Legal Aspects of Business

The winding up of a company is like the death of a human being, while closure of the company is like the final rights

done to the human body

Group 8

Members:

156 Stita Misra

129 Mrunmayee Bhide

178 Vikas Thakur

142 Archita Jajoo

154 Rajath Mehta

124 Abhishek Avate

140 Mayank Dudlani

WINDING UP OF A COMPANY

Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. An administrator, called the liquidator, is appointed and he takes control of the company, collects its assets, pays debts and finally distributes any surplus among the members in accordance with their rights. At the end of winding up, the company will have no assets or liabilities. When the affairs of a company are completely wound up, the dissolution of the company takes place. On dissolution, the company's name is struck off the register of the companies and its legal personality as a corporation comes to an end.

The procedure for winding up differs depending upon whether the company is registered or unregistered. A company formed by registration under the Companies Act, 1956 is known as a registered company. It also includes an existing company, which had been formed and registered under any of the earlier Companies Acts.

1) Winding up a Registered Company

The Companies Act provides for two modes of winding up a registered company.

i. Grounds for Compulsory Winding Up or Winding up by the Tribunal

If the company has, by a Special Resolution, resolved that the company be wound up by the Tribunal.

If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting. A petition on this ground may be filed by the Registrar or a contributory before the expiry of 14 days after the last day on which the meeting ought to have been held. The Tribunal may instead of winding up, order the holding of statutory meeting or the delivery of statutory report.

If the company fails to commence its business within one year of its incorporation, or suspends its business for a whole year. The winding up on this ground is ordered only if there is no intention to carry on the business and the Tribunal's power in this situation is discretionary.

If the number of members is reduced below the statutory minimum i.e. below seven in case of a public company and two in the case of a private company.

If the company is unable to pay its debts. If the tribunal is of the opinion that it is just and equitable that the company should be

wound up. Tribunal may inquire into the revival and rehabilitation of sick units. It its revival is

unlikely, the tribunal can order its winding up. If the company has made a default in filing with the Registrar its balance sheet and profit

and loss account or annual return for any five consecutive financial years

If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

The petition for winding up to the Tribunal may be made by :-

The company, in case of passing a special resolution for winding up. A creditor, in case of a company's inability to pay debts. A contributory or contributories, in case of a failure to hold a statutory meeting or to file

a statutory report or in case of reduction of members below the statutory minimum. The Registrar, on any ground provided prior approval of the Central Government has

been obtained. A person authorised by the Central Government, in case of investigation into the business

of the company where it appears from the report of the inspector that the affairs of the company have been conducted with intent to defraud its creditors, members or any other person.

The Central or State Government, if the company has acted against the sovereignty, integrity or security of India or against public order, decency, morality, etc.

ii. Voluntary Winding Up of a Registered Company

When a company is wound up by the members or the creditors without the intervention of Tribunal, it is called as voluntary winding up. It may take place by:-

By passing an ordinary resolution in the general meeting if :- (i) the period fixed for the duration of the company by the articles has expired; or (ii) some event on the happening of which company is to be dissolved, has happened.

By passing a special resolution to wind up voluntarily for any reason whatsoever.

Within 14 days of passing the resolution, whether ordinary or special, it must be advertised in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company.

The Companies Act (Section 484) provides for two methods for voluntary winding up:-

a. Members' voluntary winding up

It is possible in the case of solvent companies which are capable of paying their liabilities in full. There are two conditions for such winding up:-

A declaration of solvency must be made by a majority of directors, or all of them if they are two in number. It will state that the company will be able to pay its debts in full in a specified period not exceeding three years from commencement of winding up. It shall be made five weeks preceding the date of resolution for winding up and filed with the Registrar. It shall be accompanied by a copy of the report of auditors on Profit & Loss Account and Balance Sheet, and also a statement of assets and liabilities upto the latest practicable date; and

Shareholders must pass an ordinary or special resolution for winding up of the company.

The provisions applicable to members' voluntary winding up are as follows:-

o Appointment of liquidator and fixation of his remuneration by the General Meeting.

o Cessation of Board's power on appointment of liquidator except so far as may have been

sanctioned by the General Meeting, or the liquidator.o Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator

by the general meeting subject to an arrangement with the creditors.o Sending the notice of appointment of liquidator to the Registrar.

o Power of liquidator to accept shares or like interest as a consideration for the sale of

business of the company provided special resolution has been passed to this effect.o Duty of liquidator to call creditors' meeting in case of insolvency of the company and

place a statement of assets and liabilities before them.o Liquidator's duty to convene a General Meeting at the end of each year.

o Liquidator's duty to make an account of winding up and lay the same before the final

meeting.

b. Creditor's voluntary winding up

It is possible in the case of insolvent companies. It requires the holding of meetings of creditors besides those of the members right from the beginning of the process of voluntary winding up. It is the creditors who get the right to appoint liquidator and hence, the winding up proceedings are dominated by the creditors.

