and making all other payments, is deposited into a liquidation account maintained with the Reserve Bank of India.

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