Voluntary Winding up and Winding up Subject to Supervision by Court

Winding up is the legal process through which a company ceases its operations, settles its debts, sells off its assets, and distributes any remaining surplus among its shareholders. This process can be carried out either voluntarily or by an order of the court. The Companies Act, 2013 (replacing provisions of the Companies Act, 1956 in India) governs the procedures and laws related to the winding up of companies. Two important types of winding up are Voluntary Winding Up and Winding Up Subject to Supervision by Court.

Voluntary Winding Up

Voluntary winding up occurs when the members or creditors of a company decide to dissolve it without any compulsion from the tribunal (formerly known as the court). This process is initiated when the company’s directors and shareholders come to the conclusion that the company has no further purpose or is unable to meet its liabilities, and therefore, must be closed down in an orderly manner.

Under the Companies Act, 2013, voluntary winding up has been largely replaced with the Insolvency and Bankruptcy Code, 2016 (IBC), but the core idea still applies to companies that decide to wind up on their own accord.

Circumstances for Voluntary Winding Up:

1. Expiry of Duration/Completion of Objective: If the company was formed for a specific period or objective, and that period expires or the objective is fulfilled.

2. Resolution by Members: The company passes a special resolution in its general meeting to voluntarily wind up the company.

3. Inability to Pay Debts: If a company is unable to pay its debts and opts for voluntary liquidation under IBC.

Types of Voluntary Winding Up:

1. Members’ Voluntary Winding Up: Initiated by solvent companies that can pay off their debts. A declaration of solvency is filed by the directors.

2. Creditors’ Voluntary Winding Up: If the company is insolvent, the creditors are involved in the winding-up process from the beginning.

Procedure:

1. Board Resolution: Directors approve the proposal of winding up.

2. Declaration of Solvency (if applicable): Filed with the Registrar of Companies.

3. General Meeting: Special resolution passed for winding up.

4. Appointment of Liquidator: Members or creditors appoint a liquidator to manage the winding-up process.

5. Filing with ROC: Resolutions and statements must be filed with the Registrar.

6. Settlement of Accounts: Assets are liquidated, and proceeds are used to pay off liabilities.

7. Final Meeting: Called to present the final accounts.

8. Dissolution: Company is dissolved after submission of final accounts to the Registrar and order by the Tribunal.

Advantages:

• Faster and less expensive than compulsory winding up.

• Fewer legal formalities.

• Greater control by shareholders and creditors.

• Less stigma attached compared to court-ordered winding up.

Winding Up Subject to Supervision by Court (Tribunal)

Winding up subject to supervision by the court refers to a situation where a company, although it has initiated voluntary winding up, is later brought under the supervision of the National Company Law Tribunal (NCLT). This is a hybrid process in which the court steps in to supervise the conduct of the voluntary winding-up procedure to ensure that the process is conducted fairly and without prejudice to stakeholders.

Although this provision was previously recognized under the Companies Act, 1956, the Companies Act, 2013 does not specifically provide for “supervision” of voluntary winding up in the same manner. However, in practice, the Tribunal retains power to intervene in ongoing liquidation processes under the IBC framework or where fraud or mismanagement is suspected.

Circumstances:

1. When the court is convinced that the voluntary winding-up process is not being conducted in a fair or lawful manner.

2. When creditors, contributories, or other stakeholders petition the court for intervention.

3. If fraud, misfeasance, or mismanagement by the liquidator is suspected.

4. When disputes arise among members or between the liquidator and creditors.

Procedure:

1. Petition for Supervision: Creditors or contributories can file a petition to the Tribunal requesting supervision.

2. Tribunal Order: The Tribunal may grant supervision, place conditions, and issue directions.

3. Appointment of Liquidator: The Tribunal may allow the existing liquidator to continue or appoint a new one.

4. Oversight: Tribunal may call for reports, order audits, and intervene in case of irregularities.

5. Final Dissolution: The company is ultimately dissolved under the authority of the Tribunal.

Key Features:

• Combines features of voluntary and compulsory winding up.

• Tribunal ensures fairness and legality of the process.

• Safeguards the interests of minority shareholders and creditors.

• Involves judicial scrutiny over the liquidator’s decisions.

Benefits:

• Protects interests of dissenting creditors or shareholders.

• Ensures transparency in liquidation proceedings.

• Prevents potential misuse of voluntary winding up.

• Enables rectification if irregularities are found.

Comparison Between Voluntary Winding Up and Winding Up Under Supervision