School Of Law

BALLB
Academic Year 2024-25
BA LLB 3st Year Semester 5

Assignment Type: Individual

Topic: Winding up of a company

Name: Akshay Narayan Singh Rawat

Enrolment Number: 06951103821
Batch: 2021-2026
Winding Up of a Company: Legal Framework, Types, and Procedures
Introduction
Winding up a company marks the end of its legal existence. Unlike dissolution, which legally
removes a company from the register of companies, winding up involves a series of formal
steps that lead to a company's closure. This article provides an in-depth look at the winding-
up process, types of winding up, and the legal framework governing it. It also examines the
procedures involved, focusing on the roles of the liquidator, stakeholders, and courts.
Definitions of:
 Winding Up
A company is an artificial person. Therefore, its name can be struck off the register of
companies by a process of law. Such a process is called Winding Up. Winding up is the
process of realisation of assets, payments of liabilities and distribution of surplus, if any,
amongst the members as per their rights.
 Dissolution
Winding up is one of the modes of dissolution of a company. After the competition of
winding up of a company, the company ceases to exist. When a company ceases to exist, it is
said to be dissolved. In other words, company is said to be dissolved when it ceases to exist.
Thus, winding up is the end result of winding up of a company.

Difference between Winding up and Dissolution

Basis Winding Up Dissolution
1. Meaning Winding is one of the Dissolution is the ned result of
methods by which the life of winding up.
a company comes to an end.
Thus, winding up precedes
dissolution.

2. Separate Legal Separate legal entity of the The company loses its separate legal
Entity company remains at the time entity after dissolution. In case of
of commencement of the winding up by the tribunal, the
winding up. It comes to an company stands dissolved from the
end only when the winding date of Tribunal’s order.
up is complete.

3. Business The company may be allowed The company is no more in

to do business so far as it is existence and therefore, there is no
required for beneficial question of doing any business.
winding up of the company.
2. Legal Framework Governing Winding Up in India
The Companies Act, 2013, governs the winding-up process in India. The Act provides the
legal foundation for both voluntary and compulsory winding-up proceedings. Additionally,
the Insolvency and Bankruptcy Code (IBC) of 2016 plays a pivotal role, particularly for
insolvent companies, by offering a structured process for liquidation. The IBC and
Companies Act also detail the roles of the National Company Law Tribunal (NCLT) in
overseeing and directing the winding-up proceedings.
3. Modes of Winding Up
The winding-up process is broadly classified into two types: voluntary winding up and
compulsory winding up.
i. Voluntary Winding Up
Voluntary winding up occurs when the members or creditors decide to dissolve the company
without court intervention. There are two main forms:
 Members’ Voluntary Winding Up: Initiated when the company is solvent, meaning
it can meet its financial obligations. Shareholders pass a special resolution to start the
process, and an insolvency declaration is typically filed to confirm solvency. The
liquidator then oversees the process, settles outstanding debts, and distributes any
surplus among the members.
 Creditors’ Voluntary Winding Up: Occurs when the company is insolvent. In this
case, creditors play a central role in appointing the liquidator and overseeing the
distribution of remaining assets. Unlike members’ voluntary winding up, creditors’
involvement is critical since they may not recover the full amount owed, and the goal
is to minimize their losses.
ii. Compulsory Winding Up
Compulsory winding up, also known as court-ordered winding up, takes place under the
authority of the NCLT. This type of winding up is generally initiated by a petition filed by
creditors, shareholders, or other stakeholders, typically due to insolvency or severe
mismanagement.
 Grounds for Compulsory Winding Up: The NCLT may order winding up under
several grounds outlined in Section 271 of the Companies Act, 2013. These include:
o The company’s inability to pay its debts.
o Failure to file statutory reports or hold mandatory meetings.
o If the company is deemed to be operating against public interest.
o If shareholders or creditors can prove that continuing operations is unfair or
prejudicial to their interests.
o Any other reason deemed "just and equitable" by the court.
Once the order is granted, a liquidator is appointed to oversee the winding-up process,
including the sale of assets and settling of liabilities.
Case Laws:
Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. 426 (1916-17) All E.R. Rep. 1050 (CA)
(Where there are only two directors having equal voting rights and are so hostile that neither
of them would speak to the other except through the secretary, it was held that there was
complete deadlock and consequently the company was ordered to be wound up although its
business was flourishing.)
Facts: The petitioner and Rothman, both cigarette manufacturers, agreed to amalgamate their
business and formed a private limited company of which they were the only two shareholders
and the directors. They had equal rights to management and voting power of the company.
The articles of association were accordingly so drawn that neither party was in a position to
outvote the other or to carry any resolution in opposition to other. The articles further
provided that any dispute or difference between the two should be referred to arbitration.
Eventually differences between them arose, and the matter was referred to arbitration who
made the award. But Rothman dissented from the award. Both became so hostile to each
other that neither would speak to the other except through the secretary. Notwithstanding
these disagreements it appeared that the company continued to make considerable profits.
Under these circumstances, Rothman brought an action for compulsory winding up of the
company on the ground that it was just and equitable that the company should be wound up.
Issues Involved:
1.Whether there was a complete deadlock?
2. Whether it was 'just and equitable' to wind up the company?
Decision: The Court held that having regard to the fact that the only two directors would not
speak to each other, and no business which deserves the name of business in the affairs of the
company could be carried out, the company should not be allowed to continue. Lord Corzens
Hardy M.R. sated that "if ever there was a case of deadlock, it exists here." The court found
that there was no way to put an end to the state of things which existed except by means of
compulsory order. It was just and equitable that the state of things should not be allowed to
continue, and court should intervene and order to wind up the company. The court observed
that in case like this the circumstance which would induce, the Court to exercise its
jurisdiction under 'just and equitable' clause to wind up the company.
The company was ordered to be wound up.