The provisions applicable to creditors' voluntary winding up are as follows:-

The Board of Directors shall convene a meeting of creditors on the same day or the next day after the meeting at which winding up resolution is to be proposed. Notice of meeting shall be sent by post to the creditors simultaneously while sending notice to members. It shall also be advertised in the Official Gazette and also in two newspapers circulating in the place of registered office.

o A statement of position of the company and a list of creditors along with list of their

claims shall be placed before the meeting of creditors.o A copy of resolution passed at creditors' meeting shall be filed with Registrar within 30

days of its passing. o It shall be done at respective meetings of members and creditors. In case of difference,

the nominee of creditors shall be the liquidator.o A five-member Committee of Inspection is appointed by creditors to supervise the work

of liquidator.o Fixation of remuneration of liquidator by creditors or committee of inspection.

o Cessation of board's powers on appointment of liquidator.

As soon as the affairs of the company are wound up, the liquidator shall call a final meeting of the company as well as that of the creditors through an advertisement in local newspapers as well as in the Official Gazette at least one month before the meeting and place the accounts before it. Within one week of meeting, liquidator shall send to Registrar a copy of accounts and a return of resolutions.

2) Winding up an Unregistered Company

According to the Companies Act, an unregistered company includes any partnership, association, or company consisting of more than seven persons at the time when petition for winding up is presented. But it will not cover the following:-

A railway company incorporated by an Act of Parliament or other Indian law or any Act of the British Parliament;

A company registered under the Companies Act, 1956; A company registered under any previous company laws. An illegal association formed against the provisions of the Act.

However, a foreign company carrying on business in India can be wound up as an unregistered company even if it has been dissolved or has ceased to exist under the laws of the country of its incorporation.

The provisions relating to winding up of a unregistered company:-

Such a company can be wound up by the Tribunal but never voluntarily. Circumstances in which unregistered company may be wound up are as follows:-

o If the company has been dissolved or has ceased to carry on business or is carrying on

business only for the purpose of winding up its affairs.o If the company is unable to pay its debts.

o If the Tribunal regards it as just and equitable to wind up the company.

Contributory means a person who is liable to contribute to the assets of a company in the event of its being wound up. Every person shall be considered a contributory if he is liable to pay any of the following amounts:- o Any debt or liability of the company;

o Any sum for adjustment of rights of members among themselves;

o Any cost, charges and expenses of winding up;

On the making of winding up order, any legal proceeding can be filed only with the leave of the Tribunal.

Winding up is a means of dissolving a company. In that event, its assets are realized and applied in payment of its debts, and after satisfaction of its debts, the balance, if any, is paid back to the members in proportion to the contribution made by them to the company.

According to Section 425 of the Indian Companies Act, 1956, the winding up of a company can be done by the Tribunal or can be wound up voluntarily.

Section 433(e) of Indian Companies Act, 1956 deals with the tools available to the creditors where the company is unable to pay its debts. The creditors in that case can approach the court of law to get the company wound up in order to recover its debt.

The sub section above does not confer on any person a right to seek an order that a company shall be wound up. It confers power to the court to pass an order of winding up in appropriate cases, i.e. the remedy is discretionary and cannot be claimed as a matter of right. However, the right to petition, being a statutory right cannot be excluded by a clause in the articles of association. A company will not be wound up merely because it is unable to pay its debts so long as it can be revived or resurrected by a scheme or arrangement or it still has prospects of coming back to life.

A debt for a company must be determined or definite sum of money payable immediately or at a future date. A conditional or contingent liability is not a debt, unless the contingency or condition has already happened. Where a company acts as a guarantor for repayment of a loan, and the principle debtor has committed default, the amount guaranteed is a 'debt' in respect of which a petition for winding up will lie under this section. When a dividend is declared by the company, it becomes a debt due by the company and entitles the shareholder to apply under this section in case the company is unable to pay the amount of the dividend. A winding up petition cannot be sustained on the basis of a debt which became due before prior to the company's incorporation even if one of the objects of the company is to was to pay off the debt. The court should not go in a winding-up petition into disputed questions of fact which cannot be sorted out without leading evidence. A claim for damages for breach of contract is not in the category of a debt due. A petition filed by a secured creditor just to exert pressure on the company is liable to be dismissed.

