PROCEDURE - WINDING UP

PRIOR TO WINDING-UP
Admission of petition and directions as to advertisement
Upon directions of the Company Court, the petition for winding up may be directed to be published. The publication shall be made at least fourteen days prior to the date fixed for hearing on admission. Such publication shall be made in one issue each of a daily newspaper in the English language and a daily newspaper in the regional language circulating in the State or the Union Territory concerned. The advertisement shall be made in Form 5 (Rule 24&25 read with Rule 96).
The advertisement of petition shall contain the following:

  • the date on which the petition was presented
  • the name and address of the petitioner and his advocate
  • the nature of the petition and the date fixed for hearing

 Unless a direction is given to the contrary by the Court, the advertisement shall also state:

  • any person who intends either to oppose or support the petition at the hearing should send notice of his intention to the petitioner or his advocate so as to reach him not later than two days previous to the day fixed for the hearing
  • and in the case of a petition for a winding-up, not later than 5 days previous to the day fixed for the hearing of the petition.

Appointment of Provisional Liquidator
After the presentation of the winding up petition and before the passing of the winding up order, the court may, at any point in time deemed fit, appoint the Official Liquidator as a Provisional Liquidator (Section 450(1)) (Rule 106). The order for appointment of Provisional Liquidator shall be in Form 49.
The Provisional Liquidator has the same powers as the Official Liquidator until and unless restricted by the order of the court either at the time of appointment or subsequently (Section 450(3)).

WINDING-UP ORDER – EFFECT

Appointment of Official Liquidator

On the passing of the winding up order by the Company Court, in case, the Official Liquidator has been appointed as the Provisional Liquidator, then he shall cease to hold office as the Provisional Liquidator and become the Liquidator of the company in winding up (Section 450(4)). In case there is no Provisional Liquidator appointed prior to passing of the winding up order, then the Official Liquidator attached to the Court is appointed as the Liquidator for the company in winding up.

Advertisement of the order of winding up

The order for winding up of the company shall be caused to be published by the petitioner in one issue each of a newspaper in the English language and a newspaper in the regional language circulating in the State or the Union Territory concerned. The advertisement shall be in form 53. (Rule 113)

Order of winding up to be communicated to the Registrar of Companies and Official Liquidator

The order for winding up (Section 443(1)(d)) shall be communicated to the Official Liquidator and Registrar of companies within a period not exceeding two weeks from the date of passing of the order (Section 444). The order of winding up shall be in Form No. 52 (Rule 111).
Further, it shall be the duty of the petitioner in winding up proceedings and of the company in winding up to furnish the Registrar of Companies with a certified copy of the order of winding up within 30 days of the passing of the order of winding up (Section 445)

Custody of Company’s property

Where a winding up order has been passed or a provisional liquidator has been appointed, the Official or the Provisional Liquidator, as the case may be, take into his custody all the property, books and papers of the company and actionable claims to which the company is either entitled or appears to be entitled (Section 456(1)) (Rule 114).

Suits stayed on winding up order

No suits to be instituted without leave of the Winding Up Court (Section 446(1))
Upon the passing of the winding up order or on appointment of the Official Liquidator as the Provisional Liquidator, no suit can be instituted without the Leave of the Winding Up Court and upon such terms as the Court may deem appropriate.

Suits already instituted (Section 446(1))

Suits instituted against the company in winding up shall be stayed upon passing of the winding up order or on appointment of the Official Liquidator as the Provisional Liquidator. The same may be proceeded with the leave of the Company Court upon such terms as the Court may deem appropriate.

  • Exclusion - proceedings before DRT are neither stayed nor transferred to the Company Court (Allahbad Bank Vs. Canara Bank (AIR 2000 SC 1347)).
  • Power of Company Court (Section 446(2))

The Company Court has the power to adjudicate:

  • any suit or proceeding by or against the company in winding up.
  • any claim made by or against the company in winding up.
  • any application to compromise or make arrangements with creditors and members (as under Section 391).
  • any question of priorities or any other question which may arise in the course of winding up of the company.
  • Non-Applicability

The section shall not apply to appeals pending adjudication before the Hon’ble Supreme Court or the Hon’ble High Court.

