Winding Up Of Company: A Statutory Glance – Part 2 – Corporate/Commercial Law | #corporatesecurity |



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The first part of the series discussed winding-up of a company
under the Companies Act, 2013 the concluding section will focus on
Insolvency and Bankruptcy Code, 2016 and Winding-up Rules,
2020.

Companies (Winding-Up) Rules, 2020

It is necessary to understand that while the winding-up is
conducted as per the sections of the Companies Act, 2013
(‘Act’), the procedure is governed as per the National
Company Law Tribunal Rules, 2016, as there were no specific rules
of winding up under the Companies Act, 2013. But, the Ministry of
Corporate Affairs vide notification dated 24.01.2020 has notified
the Companies (Winding-Up) Rules, 2020, (‘Rule/s’) with a
perspective to systemize the winding up of a company under the Act.
There are in total 191 Rules and 95 Forms in the Rules to govern
and regulate the procedure of winding up. These Rules are valid
from 01.04.2020.

The Companies Act, 2013, lays down the sections, which states
about winding up of the Company and its procedure, whereas the
Rules play an essential role, in governing and guiding the
application of these sections. These Rules apply to Companies going
into winding up as per Section 271 of the Act, as well as going
under liquidation through a summary procedure, as mentioned under
Section 361 of the Act.

Various Forms accompany these Rules; such Forms act as an aid
for executing the process of winding up. Among such 95 Forms, some
of them are mentioned below:

  1. Form WIN 1 or WIN 2- Petition for
    winding up under section 272(1)

  2. Form WIN 3- Affidavit verifying the
    petition

  3. Form WIN 4- Statement of affairs as
    required to be filed under section 272(4) or 274(1)

  4. Form WIN 5- Affidavit verifying such
    statement of affairs

  5. Form WIN 6- Advertisement of notice
    of petition before the date fixed for hearing

  6. Form WIN 9- Notice of appointment of
    provisional Liquidator

  7. Form WIN 10- Disclosures by
    provisional or Company Liquidator

  8. Form WIN 11- Winding up order

  9. Form WIN 14- Advertisement of order
    of winding up

  10. Form WIN 16- Report by company
    liquidator

  11. Form WIN 17- Provisional list of
    contributories

  12. Form WIN 23- Report of result of a
    meeting of creditors and contributories to determine the members of
    the advisory committee.

  13. Form WIN 38A to 38T- Registers and
    books of accounts to be maintained by Liquidator

  14. Form WIN 41- Company liquidator’s
    final account

  15. Form WIN 43- Advertisement of notice
    to creditors to prove their claim

  16. Form WIN 44- Affidavit of proof of
    debt

  17. Form WIN 45- Proof of debt of
    workmen

  18. Form WIN 47- Notice of rejection of
    debt

  19. Form WIN 48- Notice of admission of
    proof

  20. Form WIN 49- Appeal by creditor

  21. Form WIN 50- List of creditors whose
    claims are admitted or rejected by the Liquidator

  22. Form WIN 94- Statement of unclaimed
    dividends or undistributed assets furnished to ROC, by the
    Liquidator when making any payments of such dividends or assets
    into the Company Liquidation Dividend and Undistributed Assets
    Account.

These Forms are provided in the Rules which can be relied upon
as ready reckoners, thereby making this overall entangled process
of winding up, effortless and straightforward.

The rules governing the summary procedure for liquidation is an
essential feature of this Rule, as it permits winding up of small
businesses without going to the Tribunal. The small businesses are
the ones that have assets of book value not exceeding Rs.1 Crore as
stated under section 361(1)(i) of the Act. The class of companies
that is considered as a small business under section 361(1)(ii) of
the Act are as below, based on the latest audited Balance
Sheet:

  1. The Company which has taken a deposit
    and total outstanding deposits
    not exceeding Rs.25 lakh

  2. The Company which has total
    outstanding loan including secured loan-
    not exceeding Rs.50 lakh

  3. The Company which has a turnover of
    upto Rs.50 crore

  4. The Company which has paid up
    capital-
    not exceeding Rs.1 crore

The powers and functions of the official Liquidator
relating to the summary procedure are highlighted as
below:

  1. Maintain the Registers and books of
    accounts in which it shall mention the minutes of all proceedings
    and resolutions passed at any meeting of the creditors or
    contributories or of the advisory committee. (Rules 79 and 80)

  2. Filing and audit of the company
    liquidator’s accounts as per the procedure laid down under
    Rules 91 to 99, shall be followed and all the assets shall be
    disposed of as per Rules 165 to 167, with a modification that the
    word ‘Tribunal’ shall be considered as ‘Central
    Government.’

