Voluntary winding up is a legal process that allows a company to cease operations in an orderly and controlled manner. Our guide covers the step-by-step procedure for India-based companies.
Voluntary winding up is a legal process in which a company decides to cease its operations and wind up its affairs voluntarily. This process is initiated by the shareholders or members of the company when they feel that the company is no longer viable or profitable.
The procedure for voluntary winding up in India is governed by the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. This article will discuss the step-by-step procedure for voluntary winding up in India.
Passing a Resolution for Voluntary Winding Up
The first step in the voluntary winding-up process is to pass a resolution for winding up the company. This resolution must be passed by the shareholders or members of the company by way of a special resolution. A special resolution is a resolution that requires the approval of at least 75% of the shareholders or members of the company. The resolution must also be passed at a general meeting of the company.
Appointment of Liquidator
Once the resolution for voluntary winding up of company is passed, appointing a liquidator is next. A liquidator is a person who is appointed to wind up the affairs of the company. The liquidator can be a person or a firm of chartered accountants or company secretaries.
The shareholders or members must approve the appointment of the company’s liquidator at a general meeting. The liquidator must be appointed within 30 days of the passing of the resolution for voluntary winding up.
Notice to Creditors and Contributories
Once the liquidator is appointed, the next step is to issue a notice to the creditors and contributors of the company. A contributory is a person liable to contribute to the company’s assets in the event of its winding up. The notice must be published in a newspaper and sent to all the creditors and contributors of the company.
The notice must specify the date on which the company will be wound up and the name and address of the liquidator.
Verification of Claims
After the notice is issued, the liquidator must verify the claims of the creditors and contributors of the company. The liquidator must invite the creditors and contributors to submit their claims in writing. The claims must be submitted within a specified period, usually 30 days from the date of the notice.
The liquidator must verify the claims and make a list of the claims that are admitted and the claims that are rejected.
Realisation of Assets and Payment of Liabilities
The next step is to realise the company’s assets and pay off its liabilities. The liquidator must take possession of the company’s assets and sell them off to realise the maximum value. The proceeds from the sale of the assets must be used to pay off the company’s liabilities. The liabilities of the company must be paid off in the following order of priority:
- Secured creditors
- Workmen’s dues
- Other debts and liabilities
If there are not enough assets to pay off all the company’s liabilities, then the creditors must be paid off in proportion to the number of their claims.
What Is Winding Up?
When a company decides it’s time to close down, we call this process winding up. Initially, the company sells off its assets—anything from property to inventory—converting these holdings into cash. This cash is then allocated to settle outstanding debts and financial obligations.
The noteworthy aspect is the subsequent allocation of any surplus funds or assets among the company’s stakeholders. This group includes creditors (those the company owes money to) and shareholders (individuals who own a part of the company). The objective is to distribute any remaining resources equitably.
Winding up isn’t a one-size-fits-all scenario. It can be a proactive decision by company leadership, known as voluntary winding up. Depending on the financial status, it can be further classified into Members’ Voluntary Liquidation (MVL) for solvent companies or Creditors’ Voluntary Liquidation (CVL) for those in financial distress. Conversely, external factors, often legal, can mandate a court-ordered or involuntary winding up due to financial instability or legal non-compliance.
Types of Company Windup:
Voluntary Winding Up:
- Members’ Voluntary Liquidation (MVL): Initiated when the company is solvent and its members decide to cease operations.
- Creditors’ Voluntary Liquidation (CVL): Occurs when the company is unable to meet its financial obligations and creditors decide to wind up the business.
Compulsory Winding Up:
Court-Ordered Liquidation: Initiated by a court order due to reasons such as insolvency, inability to pay debts, or a breach of statutory compliance.
Top Reasons Why Companies Wind Up:
- Financial Insolvency: Inability to meet financial obligations and pay debts.
- Operational Failure: Persistent losses and inability to sustain business operations.
- Directorial Disputes: Internal conflicts among company directors affecting decision-making.
- Obsolete Business Model: Failure to adapt to changing market conditions or technological advancements.
- Breach of Legal Requirements: Violation of statutory regulations leading to legal actions.
- Fraud or Mismanagement: Discovery of fraudulent activities or gross mismanagement.
Distribution of Remaining Assets
After all the liabilities of the company are paid off, the remaining assets must be distributed among the shareholders or members of the company. The distribution must be made in proportion to their shareholding or membership. If there are any assets that cannot be distributed, then they must be transferred to the appropriate authority.
FAQs:
What is the difference between a windup and a strike-off of a company?
Winding up is a formal process of closing a company, settling debts and distributing assets. Strike-off is a simpler procedure to remove non-operational companies from the register.
Who is a liquidator?
A liquidator is an appointed individual overseeing the winding-up process, ensuring fair asset distribution among creditors and shareholders.
Why would a company liquidate?
Companies may liquidate due to financial distress, operational failure, strategic decisions, or legal obligations, aiming to settle debts and cease operations.
What is the importance of liquidation?
Liquidation ensures an orderly closure, settling debts, distributing assets, and legally dissolving a company, safeguarding the interests of stakeholders.
Who can initiate voluntary wind-up?
Shareholders can initiate voluntary wind-up through mechanisms like Members' Voluntary Liquidation (MVL) when deciding to cease a solvent company's operations.
What Is Liquidation?
Liquidation is converting a company's assets into cash to settle debts and distribute the remaining funds among creditors and shareholders.
What are the types of liquidation?
There are two main types—Compulsory Liquidation, court-ordered due to insolvency, and Voluntary Liquidation, initiated by shareholders when ceasing operations.
What happens to shareholders when a company is liquidated?
Shareholders typically receive a share of remaining assets after creditors are paid, but the amount depends on the company's financial standing and the type of liquidation.
Conclusion
It is important to note that the procedure for voluntary winding up can vary depending on the type of company and the specific circumstances involved. In some cases, additional steps may be required, such as obtaining approval from regulatory authorities or court approval for the winding up process. As such, it is always advisable to seek the guidance of a legal professional when initiating the voluntary winding-up process.
One of the critical benefits of voluntary winding up is that it allows the company to avoid going through the lengthy and costly insolvency process. It also provides an opportunity for the company to wind up its affairs in an orderly and controlled manner.
Vakilsearch is a legal services platform that offers comprehensive support for companies undergoing voluntary winding up in India. Our team of experienced legal professionals can guide you through the entire process, from passing a resolution to distributing remaining assets. We can assist with appointing a liquidator, issuing notices to creditors and contributories, verifying claims, realizing assets and paying off liabilities, and more.
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