Chapter 11 Winding-Up by Tribunal – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Winding-Up by Tribunal – CS Professional Insolvency Law and Practice Study Material
Question 1.
Mention the circumstances in which a Company may be wound up by Tribunal. (Dec 2021, 6 marks)
Answer:
Section 271 of the Companies Act provides that a company may, on a petition under section 272, be wound up by the Tribunal-
a. if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
b. 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;
c. if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
d. if the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial years; or
e. if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
Question 2.
What is the meaning of winding up?
Answer:
- Winding-up is the process whereby assets are realised, liabilities are paid off and the surplus, if any, distributed among its members.
- Winding up is a means by which the dissolution of a company is brought about.
- The main purpose of winding up of a company is to realize the assets and pay the company’s debts expeditiously and fairly in accordance with the law. If any surplus is left, it is distributed among the members in accordance with their rights.
Question 3.
On winding up, the company does not cease to exist as such except when it is dissolved. Comment.
Answer:
- On winding up, the company does not cease to exist as such except when it is dissolved.
- Even after commencement of the winding-up, the property and assets of the company belong to the company until the dissolution takes place.
- On dissolution, the company ceases to exist as a separate entity and becomes incapable of keeping property, suing or being sued.
- Thus in between the winding up and dissolution, the legal status of the company continues and it can be sued in the court of law.
Question 4.
Explain the important changes brought about by the Insolvency and Bankruptcy Code, 2016 to provisions relating to winding up in the Companies Act, 2013.
Answer:
The Insolvency and Bankruptcy Code, 2016 has made significant amendments to provisions relating to winding up in the Companies Act,
2013. The important ones are as under:
A. “Winding up”: The expression “winding up” was not defined in the Companies Act, 2013 .The Eleventh Schedule has added sub-section (94A) to section 2 of the Companies Act, 1956. The definition of “winding up” reads as follows: “Winding up” means winding up under the Companies Act, 2013 or liquidation underthe Insolvency and Bankruptcy Code, 2016, as applicable.”
B. [Section 2(94A)] Voluntary winding up: Provisions relating to voluntary winding up in the Companies Act, 2013 i.e., sections 304 to 323 have been omitted by the Insolvency and Bankruptcy Code, 2016. Voluntary liquidation is now dealt with under section 59 of the Insolvency and Bankruptcy Code, 2016.
C. Inability to pay debts: Insolvency and Bankruptcy Code, 2016 has substituted section 271 of the Companies Act, 2013. Now after its substitution, section 271 provides the following five grounds where a company may be wound up by a Tribunal:
(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) 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;
(c) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
(d) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.”
The following two grounds have been deleted from section 271:
(a) if the company is unable to pay its debts;
(b) if the Tribunal has ordered the winding up of the company under Chapter XIX.
Question 5.
Explain the circumstances in which company may be wound up by Tribunal.
Answer:
Section 271 of the Companies Act provides that a company may, on a petition under section 272, be wound up by the Tribunal,
(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) 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;
(c) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
(d) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
Question 6.
Who may file Petition for Winding up?
Answer:
Section 272 lays down that a petition to the Tribunal for the winding up of a company shall be presented by
(a) the company;
(b) any contributory or contributories;
(c) all or any of the persons specified in clauses (a) and (b);
(d) the Registrar;
(e) any person authorised by the Central Government in that behalf; or
(f) in a case falling under clause (b) of section 271, by the Central Government or a State Government
Question 7.
State the provisions related to filing of statement of affairs of the company in case of winding up.
Answer:
- Section 274 of Companies Act lays down that in case, where the Tribunal is satisfied that on a petition that the winding up of the company is to be made out, he may by an order direct the company to file its objections along with a statement of its affairs within thirty days of the order which can be allowed a further period of thirty days in a situation of contingency or special circumstances.
- In case, where the Company fails to file the statement of affairs, the tribunal shall forfeit the right of the company to oppose the petition and right of such directors and officers of the company as found responsible for such non-compliance.
- Further, the director or the officer of the company who is in default will be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both
Question 8.
Explain the provisions related to appointment of liquidator in case of winding up.
Answer:
- For the purposes of winding up of a company by the Tribunal, the Tribunal at the time of the passing of the order of winding up, shall appoint an Official Liquidator or a liquidator from the panel maintained under sub-section (2) as the Company Liquidator. [Section 275(1)]
- The provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016.] [Section 275(2)]
- Where a provisional liquidator is appointed by the Tribunal, the Tribunal may limit and restrict his powers by the order appointing him or it or by a subsequent order, but otherwise he shall have the same powers as a liquidator. [Section 275(3)]
- The terms and conditions of appointment of a provisional liquidator or Company Liquidator and the fee payable to him or it shall be specified by the Tribunal on the basis of task required to be performed, experience, qualification of such liquidator and size of the company.