  • Responsibility of Directors and Officers
  • Submission of Books of Accounts

The officer and directors ought to ensure that the books of accounts are duly audited upto the date of order for winding up are submitted to the court (Section 446A) – in ordinary course the court while ordering winding-up or appointing the Official Liquidator as Provisional Liquidator also directs taking into custody of all books of accounts of the company – hence the Directors and Officers ought to submit the necessary books with the Official Liquidator.

  • Submission of Statement of Affairs of the company

On passing of order for winding up or appointment of the Provisional Liquidator, a Statement of Affairs of the company in the prescribed form (Form 57) verified by an affidavit (Form 58) shall be submitted to the Provisional or Official Liquidator, as the case may be (Section 454(1)) (Rule 127). The statement shall be submitted within 21 days from the date of appointment of Provisional Liquidator or the date of order of winding up or on any other date with the direction of the Court or Official Liquidator not exceeding three months from the order of winding up.

Such Statement of Affairs shall contain the following particulars:

  • Assets of the company including, but not limited to, cash balance in hand and at the bank, negotiable securities (Section 454(1)(a)).
  • Debts and liabilities of the company (Section 454(1)(b)).
  • Particulars of secured and unsecured creditors containing (Section 454(1)(c)) - Names, residences and occupations of its creditors; and the amount of secured and unsecured debts.

In the case of secured debts, it shall also contain the following:

  • Particulars of securities given by company or any officer thereof;
  • Value of the security; and
  • Date on which the security was given.
  • Debts of the company containing (Section 454(1)(d)) -

Names, residences and occupations of the person from whom they are due; and the amount likely to be realized.

  • Report by Official Liquidator

In case where a winding up order has been made, and after receipt of the statement of affairs, however not later than six months from the date of the order or such extended period as may be allowed by the court, the Official Liquidator shall submit a preliminary report (Form 60) to the Court (Section 455(1)) (Rule 135).

The preliminary report shall contain the following (Section 455(1)(a));

  • Capital – Issued, Subscribed and Paid up;
  • Estimated amounts of assets and liabilities;
  • Assets to include - Cash and negotiable securities, Debts due from contributories, Debts due to the company and securities, Movable and immovable properties, Unpaid calls;
  • In case the company has failed, the cause of its failure;
  • Official Liquidator may also state in its report, if, in his opinion any fraud has been committed by any person in its promotion or formation (Section 455(1)(a))
PROCEDURE THEREAFTER -

SALE OFASSETS

  • Sale of Assets of the company in winding up

Sale of assets of the company in winding up by the Official Liquidator is subject to sanction and confirmation by the Court. Therefore, the Official Liquidator needs to take leave of the court to sell the property of the company in winding up. The sale so done, needs to be confirmed by the Court (Rule 272).

All sales shall be made by the Official Liquidator or by an agent or auctioneer appointed by court. All sales shall be made by public auction or by inviting sealed tenders (Rule 273).

Secured Creditors shall be paid first out of the proceeds of sale. Thereafter, the expenses of winding up shall be settled out of the remaining amount. Thereafter, the amount shall be paid to general creditors and part time workers/employees. Thereafter, if any amount is left with the Official Liquidator, then the same is paid over to the contributories.

  • In case a secured creditor opts to sell the security

Where, instead of proving his proving his debt, the secured creditor opts to sell the security, then (Section 529):-

  • the liquidator shall be entitled to represent the workmen and enforce such charge.
  • any amount realized by the liquidator by enforcement of such charge shall be applied rateably for the discharge of dues of the workmen.

PROOF AND RANKING OF CLAIMS - CREDITORS, WORKMEN AND CONTRIBUTORIES

  • Settlement of list of contributories and creditors

Within seven days from the date of filing of the preliminary report, the Official Liquidator shall take out summons for directions with regard to the settlement of the list of contributories and the list of creditors. (Rule 139)
In case the assets of the company are insufficient to meet the debts of the secured creditors and workmen’s dues, then the same shall be paid on pro-rata basis out of the amount from the sale of assets.

  • CREDITORS
  • Filing of list of creditors in Court

The Official Liquidator shall, within three months from the date fixed for submission of proof, adjudicate the claims and file a certificate in Court in Form 71 containing the following details (Rule 167):

  • a list of creditors who’ve submitted proof of respective claims in pursuance of advertisement and notices;
  • amount of debt for which such claims have been made;
  • list of claims admitted wholly;
  • list of claims admitted or rejected in part or full.
  • Priority of Claims amongst Creditors –
  • Secured Creditors and Workmen

The amount due to secured creditors and workmen’s dues shall have priority over all other outstanding claims and payments. The amount due and outstanding towards Secured Creditors and workmen’s dues shall be paid in full unless the assets of the company are not sufficient to meet the outstanding of the same (Section 529A).

