Company being artificial person can only be dissolved by striking off the register of companies. This is called liquidation of company.
There are two types of liquidation (S.270):
- Compulsory winding under tribunal’s order
- Voluntary winding
- Compulsory Winding (S.271)
The company, or creditor or the Registrar may petition the tribunal for liquidation of company if,
- Inability to pay debts (S.271(1)(a))
The courts may not order liquidation even if company is unable to pay debts, so long as it can be resurrected or revived by any scheme or arrangement.s.271(2) provides company shall be deemed to be unable to pay debts if;
- Statutory Notice: When company fails to pay, or secure, or re-structure, or compound the debt exceeding Rupees One lakh to creditor within three weeks, from his demand, being presently payable and without any bona-fide dispute.
In re Cotton Corporation of India Ltd. vs. United Commercial Bank Ltd. the remedy of liquidation is not allowed to be misused as means for putting pressure on company to realize debts.
- Decreed debt: When company fails to execute the decree or order of court(s) in whole or in part passed in favor of creditor of company.
- Commercial insolvency: When the company is unable to meet current demands and the assets are insufficient to meet future demands. In re European Life Assurance Society, if assets and liabilities are such that assets would be insufficient to meet the liabilities. In Sree Shanmaugar Mills vs. Dharmaraja Nadar, where after selling the assets, though liabilities would have been satisfied but the company wouldn’t have been able to conduct business, it was held to be unable to pay debts.
- Special Resolution (S.271(1)(b))
If company, through special resolution, has decided that it be wound up by the tribunal, however, the tribunal has discretion upon acting such resolution.
- On an application by state/central government, the company may be wound up by tribunal if it has acted against the sovereignty and integrity of India, security of state, friendly relations with foreign states, public order, decency or morality under section271(1)(c).
- The company is ‘sick’ S. 271(1)(d).
- Fraudulent conduct and unlawful acts by company or its management.
- Default in filing financial statements for immediately preceding 5consecutive financial years with the registrar.
- If it appears to be just and equitable on any other grounds (eg. Deadlock in management, loss of substratum, continuous loss, Bubble Company etc).
Who can apply for liquidation? (S.272)
The petition for liquidation can be presented by the company, creditors, contributors, Registrar or the state/central government.
Powers of Tribunal (S.273)
- Dismiss petition with/without costs
- Pass interim orders
- Appoint liquidators
- Pass an order for winding up of company
- Any other order as it deems fit
- Voluntary Winding Up (S.304)
The declaration of solvency has to be made by majority of directors after full inquiry into affairs of company verified by an affidavit and accompanied by report of auditors of company on the profits and loss accounts and balance sheet of company, statement of companies assets and liabilities prepared up to date, within five weeks immediately preceding date of passing of resolution.
The company shall call meeting of creditors. The board of Directors has to put before the meeting full statement of affairs of company, copy of declaration of solvency and estimated amount of claims. Notice of resolution passed at creditors’ meeting must be given by the company to Registrar within 10days. Upon any contravention, company shall be punishable with fine not less than Rupees fifty thousandnot extending Rupees Two lakh and director shall be punished with imprisonment extending up to six months with or without fine as above mentioned.
Company may be wound up by:
- Ordinary Resolution
- Special Resolution
Consequences of Liquidation:
- The corporate status and powers of company till dissolution but the business is stopped, except so far as may be necessary for beneficial liquidation.
- Liquidator has to be appointed.
- The resolution must be advertised within 14days in the official gazette and in newspapers circulating in the district of registered office of company.
- Liquidation commences from date of resolution.
Members winding up
- Appointment of liquidators (S.310) from a panel prepared by the central govt. in the general meeting of the company for winding up and distribution of assets. The majority of creditors must approve to such appointment.
On appointment liquidator shall file declaration within seven days disclosing conflict of interest or lack of independence with the company and creditors.
- Liquidator appointed by the company can be removed by it by giving a written notice stating the ground of his removal. Three fourth of members or three fourth of creditors must approve such removal (S.311).
- Liquidator shall settle the list or contributories, which shall be prima-facie evidence of liability of persons named therein to be contributories. He can call general meetings of company whenever necessary (S.314). He shall prepare duly audited quarterly statements of accounts and file within 30days from the close of each quarter with Registrar. Failure to comply can levy fine extending upto Rupees Ten Lakhs.
- Company or creditors (S.315, 306) may appoint committees to supervise and assist liquidator.
- Liquidator shall report quarterly about the progress if winding up to members and creditors.
- Liquidator shall report to tribunal for investigation if he is of the opinion that fraud has been committed.
- Upon completion of winding up, liquidator shall call general meeting of company for laying accounts showing that assets, debts have been discharges and the members shall pass resolution for winding up, which shall be sent to registrar and tribunal within 14days.
- Tribunal shall dissolve the company within 60days and Registrar shall within 30days notify dissolution in official gazette.
- The assets of company shall be applied in satisfaction of liabilities and distributed among members according to their interests.
- Liquidator shall exercise all powers of tribunal to enforce calls, stay proceeding etc. and may apply to tribunal to determine any questions (S.322).
- Every expense incurred by liquidator during liquidation shall be payable in priority. (s.323).