[Section 275(5)] - On appointment as provisional liquidator or Company Liquidator, as the case may be, such liquidator shall file a declaration within seven days from the date of appointment in the prescribed form disclosing conflict of interest or lack of independence in respect of his appointment, if any, with the Tribunal and such obligation shall continue throughout the term of his appointment. [Section 275(6)]
- While passing a winding up order, the Tribunal may appoint a provisional liquidator, if any, appointed under clause (c) of sub-section (1) of section 273, as the Company Liquidator for the conduct of the proceedings for the winding up of the company. [Section 275(7)]
Question 9.
State the content of report which is submitted by Company Liquidator in case of winding up.
Answer:
According to section 281(1), where the Tribunal has made a winding up order or appointed a Company Liquidator, such liquidator shall, within sixty days from the order, submit to the Tribunal, a report containing the following particulars, namely:
(a) the nature and details of the assets of the company including their location and value, stating separately the cash balance in hand and in the bank, if any, and the negotiable securities, if any, held by the company;
(b) amount of capital issued, subscribed and paid-up;
(c) the existing and contingent liabilities of the company including names, addresses and occupations of its creditors, stating separately the amount of secured and unsecured debts, and in the case of secured debts, particulars of the securities given, whether by the company or an officer thereof, their value and the dates on which they were given;
(d) the debts due to the company and the names, addresses and occupations of the persons from whom they are due and the amount likely to be realised on account thereof;
(e) guarantees, if any, extended by the company;
(f) list of contributories and dues, if any, payable by them and details of any unpaid call;
(g) details of trademarks and intellectual properties, if any, owned by the company;
(h) details of subsisting contracts, joint ventures and collaborations, if any;
(i) details of holding and subsidiary companies, if any;
(j) details of legal cases filed by or against the company; and
(k) any other information which the Tribunal may direct or the Company Liquidator may consider necessary to include.
Question 10.
Explain the powers and duties of Company Liquidator in a winding up of a company.
Answer:
Section 290 of the Companies Act, 2013 lays down that the Company Liquidator, in a winding up of a company by the Tribunal, shall have the following powers
- to carry on the business of the company so far as may be necessary for the beneficial winding up of the company;
- to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose, to use, when necessary, the company’s seal;
- to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels;
- to sell the whole of the undertaking of the company as a going concern
- to raise any money required on the security of the assets of the company;
- to institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in the name and on behalf of the company;
- to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this Act;
- to inspect the records and returns of the company on the files of the Registrar or any other authority;
- to prove rank and claim in the insolvency of any contributory for any balance against his estate, and to receive dividends in the insolvency,
- to draw, accept, make and endorse any negotiable instruments including cheque, bill of exchange, hundi or promissory note in the name and on behalf of the company
- to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company
- to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities and for protection of the assets of the company, appoint an agent to do any business which the Company Liquidator is unable to do himself;
- to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond or instrument as may be necessary for winding up of the company, for distribution of assets and in discharge of his duties and obligations and functions as Company Liquidator; and
- to apply to the Tribunal for such orders or directions as may be necessary for the winding up of the company.
Question 11.
Write a note on audit of Company Liquidator’s accounts in case of winding up.
Answer:
- The Company Liquidator shall maintain proper and regular books of account including accounts of receipts and payments made by him in such form and manner as may be prescribed.
- The Company Liquidator shall, at such times as may be prescribed but not less than twice in each year during his tenure of office, present to the Tribunal an account of the receipts and payments as such liquidator
- The Tribunal shall cause the accounts to be audited in such manner as it thinks fit, and for the purpose of the audit, the Company Liquidator shall furnish to the Tribunal with such vouchers and information as the Tribunal may require, and the Tribunal may, at any time, require the production of, and inspect, any books of account kept by the Company Liquidator.
- When the accounts of the company have been audited, one copy thereof shall be filed by the Company Liquidator with the Tribunal, and the other copy shall be delivered to the Registrar which shall be open to inspection by any creditor, contributory or person interested.
- The Company Liquidator shall cause the accounts when audited, or a summary thereof, to be printed, and shall send a printed copy of the accounts or summary thereof by post to every creditor and every contributory.
Question 12.
Discuss the provisions related to dissolution of company.
Answer:
Provisions related to dissolution of company are as under:
- When the affairs of a company have been completely wound up, the Company Liquidator shall make an application to the Tribunal for dissolution of such company. [Section 302(1)].
- The Tribunal shall on an application filed by the Company Liquidator under sub-section (1) or when the Tribunal is of the opinion that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company should be made, make an order that the company be dissolved from the date of the order, and the company shall be dissolved accordingly. [Section 302(2)].