The machinery for winding up will not be allowed to be utilized merely as a means for realizing debts due from a company. A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by a company. However, the court can hardly exercise any discretion where the company is so hopelessly insolvent that there is absolutely no chance of resurrection. The company is not liable to be wound up if it is financially sound and refuses to pay the debts. Winding up is not an alternative to a civil suit.

The views of Indian courts are also not rigid on the issue of winding up under sub section (e) of Section 433, different views have been adopted by courts.

For example, in National Textile Workers' Union vs PR Ramakrishnan, the Supreme Court, in order to avoid undue hardship on the part of the company, had held that the trade union could not present a petition for winding up. It cannot represent workers for this purpose, as they have an alternative remedy under the Industrial Disputes Act, 1947. However, in the case of M Satyanarayana vs Stiles India Ltd, the high court of Andhra Pradesh has held that the unpaid salary is also a debt.

In brief, it can be inferred that a winding up order with reference to Section 433(e) is an extreme remedy and therefore, is to be sparingly invoked.

Who shall carry out the winding up procedure ? & At shall be the procedure ?

• Company in the general meeting [ in which resolution for winding up is passed] , and the creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act. ( 502)

•Any director, member or creditor may approach the court, for direction that ;

o Liquidator appointed in general meeting shall act, or

o He shall act jointly with liquidator appointed by creditor, or

o Appointing official liquidator, or

o Some other person to be appointed as liquidator. [502 (2)]

• The remuneration of liquidator shall be fixed by the creditors, or by the court. (504)

• On appointment of liquidator, all the power of Board of Directors shall cease. (505)

• In case, the winding up procedure, takes more than one year, then he will have to call a general meeting, and meeting of creditors, at the end of each year, and he shall present, a complete account of the procedure, and the status / position of liquidation (505).

When affairs of the company are fully wound up ( 509)

The liquidator shall take the following steps, when affair of the company are fully wound up:

1. Call a general meeting, and meeting of creditors, and lay before it, complete picture of accounts, winding up procedure and how the properties of company are disposed of .

2. The meeting shall be called by advertisement, specifying the time, place and object of the meeting.

3. The liquidator shall send to the Registrar and official liquidator copy of account, within one week after the meeting.

4. If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it' s members or public, then the company shall be deemed to be dissolved, from the date of report to the court.

5. However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public, then court may direct the liquidator to investigate further.

Distribution of property of company on voluntarily winding up [ both members and creditors voluntarily winding up]

Once the company is fully wound up, and assets of the company sold or distributed, the proceedings collected are utilised to pay off the liabilities. The proceedings so collected shall be utilised to pay off the creditors in equal proportion . Thereafter any money or property left, may be distributed among members according to their rights and interests in the company.

What is the procedure for winding-up of a Company in India?

The winding-up of a company may be either voluntary or compulsory.

A voluntary winding-up may take peace either by a provision of the articles of association, or by a resolution passed by the shareholders in general meeting.

In this case the operation is carried Jut in such a form as may be decided on by the assembly of shareholders.

A compulsory winding-up must be resolved upon by the Court, which occurs-

(a) When the company does not commence busi¬ness within a year from its incorporation, or suspends business for twelve months.

(3) Whenever the number of its members is reduced to less than seven.

(c) Whenever the company is unable to pay its debts.

(d) When, on a petition presented by interested parties, the Court may think it just and advisable to wind it up.

Procedure of Winding-up.-

On resolving upon the winding-up of a company the Court is to appoint an official liquidator on whom the powers of the directors are devolved, and whose discretionary licence is, there¬fore, almost unlimited; that he may call up the share¬holders to the payment of the sums still due on the amount represented by their shares, collect credits, sell properties, and in any other way realize the assets of the company, paying out, in proportion of such assets, the outstanding debts and other liabilities of the company.

The official liquidator, usually a public accountant, must, of course, be a person wholly independent and outside the influence neither of the company, nor in any way connected with its business.

He is to give sureties for the pecuniary correctness of his proceedings, and is invariably required to pay into the Bank of England, directly on receipt, any money or security of any sort passing through his hands.

In the course of the winding-up operation a liquidator usually consults with the shareholders and the creditors of the company, with the purpose of facilitating his task or proposing a compromise of arrangement between the parties.

When the creditors are all paid, or the capital of the company (if limited) is exhausted, the liquidator is to lay before the Court a complete account, show in the manner in which the operations have been conducted and the property of the company disposed of. The Court, upon exhibition of the said account, pronounces the dissolution of the company.