Dues of the workmen carry an equal charge on the assets of the company kept as security with the secured creditors.

  • Preferential payments
  • Secured Creditors and Workmen’s dues (Section 529A)
  • Dues of the Central Government, State Government and Local Authority (Section 530(1)(a)) – Revenues, Taxes, Cesses, Rates - having fallen due within twelve months from the date of appointment of Provisional Liquidator or the date of order of winding up.
  • Wages or salary of employees in respect of services rendered to the company having become due for a period not exceeding four months having fallen due within twelve months from the date of appointment of Provisional Liquidator or the date of order of winding up. The limit of claim for an employee falling under this clause may be notified by the Central Government (Section 530(1)(b) r/w 530(2)).
  • All accrued holiday remuneration to employees or their legal heirs (Section 530(c)).
  • Amounts due in respect of contributions payable during the twelve months prior to passing of the order of winding up or appointment of Provisional Liquidator (Section 530(d))
  • Liability for compensation under the Workmen’s Compensation Act, 1923 in respect of death or disablement of an employee of the company (Section 530(e).
  • Sums payable to employees from (Section 530(f)) - Provident Fund, Pension Fund, Gratuity Fund or any other fund for the welfare of the employees.
  • Sums payable for investigation.

The debts under clause (i)-(viii) rank equally among themselves. General creditors have a priority over the claim of debenture holders who have a floating charge over the assets of the company (Section 530(5)).

Expenses of winding up have priority over general creditors of the company as well as the claim of debenture holders who have a floating charge over the assets of the company (Section 530(6)).

  • Notice to Creditors and adjudication of claims

The liquidator shall give a notice (Form 63) of not less than 14 days in one issue of a daily newspaper in the English language and one issue of a daily newspaper in the regional language circulating in the State or Union Territory concerned calling for claims of the creditors.

The Liquidator shall also give a notice of not less than 14 days of the date fixed, in a winding-up by the Court, to every person mentioned in the statement of affairs, as a creditor, who has not proved his debt and to every person mentioned in the statement of affairs as a preferential creditor, whose claim to be a preferential creditor has not been established or is not admitted. Such notice shall be in Form 64 (Rule 148).

Proof of Debt
Secured Creditors and Preferential Creditors -
Creditor(s) or person(s) authorized on its/ their behalf may prove the debt by delivering or sending by post to the Liquidator, an affidavit verifying the debt (Rule 150). The affidavit shall be in Form 66, and shall contain (Rule 151):

  • Statement of account showing the particulars of debt
  • Vouchers if any in support of the debt
  • Affidavit to state whether the creditor is a secured creditor or a preferential creditor.
  • Particulars of security or of preferential claim

Workmen -
Claims for wages or accrued holiday remuneration of workmen and other personnel employed by the company may be proved individually by each such workman or any one on behalf of all others. Claim if made jointly shall be through a foreman or some other person on behalf of all such creditors/workmen.

The proof forming part of the claim of the workman/men shall be annexed as a schedule setting forth the names of the workmen and others and the amounts severally due to them. Such claim shall be made in Form 67 (Rule 152).

Interest on Debt
Where there is no interest agreed upon a debt and the same falls due and outstanding on the date of winding up, then the creditor may claim an interest at the rate of 4% from the date of instrument forming the basis for debt, if any, or from the date from when the demand was raised in writing (by notice) till the date of payment (Rule 156).

  • CONTRIBUTORIES
  • List of contributories and adjudication of claims

Official Liquidator shall prepare and file a provisional list of contributories on the application within 21 days from the date of order by the Court (Rule 139 read with Rule 180).
The provisional list of contributories shall contain the following (Form 76):

  • their names and addresses
  • the number of shares or the extent of interest to be attributed to each contributory
  • the amount called up and the amount paid up in respect of such shares or interest
  • distinguishing in such list the several classes of contributories

        The list shall be in two parts:

  • first part consisting of those who are contributories in their own right
  • the second part, of those who are contributories as being representatives of, or liable for the debts of others

The Official Liquidator shall fix a date not later than one month from the date of the filing of the provisional list for the settlement of the list before him. For the settlement of the list he shall give a notice thereof to every person included in such list, stating therein (Rule 181) (Form 77);

  • in what character and for what number of shares or extent of interest such person is included in the list
  • the amount called up and the amount paid up in respect of shares or interest.