- A copy of the order shall, within thirty days from the date thereof, be forwarded by the Company Liquidator to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company. [Section 302(3)].
- If the Company Liquidator makes a default in forwarding a copy of the order within the period specified in subsection (3), the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.
[Section 302(4)].
Question 13.
An application under Section 7 of the Code is maintainable when winding-up proceeding against the Corporate Debtor has already been initiated? Comment.
Answer:
- NCLAT relied on the case of Forech India Pvt. Ltd. Vs. Edelweiss Assets Reconstruction Company Ltd. & Anr., wherein the NCLAT observed that if a Corporate Insolvency Resolution has started or on failure, if liquidation proceeding has been initiated against the Corporate Debtor, the question of entertaining another application under Section 7 or Section 9 against the same very Corporate Debtor does not arise, as it is open to the ‘Financial Creditor’ and the ‘Operational Creditor’ to make claim before the Insolvency Resolution Professional/Official Liquidator.
- The NCLAT further opined that once second stage i.e. liquidation (winding-up) proceedings has already been initiated, the question of reverting back to the first stage of Corporate Insolvency Resolution Process or preparation of Resolution Plan does not arise.
- In view of the facts of the present case, the NCLAT concluded that as the High Court had already ordered winding-up of Corporate Debtor and the same has been initiated, therefore, initiation of Corporate Insolvency Resolution Process against Corporate Debtor did not arise.
Question 14.
The applicant filed an application before NCLT Bench under section 10 of the Insolvency and Bankruptcy Code, 2016 suppressing the material facts that liquidation order had been passed in a winding-up petition against the corporate debtor. State the penal provisions in this regard.
Answer:
- The corporate applicant suppressed this material fact, knowing it to be material, and filed the petition under section 10 and in contravention of Rule 10 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The alleged act of the corporate applicant is punishable under section 77(a) of the Insolvency and Bankruptcy Code 2016.
- Accordingly, it directed the Registrar of Companies to lodge prosecution against the applicant under section 77(a) of the Code. It rejected application with costs of ?10 lakh, which shall be paid by the applicant in the account of the Prime Ministers National Relief Fund
Question 15.
Explain the constitution and role of the Advisory Committee in the winding-up process.
Answer:
- The Tribunal may, while passing an order of winding up of a company, direct that there shall be, an advisory committee to advise the Company Liquidator and to report to the Tribunal on such matters as the Tribunal may direct. [Section 287(1)]
- The advisory committee appointed by the Tribunal shall consist of not more than twelve members, being creditors and contributories of the company or such other persons in such proportion as the Tribunal may, keeping in view the circumstances of the company under liquidation, direct. [Section 287(2)]
- The Company Liquidator shall convene a meeting of creditors and contributories, as ascertained from the books and documents, of the company within thirty days from the date of order of winding up for enabling the Tribunal to determine the persons who may be members of the advisory committee. [Section 287(3)]
- The advisory committee shall have the right to inspect the books of account and other documents, assets and properties of the company under liquidation at a reasonable time. [Section 287(4)]
- The provisions relating to the convening of the meetings, the procedure to be followed thereat and other matters relating to conduct of business by the advisory committee shall be such as may be prescribed. [Section 287(5)] The meeting of advisory committee shall be chaired by the Company Liquidator. [Section 287(6)]
Question 16.
Can Company Liquidator take professional assistance in case of winding up of company?
Answer:
- The Company Liquidator may, with the sanction of the Tribunal, appoint one or more chartered accountants or company secretaries or cost accountants or legal practitioners or such other professionals on such terms and conditions, as may be necessary, to assist him in the performance of his duties and functions under this Act. [Section 291(1)]
- Any person appointed under this section shall disclose forthwith to the Tribunal in the prescribed form any conflict of interest or lack of independence in respect of his appointment. [Section 291(2)]
Question 17.
Explain the provisions related to fraudulent preferences.
Answer:
- Section 328 of the Companies Act, 2013 deals with fraudulent preference.
- Sub-section (1) of section 328 provides that where a company has given preference to a person who is one of the creditors of the company or a surety or guarantor for any of the debts or other liabilities of the company, and the company does anything or suffers anything done which has the effect of putting that person into a position which, in the event of the company going into liquidation, will be better than the position he would have been in if that thing had not been done prior to six months of making winding up application, the Tribunal, if satisfied that, such transaction is a fraudulent preference may order as it may think fit for restoring the position to what it would have been if the company had not given that preference.
- According to sub-section (2), if the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within six months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.
- Where a company is being wound up and anything made, taken or done after the commencement of this Act is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company’s debt, then, without prejudice to any rights or liabilities arising, apart from this provision, the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as a surety for the debt, to the extent of the mortgage or charge on the property or the value of his interest, whichever is less. [Section 331(1)]