Modes through which a Company may be Wound Up
Section 293 of the Companies Act, 2017 outlines the various modes through which a company may be wound up, which includes winding up by the court, voluntary winding up, or winding up subject to the supervision of the court. It thus clarifies the different ways through which a company may be wound up.
Circumstances under which a Company may voluntarily be Wound Up
Section 347 of the Companies Act, 2017 outlines two circumstances under which a company may voluntarily be wound up. Subsection (a) pertains to situations where the company’s article stipulates a predetermined condition or event, upon the occurrence of which the company must be dissolved, thus offering an automatic mechanism for winding up. Furthermore, subsection (b) empowers the shareholders to voluntarily wind up the company by passing a special resolution. This provision grants greater flexibility as it enables the company to be wound up at the discretion of its shareholders based on the prevailing circumstances, even in the absence of predefined conditions in its articles.
Voluntary Winding Up of a Company
Section 348 clarifies that the commencement of a voluntary winding up, legally, is regarded to be at the passing of the resolution for voluntary winding up.
Section 349 of the Companies Act, 2017 provides clarity regarding the standing of a company upon the initiation of the voluntary winding up procedure. According to the section, the company shall cease to exercise its business activities upon the initiation of the process. This cessation applies broadly to any business activities. Nonetheless, the section grants flexibility to the companies by enabling them to continue their business operations to the extent necessary for the beneficial winding up. Consequently, the concerned company may engage in certain activities that aid the process of winding up the business efficiently, and meet its obligations. Thus, the provision primarily serves the purpose of ensuring that the company’s business activities are limited to those that assist the orderly and effective winding up process. Furthermore, the section clarifies that the company continues to exist as a legal entity, with its corporate powers intact until the winding-up process is complete and the company is officially dissolved. The retention of the corporate status and power enables the companies to ensure that the winding up is effectively carried out. It is pertinent to note that the company’s corporate state and powers remain intact regardless of any contrary suggestion by its article. Consequently, legal continuity is maintained and the resolution of all outstanding matters regarding the company’s dissolution is facilitated. The section therefore balances the necessity of halting business operations with the practical requirement of enabling a smooth and orderly winding up procedure.
Section 301 of the Companies Act, 2017 provides a comprehensive list of the specific situations or circumstances under which a court may order the winding up of a company. These circumstances cover both financial and operational defaults, alongside fraudulent or illegal activities.
Section 301 subsection (a) enables companies to seek the court’s assistance for an orderly winding up process by establishing that a court may order the company to do so provided that the company decides, through a special resolution, that it is to be wound up by the Court. Furthermore, the poor governance, transparency, or operational negligence of the companies enables the courts to order the winding up of the companies as illustrated by the events set out in subsections (b), (c), and (d). Additionally, a company’s failure to operate according to the legal standards grants the court the power to order winding up, as illustrated from subsection (e) which establishes that the order may be passed upon the number of members falling below the statutory minimum, i.e., three for public and two for private companies. Subsection (f) further allows the order to be passed upon a company’s failure to pay its debts, thereby protecting creditors by ensuring that an insolvent company is wound up and its assets are liquidated to pay off debts. Furthermore, such an order may also be passed if the company engages in unlawful, fraudulent, oppressive activities, as highlighted by subsection (g), thereby providing a safeguard against companies engaging in illegal, harmful and oppressive activities. The concerned order may also be passed if the company ceases to be listed (subsection (h)), have a member (subsection (j)), or if a listed company suspends business for a whole year (subsection (m)). Moreover, revocation of licenses further serves as a ground for an order of winding up to be passed by the court, as illustrated in subsections (k), and (l). It is pertinent to note that subsection (i) further grants the courts the discretion to wind up a company upon deeming the order to be just and equitable, thereby enabling court to intervene in instances where it is evident that the company’s operation no longer serves to be in the interest of justice or fairness.
Consequently, section 301 serves to protect creditors, minority shareholders, public, etc. by ensuring that the companies that are insolvent, mismanaged, or engaging in illegal activities are wound up in an orderly and justifiable fashion. Therefore, it provides the court with a wide range of grounds upon which they may order the winding up of a company, covering both the voluntary court-supervised winding up and compulsory winding up due to statutory defaults or unlawful conduct.
Section 370 of the Companies Act, 2017 deals with the distribution of a company’s property upon its winding up, setting out a framework for how the assets are to be distributed subsequent to the company’s dissolution. It clarifies that the company’s property is first applied to satisfy its debts with creditors equally, and any remaining assets may be distributed among the members in light of their rights and interest in the company, provided that the articles do not suggest otherwise. The section thus provides a structured and reasonable approach for the companies to adopt in light of their properties, ensuring the just treatment of both creditors and shareholders, while also respecting the company’s articles which may suggest an alternate approach.