Private Companies.-

By the amendment of August, 1907, to the Companies Act, a distinction, already in practical use, was acknowledged as legal: companies being thereby classified as either public-to which all rules above described apply-or private, for the forma¬tion whereof a minimum of two members is required, and a maximum of fifty is allowed.

Like a public company, a private company enjoys the advantage of limitation in the liability of its members, and is exempt from a part of the formalities prescribed for the former, but has a restriction imposed on the transfer of its shares, and is not allowed to invite the public for the subscription of its shares and debentures.

Foreign Companies.-

Down to 1907 a foreign com¬pany, viz. a company established in a foreign country, although acting in the United Kingdom, was subject to no control on the part of the British Government:

which gave rise to frequent drawbacks owing especially to the want in such companies of any legal personality under the British law.

Such a state of things was done away with by the above quoted amendment, whereby it was enacted that any foreign company having a place of business in the United Kingdom shall henceforth file with the Registrar of joint stock companies a certified copy of the instru¬ment whereby the company has been constituted abroad, a list of the company's directors, and the name and address of a representative duly authorized to accept on behalf of the company any legal deed or notice required to be served on the company.

Any such company shall moreover conspicuously declare and exhibit the name of the company, the name of the country where it was incorporated, and the quali¬fication of "Limited" in the case of limited liability. It shall then be subject to the provisions of the Companies Acts as regard the control of the Board of Trade over the company's affairs.

CLOSING OF A COMPANY

Every aspiring entrepreneur starts a business with dreams of success and growth. But during the whole process of expanding the organisation, it is possible that he/she is unable continue the business in a profitable manner on a sustained basis. So it may become necessary for him/her to change the type/form of the business organisation. This change may be from a public company to a private company or vice versa. The Companies Act, 1956 contains the provisions and procedures for such conversions. It is also possible that the entrepreneur has to wind up or close down his company. Closure of a business unit refers to shutting down of the various functional as well as non-functional areas of the company.

•Sec.560 of the Companies Act, 1956 contains the provisions and procedures for such conversions.

REASONS FOR CLOSURE OF A COMPANY

•Economic recession in the economy

•Intense competition

•Use of obsolete techniques of production

•Poor infrastructural facilities in an organisation

•Dissatisfaction among workers and trade workers, conflict between labour and management, lockouts, strikes,etc

•Lack of resources/ funds to finance various activities of as organisation.

DOCUMENTS REQUIRED

•Board Resolution containing the following points:

– Unanimous approval of Board for making an application for striking off the name of Company from the Register as per section 560.

– To authorize the directors of the Company for execution and signing the Affidavits and Indemnity Bond.

– To approve the audited financial statement or statement of accounts as prepared for a period not prior to the one month from the date of application.

– To authorized the M.D./W.T.D./Director of the Company to apply in prescribed form (Form No. 61) to the ROC for striking off name of the Company.

– To approve the Audited Financial Statements as prepared not earlier than one month from the date of application.

•APPLICATION IN FORM NO.61 TO ROC

– Audited Financial Statements showing no assets and liabilities (Nil Balance Sheet).

– Duly Attested Affidavits on Non Judicial Stamp Paper from each Director of the Company that Company is not doing any business, it does not have any dues, he will pay/indemnify for any loss/damages, if caused to any person due to striking off name of the Company u/s 560.

– Duly Attested Indemnity Bond on Non Judicial Stamp Paper from each Director of the Company that Company is not doing any business, it does not have any dues, he will pay/indemnify for any loss/damages, if caused to any person due to striking off name of the Company u/s 560 and Company has no worker as on date .

– Certified copy of Bank Accounts

•Brief Particulars of all the Litigations

•Statutory Auditor Certificate that Company is not doing any business since inception or Company is inoperative and Company has no Statutory dues pending towards banks, Financial Institutions, Govt. organizations, creditors and to other person.

•Certificates from each Director of the Company clearly mentioning that Company Company is not doing any business since inception or Company is inoperative and Company has no Statutory dues pending towards banks, Financial Institutions, Govt. organizations, creditors and to other persons.

Closing up a business takes more than just walking away. There are legal, tax, and financial matters which must be addressed. Below is a guide to the steps an owner must take when closing the business's doors.

1. Vote to dissolve. The owners of the business entity must agree to dissolve. Your articles of incorporation, partnership agreement, or articles of organization should contain provisions setting the rules for such a vote. If not, state statutes that govern your form of business will act as "fall-back" provisions by prescribing how a vote to dissolve must be conducted.