For the purposes of settlement of the list, the Official Liquidator shall grant an opportunity of being heard to a person whose name is appearing in the list of contributory. Subsequent to opportunity of being heard, the final list of contributories shall be prepared by the Official Liquidator (Rule 182).

Upon final settlement of the list by the Official Liquidator, he shall file before the court a certificate of final list of contributories which shall be in Form 79 (Rule 183).

Contributories to company in winding up shall be paid at the end i.e. after the payment has been made to the secured creditors and workmen, expenses of winding up, general creditors, debenture holders etc.

  • Surplus

If any amount is left after the final payment to contributories, then the same is called surplus.

Payment of subsequent interest

When there is a surplus after payment in full of all the claims admitted to proof, creditors whose proofs have been admitted shall be paid interest from the date of the winding-up order or of the resolution as the case may be, up to the date of the declaration of the final dividend, at a rate not exceeding 4 per cent per annum, on the admitted amount of the claim, after adjusting against the said amount the dividends declared as on the date of the declaration of each dividend.

DISSOLUTION

When all the payments as aforesaid have been made and all the claims have been settled or all the assets of the company have been applied to settle the claims and the Official Liquidator cannot proceed further with the winding up, then the Court shall pass an order for dissolution of the company (Section 481).

The Official Liquidator shall pay into the Companies Liquidation Account in the public account of India in the Reserve Bank of India any unclaimed dividends payable to creditors or undistributed assets refundable to contributories in his hands on the date of the order of dissolution, and such other balance in his hands as he has been directed by the Court to deposit into the Companies Liquidation Account in the Reserve Bank of India (Rule 283).

Payment to Central Government

After all the payments, as aforesaid having been made, then any amount left over is paid to the Central Government.

FREQUENTLY ASKED QUESTIONS

Que.What are the powers of the Provisional Liquidator?
Ans.Provisional Liquidator has the same powers as the Official Liquidator until limits and restrictions on the exercise of powers is put by the Court.

Que. When does a Provisional Liquidator of a company become its Official Liquidator?
Ans. In case a Provisional Liquidator is appointed by the court, then on the passing of the winding up order the Provisional Liquidator becomes the Official Liquidator.

Que.Is there a necessity of supplying an order of winding up to the registrar of Companies?
Ans.Yes.

Que. Whose obligation is it to supply the order of winding up to the Registrar of Companies?
Ans. The obligation to supply the order of winding up is upon the petitioner to the winding up as well as the company.

Que. What happens to the ongoing suits on the passing of the winding up order?
Ans. All the suits are automatically stayed upon passing of the winding up order.

Que. What is the effect of winding up order on the proceedings before the Debts Recovery Tribunal?
Ans. The winding up order has no effect upon the proceedings before the Debts Recovery Tribunal since proceedings under the DRT Act fall under a special Act therefore, they have an overriding effect over the General Acts and consequently, it ousts the jurisdiction of civil courts and company courts.

Que. What are is the responsibility of directors and officers of the company on passing of the order of winding up?
Ans. The directors and officers in charge of the company are liable to furnish the duly audited books of accounts to the Court or the Official Liquidator as the case maybe.

Que. Who can sell the property of the company in winding up?
Ans. The Official Liquidator can sell the property of the company in liquidation. Any State Financial Corporation having a claim against the company can also sell its property in terms of Section 29 of the State Financial Corporation Act, 1951.

Que. Do workmen have a claim against the company with respect to their dues?
Ans.Yes.

Que.Where do the claims of the workmen stand in a company being wound up?
Ans. The claim of the workmen are the highest ranked and they have a first right to claim alongwith secured creditors.

Que. Do the workmen have any charge over the property of the company in winding up?
Ans. 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.
Que. What happens to the claims of the workmen if the secured creditor wants to sell off his security rather than proving his debt?
Ans. 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.
Que. What happens to the surplus or amount left over after payment to all concerned?
Ans. The amount of surplus or the amount remaining after payment to all concerned is paid over to the Central Government.

