Winding Up

Winding up (also called liquidation) is the formal process by which a company's existence is brought to an end. The process involves: (1) appointment of a liquidator to take over the management of the company's affairs; (2) realisation of all the company's assets; (3) payment of the company's debts and liabilities in the prescribed order of priority; (4) distribution of the surplus (if any) among the shareholders in proportion to their shareholding; and (5) filing of a return with the Registrar of Companies and dissolution — the company's name is struck off the register and it ceases to exist.

Under the Companies Act, 2013 (which continues to govern voluntary winding up not covered by the IBC), winding up may be: (1) Compulsory winding up by the Tribunal (NCLT) — under Section 271 CA 2013, on grounds including inability to pay debts, default in holding the statutory meeting, acting against the interests of the sovereignty and integrity of India, and where it is just and equitable; and (2) Voluntary winding up — initiated by the members (members' voluntary winding up, where the company is solvent) or creditors. Since the IBC, 2016 came into force, all insolvency-driven liquidations of companies are handled under the IBC framework — the CA 2013 voluntary liquidation applies primarily to solvent companies winding down.

The order of priority for payment of debts in liquidation (under the IBC, 2016 for corporate debtors, and under CA 2013 for others) is: (1) Insolvency Resolution Costs (the costs of the liquidation process itself — paid first); (2) Workmen's dues for the preceding 24 months; (3) Debts owed to secured creditors (to the extent of their security); (4) Wages and salaries for the preceding 12 months; (5) Other statutory dues (taxes, etc.); (6) Unsecured creditors; and (7) Preference shareholders; with (8) equity shareholders receiving the residue. This waterfall determines who gets paid and in what order — critical in insolvent liquidations where there are insufficient assets to pay all creditors.

For advocates, winding up matters involve: (1) petitioning the NCLT for compulsory winding up on the 'just and equitable' ground or inability to pay debts; (2) challenging winding up orders on behalf of companies or directors; (3) advising liquidators on realisation of specific assets; (4) adjudicating proof of debt claims by creditors in the liquidation; and (5) avoidance applications — setting aside pre-liquidation transactions that were at an undervalue or that preferred certain creditors (transactions in fraud of creditors under Sections 328-332 CA 2013 and Sections 43-51 IBC).