  3. Monies received by the Liquidator, as
    referred in section 349 of the Act, shall be paid by him into the
    public account of India in the Reserve Bank of India, as mentioned
    in that section not later than the next working day of the said
    Bank.

  4. Creditors shall prove their claim as
    per section 363 of the Act against the Company, and if the proof of
    such debt gets rejected by the company liquidator, the creditor can
    appeal to the Tribunal. (Rules 100 to 125)

Therefore, these Rules, along with the forms, are quite
explicit, which very well describes the procedure of winding up by
the Tribunal as well as the summary procedure for liquidation. The
exceptional feature of this Rule is the involvement of the Central
Government in the summary procedure for liquidation, thereby
reducing the burden of the Tribunals.

Liquidation under IBC

Insolvency and Bankruptcy Code, 2016 (‘IBC / Code’) is a
time-bound legislative framework which initially encourages
resolution of the Corporate Debtor (‘Company’) which has
failed to pay its debts, but if such a resolution fails, the
Adjudicating Authority (‘Tribunal’) eventually orders for
liquidation of the Company, as a last resort under Section 33 of
IBC.

The liquidation proceedings run from Sections 33 to 54 of the
Code, which are based on similar lines of winding up by the
Tribunal when the Company is unable to pay debts. After the order
for liquidation is passed by the Tribunal, a liquidator is
appointed to manage the affairs of the Company. The Resolution
Professional (‘RP’) appointed during the Corporate
Insolvency Resolution Process (‘CIRP’), shall act as a
liquidator for liquidation upon submission of written consent to
the Tribunal.

The Liquidator carries out its obligations to accomplish the
liquidation process smoothly, which involves, ensuring no suit or
legal proceeding be instituted by or against the Company unless
approved by the Tribunal, verifying the claims of all the
creditors, taking into custody all the assets, property, effects
and actionable claims of the Company, ensuring maximization of
value of the assets to keep the Company a going concern and
performing such other functions as prescribed by the Insolvency and
Bankruptcy Board of India (‘Board’).

The Liquidator performs diverse functions, it also calls for
claims from the stakeholders following the Insolvency and
Bankruptcy Board of India (Liquidation Process) Regulations, 2016
(‘Regulations’), the claims when submitted, are verified
and then either admitted or rejected by the Liquidator.

These claims should be submitted before the Liquidator within 30
days from the commencement of liquidation. After the whole process
of collating the claim is done, the Liquidator prepares a list of
stakeholders, based on proofs of claims submitted and accepted.
Further, the Liquidator shall form an estate of the assets, which
is called as the Liquidation Estate of the Company, upon which the
Liquidator prepares an asset memorandum, providing details of the
assets intended to be realized by way of sale. This memorandum is
not accessible to any person during the course of liquidation
unless permitted by the Tribunal.

It is interesting to observe here, that the secured creditors
under the liquidation proceedings have to make a choice under
Section 52, either to relinquish its security interest to the
liquidation estate and receive proceeds from the sale of assets by
the Liquidator as per section 53 or else to realize its security
interest as per the provision of the Code. It is under section 53
of IBC, the order of priority has been laid down for the
distribution of the assets of the Corporate Debtor, which is
popularly known as the ‘waterfall mechanism’. The following
is the sequence in which the debts are repaid:

  1. Insolvency Resolution Process costs
    and Liquidation Costs

  2. Workmen’s dues (for 24 months)
    and secured creditor’s dues, if the security has been
    relinquished

  3. Employees dues other than workmen
    (for 12 months)

  4. Unsecured financial creditors

  5. Government dues and unpaid dues to
    secured creditor, if the security has been realized

  6. Remaining debts and dues (unsecured
    operational debts)

  7. Preference shareholders

  8. Equity shareholders

Thereafter, the Liquidator shall deposit the amount of unclaimed
dividends, if any and undistributed proceeds if any, into the
Corporate Liquidation Account in the Public Accounts of India
before applying for dissolution, so that if a person claiming to
any money paid into the Corporate Liquidation Account, may apply to
the Board for withdrawal of the amount along with evidence to
satisfy the Board.