2. Put a dissolution team together. This team should include your attorney, CPA, and a business valuation expert.

3. List assets and take inventory. This is essential for the business valuation and is necessary in order to file your business's final tax returns.

Get a business valuation. A valuation, while costly, may prevent future disputes from arising among the business's owners and provide evidence justifying the figures you use on your final tax return.

4. Set a timetable. Be realistic. Closing a business will take time. Developing reasonable time frames for each step of the dissolution process will insure that you do not over extend yourself by taking a new position or planning to relocate too soon.

5. Make the announcement. You do not want your creditors, customers, and especially your employees to learn that the business is closing from anybody but you. Uncertainty may cost you additional revenues while preparing to close, and disgruntled and/or deserting employees will hinder your dissolution process.

6. Work out contracts and obligations that extend beyond your closing date. Negotiate final payments on automobiles, office equipment, and leases. Also inform insurance companies and utility companies of your closing date.

7. Close the business. Terminate production, sales, and services.

8. Dispose of assets. This is also a good time to terminate your business insurance coverage.

9. Pay off the business debts.

10. Prepare final tax returns. This step requires preparing both federal and state tax forms. These forms will be more complicated than the annual returns that your business prepares. If your business hasn't consulted a tax expert prior to dissolution, this is the time to do it.

11. File dissolution papers with the state. Corporations, limited liability companies, limited partnerships, and limited liability partnerships are required to notify the state that they have dissolved. Although a general partnership is not required to register, it is still a good idea to consult your attorney about a way of making your dissolution known to the state.

12. Prepare final forms for federal, state, and local governments. Every agency that registered your business, issued you a license, provided you with tax numbers, or played a role in getting your business up and running should be notified of your dissolution.

13. Close the business bank account.

14. Keep all business records and other business documents for seven years. This will provide you with peace of mind in the event the Internal Revenue Service decides to audit your business somewhere down the road.

The Companies Act, 1956

154. Power to close register of members or debenture-holders.—

(1) A company may, after giving not less than seven days’ previous notice by advertisement in some newspapers circulating in the district in which the registered office of the company is situate, close the register of members or the register of debenture-holders for any period or periods not exceeding in the aggregate fifty-five days in each year, but not exceeding thirty days at any one time.

(2) If the register of members or of debenture-holders is closed without giving the notice provided in sub-section (1), or after giving shorter notice than that so provided, or for a continuous or an aggregate period in excess of the limits specified in that sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to 1[five thousand rupees] for every day during which the register is so closed.

“Easy Exit Scheme, 2011” under Section 560 of the Companies Act, 1956.

Guidelines for Fast Track Exit mode for defunct companies under section 560 of the Companies Act, 1956.

1. For Fast Track Exit mode (FTE), it is stated as under:-

(a) Any company will be called as “defunct company” for the purpose of these guidelines, which has nil asset and liability and

(i) has not commenced any business activity or operationsince incorporation; or

(ii) is not carrying over any business activity or operation for last one year before making application under FTE.

(b) Any defunct company which has active status or identified as dormant by the Ministry of Corporate Affairs, may apply for getting its name strike off from the Register of Companies;

(c) Any defunct company which is a Government Company shall submit ‘No Objection Certificate’ issued by the concerned Administrative Ministry or Department or State Government along with the application;

(d) the decision of the Registrar of Companies in respect of striking off the name of company shall be final.

(e) The fast track exit mode is not being extended to the following

companies namely:-

(i) listed companies;

(ii) companies that have been de-listed due to non-compliance of Listing Agreement or any other statutory Laws,

(iii) companies registered under section 25 of the Companies Act, 1956;

(iv) vanishing companies;

(v) companies where inspection or investigation is ordered and being carried out or yet to be taken up or where completed prosecutions arising out of such inspection or investigation are pending in the court;

(vi) companies where order under section 234 of the Companies Act, 1956 has been issued by the Registrar and reply theretois pending or where prosecution if any, is pending in the court;

(vii) companies against which prosecution for a noncompoundable offence is pending in court;

(viii) companies accepted public deposits which are either outstanding or the company is in default in repayment of thesame;

(ix) company having secured loan ;

(x) company having management dispute;

(xi) company in respect of which filing of documents have been stayed by court or Company Law Board (CLB) or Central Government or any other competent authority;

(xii) company having dues towards income tax or sales tax or central excise or banks and financial institutions or any other Central Government or State Government Departments or authorities or any local authorities.

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