4. Key Procedures in the Winding-Up Process

The winding-up process follows a structured procedure, which ensures fairness to creditors,
employees, and shareholders:
i. Appointment of Liquidator
In both voluntary and compulsory winding up, a liquidator is appointed to oversee the
dissolution. The liquidator’s role is to gather and sell the company's assets, pay off
outstanding debts, and distribute any remaining assets. In members' voluntary winding up,
shareholders appoint the liquidator, while creditors or the court appoint the liquidator in
creditors' voluntary winding up and compulsory winding up, respectively.
ii. Realization of Assets
The liquidator collects and evaluates the company’s assets, including tangible and intangible
properties. Once assets are identified, the liquidator liquidates them to generate funds for
settling debts and liabilities. The process ensures that all proceeds are maximized to benefit
creditors.
iii. Settlement of Debts
In the winding-up process, creditors have priority. The liquidator first pays secured creditors,
followed by preferential creditors (such as employee wages, government dues, etc.).
Unsecured creditors are then paid, and if any funds remain, they are distributed to
shareholders according to their stake.
iv. Distribution to Shareholders
If assets remain after all creditors are paid, the liquidator distributes the remaining funds
among shareholders. In the case of a solvent company, shareholders may receive substantial
returns. However, for insolvent companies, the returns to shareholders are often nominal.
v. Final Report and Dissolution
Upon completing the distribution, the liquidator submits a final report detailing all
proceedings and distributions. If approved, the company is formally dissolved, marking the
end of its legal existence. The registrar of companies removes the company’s name from the
official register, completing the process.

5. Role of National Company Law Tribunal (NCLT)

The NCLT is the adjudicating authority in India for insolvency and liquidation matters under
the Companies Act and the Insolvency and Bankruptcy Code. In compulsory winding-up
cases, the NCLT reviews and approves petitions filed by stakeholders, and once the court
issues a winding-up order, it retains oversight throughout the liquidation process. In cases of
disputes, fraudulent activities, or malpractices during winding up, the NCLT has the authority
to intervene, ensuring the winding-up process adheres to legal standards.
6. Differences Between Winding Up and Insolvency Proceedings
While winding up and insolvency are closely related, they are distinct legal processes:
 Winding Up: This is the formal process of dissolving a company, which may or may
not be insolvent. Winding up focuses on ending the company’s legal existence and
distributing its assets to creditors and shareholders.
 Insolvency Proceedings: Insolvency refers specifically to a company’s inability to
pay its debts. In India, insolvency proceedings are handled under the Insolvency and
Bankruptcy Code. Insolvency is often a precursor to winding up but does not
automatically lead to it. Under the IBC, companies may undergo restructuring to
potentially revive their business rather than liquidating assets and winding up.
7. Winding Up in Special Cases: Insolvency and Bankruptcy Code (IBC)
The IBC, introduced in 2016, has revolutionized the process of winding up insolvent
companies. The Code provides a time-bound process for resolving insolvency, aiming for
resolution before liquidation. Under the IBC, financially distressed companies may enter into
a Corporate Insolvency Resolution Process (CIRP). If resolution efforts fail within a
stipulated period, liquidation follows, where a liquidator oversees asset distribution as per the
priorities outlined in the IBC.
8. Challenges and Limitations in Winding Up
 Complexity and Delays: Winding up involves several legal and financial procedures,
and delays can arise, especially in cases where stakeholders dispute the liquidation or
asset distribution.
 Creditors’ Rights: In an insolvent winding up, creditors may not receive their entire
claim, particularly if assets are insufficient. While secured creditors have priority,
unsecured creditors often face losses.
 Shareholder and Employee Interests: The winding-up process can overlook the
interests of minority shareholders or employees, particularly in compulsory winding
up. Ensuring equitable treatment requires careful regulation and oversight by the
NCLT.
Conclusion
The winding up of a company is a structured legal process that provides an orderly end to a
company’s operations. Through voluntary or compulsory winding up, stakeholders ensure
that assets are appropriately distributed, and the company’s legal obligations are met. The
Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016, have provided a
robust framework for managing both solvent and insolvent winding-up cases in India.
Winding up not only protects creditor interests but also reinforces trust in the corporate
framework by allowing a lawful and transparent dissolution process. In an evolving economic
landscape, it remains essential for lawmakers and courts to adapt the framework for winding
up to meet the needs of a diverse and dynamic corporate sector.
 Bibliography
1. Company Law by Dr. Avtar Singh (Eastern Book Company)
2. Company Law by B.K. Goyal (Singhal Law Publications)