This whole Liquidation process shall be completed within 1 year
from the liquidation commencement date. Thus after completing the
entire liquidation process, the Liquidator shall submit an
application along with the final report and a compliance
certificate to the Tribunal for the closure of the liquidation
process where the Company has been sold as a going concern; or for
dissolution of the Company. Ultimately, the Company is dissolved
and a copy of order of dissolution shall be forwarded to the
authority with which the Company is registered within 7 days from
the date of such order.

Voluntary Liquidation

The Code has separately and vividly stated under Section 59 the
procedure of Voluntary Liquidation, which is to be read with
Insolvency and Bankruptcy Board of India (Voluntary Liquidation
Process), Regulations, 2017. A corporate person registered as a
company make a declaration verified by an affidavit to initiate
voluntary liquidation under two conditions:

  1. Either the Company has no debt or
    that it will be able to pay its debts in full from the proceeds of
    assets to be sold in voluntary liquidation; and

  2. The Company is not being liquidated
    to defraud any person.

Such a declaration has to be accompanied by the audited
financial statements and valuation report of the corporate person.
Within four weeks of such a declaration, there shall be:

  1. A special resolution of members of
    the Company in a general meeting requiring the Company to be
    liquidated voluntarily and appointing an insolvency professional to
    act as a liquidator; or

  2. A resolution of the members of the
    Company in a general meeting requiring the Company to be liquidated
    as a result of expiry of the period of its duration, if any fixed
    by its articles, provided that if the Company owes any debt to any
    person, creditors representing two thirds in value of the debt of
    the Company shall approve the resolution passed for voluntary
    liquidation within 7 days of such resolution.

Thereupon, the Company notifies the Registrar of Companies
(‘ROC’) and Board about the resolution to liquidate the
Company within 7 days of such resolution or the subsequent approval
by the creditors, as the case may be. The voluntary liquidation
proceedings are deemed to have commenced from the date of passing
of the resolution by the members subject to creditor’s approval
and hence all the powers of the Board of Directors, key managerial
personnel and the partners of the Company shall cease to have
effect and shall vest in the Liquidator.

The Liquidator within 5 days of his appointment has to make a
public announcement for calling upon the claims from the creditors
and other stakeholders to be submitted within 30 days from the date
of commencement of liquidation. After verifying such claims,
accordingly, a list of stakeholders is prepared within 45 days from
the last date of receipt of claims by the Liquidator. Thereafter,
the Liquidator is required to make a preliminary report within 45
days from the date of commencement of liquidation regarding the
capital structure of the corporate person, the estimates of its
assets and liabilities, claims received etc.

The Liquidator needs to sell all the assets by auction or
through a direct party and realize the amount from the creditor and
thereafter, distribute proceedings among all the stakeholders.
Thereby a final report containing liquidation proceedings is
prepared by the Liquidator and submitted to the ROC, Board, and
Tribunal. After examining the final report the Tribunal passes an
order for dissolution of corporate entity. Therefore, a copy of
such order shall be forwarded to the authority with which the
corporate person is registered. It is to remember that the
Liquidator has to preserve the reports, registers, and books of
accounts for at least 8 years after the dissolution of the
corporate person either with himself or with an information
utility.

Overall, the winding-up procedures, which were initially
governed only by the Companies Act, 1956, slowly grew with the need
for clarity, and more sections were inserted under the Companies
Act, 2013. These laws of winding up of the Company do not have a
straight-jacket formula, it includes a lot of technicalities, and
hence it is complicated. But after the introduction of IBC and its
Regulations relating to liquidation process, the understanding of
the concept of winding up has become more straightforward with
respect to the Companies Act, 1956 and 2013, whereas, on the other
hand, it has also raised the difficulty bar in applying these
provisions, as when placed simultaneously, it is tough to decide
which supersedes the other. Hence, it will now be intriguing to
observe how the Companies (Winding-Up) Rules, 2020 would affect the
mechanism of winding up under the Companies Act, 2013, and how the
Tribunal, as well as the Central Government, would deal with such
applications.

This article is for information purpose only. It is not
intended to constitute, and should not be taken as legal advice, or
a communication intended to solicit or establish commercial motives
with any. The firm shall not have any obligations or liabilities
towards any acts or omission of any reader(s) consequent to any
information contained herein. The readers are advised to consult
competent professionals in their own judgment before acting on the
basis of any information provided hereby.



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