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

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

Overview of the Process of winding up of a company by the Court

Step 1.  Filing of a petition for winding up of the company

Step 2. Appointment of Official Liquidator as the provisional    Liquidator.

Step 3.  Passing of the order of winding up and appointment of the Official Liquidator as the Liquidator

Step 4. Filing of the report U/S 455 by the Liquidator  as to  the amount of the capital issued, subscribed and paid up and the estimated amount of assets and liabilities; the reason for the failure of the company and the desirability of any further inquiry into the formation or failure of the company.

Step 5. Recording of the statement of affairs of the company and interviews with the various directors and officers of the company for the purpose of investigating into the affairs and the assets of the company. Taking into custody all its moveable and immoveable assets.

Step 6. Securing, preservation and sale of the assets of the company by public option or by private contract.

Step 7. Invitation, admission, ranking and payment of claims against the company.

Step 8. Dissolution of the company U/s 481  

Step 9. Disposal of the books and papers of the company.

Effect of winding up on transactions.

  1. Fraudulent preference. All transfers of property, delivery of goods and payments done by or against the company within six months before the commencement of its winding up are considered to be invalid if they appear to be have been made dishonestly in order to give preference to a particular creditor or in order to cause prejudice to other creditors. Section 531 
  2. Transfer to trustee void. Any transfer or assignment by a company of all its property to trustees for the benefit of all its creditors becomes void upon the passing of an order of winding up. Section 532. 534
  3. Invalidity of floating charge. Any floating charge created on the property of the company within the twelve months immediately preceding the commencement of the winding up shall be invalid unless it is proved that the company was solvent immediately after the creation of the charge. Section 534.
  4. Disclaimer of onerous property. The liquidator with the permission of the Court can disclaim any onerous property, i.e. land rights with unprofitable obligations of payment, shares of companies and unprofitable contracts and such disclaimer ends all the rights, interests and liabilities of the company under liquidation. See Section 535
  5. No transfer after winding up. Any disposition of property or transfer of shares after the commencement of the winding up shall unless approved by the Court is void. Section 536
  6. No attachment or execution without leave of court. All attachments, distress, executions or sales done after the commencement of the winding up are void unless permission of the Court is obtained. Section 537
Offences in winding up.
  1. Not keeping the proper books of accounts of the company throughout the period of 2 years immediately preceding the winding up of the company is an offence punishable with imprisonment for a term up to 1 year. 
  2. Following acts and omissions by past and present officer of a company during the course of its winding up are an offence U/s 538 and 540 of the Act punishable with an imprisonment for a term up to 2 years. 
    1. Not informing the liquidator about the assets of the company. 
    2. Not disclosing to the liquidator to whom and for what price has any property of the company been sold. 
    3. Not delivering to the liquidator any property or books of the company in his possession. 
    4. Having concealed or removed any property of the company within a period of 12 months before the winding up or at any time after that. 
    5. Making any material omission in any statement relating to the affairs of the company. 
    6. Preventing the production of any book or paper of the company. 
    7. Concealing, destroying, mutilating or falsifying any book or paper or making any false entry in the books or papers of the company within a period of 12 months before the winding up or at any time after that. 
    8. Any person beng an officer of a company by any false representation induces any person to give credit to the company. 
    9. With intent to defraud creditors of the company makes any gift or transfer against he property of the company. 
    10. With intent to defraud creditors conceals or removes any part of the property of the company after passing of an order of payment by any Court against the company. 
  3. Following acts committed within a period of 12 months immediately before the winding up by past and present officer of a company are an offence U/s 538 of the Act punishable with an imprisonment for a term up to 5 years. 
    1. Obtaining any property on behalf of the Company on credit by any false representation or fraud or under a pretence that the company is carrying on its business, which the company later does not pay for.
    2. Pawning, pledging, or selling any property which has been obtained on credit and has not been paid for. 
  4. Following acts committed by any officer or contributory of a company with intent to deceive any person is an offence U/s 539 of the Act punishable with an imprisonment for a term up to 7 years.
    1. Destruction, mutilation, alteration, falsification of any books, papers or securities.
    2. Making of any false or fraudulent entry in any register or book of account or document belonging to the company.

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