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Company Winding up Rules, 2020: Small Firms Wind up Business without moving to Tribunal

Deepti Shikha

| Updated: Feb 03, 2020 | Category: Winding Up of a Company

Winding up Company

Winding up is a process to dissolve a company or put an end to its corporate existence. There are several reasons for winding up of a Company such as loss, Bankruptcy, mutual agreement among stakeholders, etc. The last stage of companies’ existence is winding up of a company. As prescribed in Section 270 of the Companies Act 2013, a company can wind up either by a Tribunal or by way of voluntary winding up. On January 24, 2020, the Government eased the winding-up rules for small firms. Now small firms can wind up their business without moving to National Company Law Tribunal (NCLT). The Central Government introduced new rules for winding up through the powers conferred to it under Section 468(1) & (2) and Section 469 (1) & (2). 

What is Winding up of Company?

According to Section 2(94A) of the Companies Act, 2013, winding up means ‘winding up as prescribed in this Act or liquidation under the Insolvency and Bankruptcy Code, 2016’.

Winding up is a step for the dissolution of a Company, where its assets are realized and used in paying off its debts. After clearing its debts, if there is any unpaid amount left, it is used for the profit of its members and its creditors by paying it back to them.

An administrator or Liquidator is appointed to take control of the company, collect its assets, pay off its debts and finally to distribute the surplus amount among the members as per their rights.

Winding up of Small Companies as per Company Rules, 2020- An Introduction

The Ministry of Corporate Affairs notified new rules for winding up of Companies. Now small firms can wind up a Company without approval. The rules have provided summary procedures for the liquidation of Companies. Now the Central Government will grant all the required permissions instead of the Tribunal. As per the rules it is specified that wherever the word Tribunal is mentioned, it shall be read as Central Government. The following firms are to be considered as small firms according to the new rules:

  • The company having an asset size of Rs 1 crore.
  • They must not have accepted deposits exceeding Rs. 25 lakh.
  • Turnover must be less than Rs — 50 crores.
  • The total loan must be under Rs 25 lakh.

The procedure introduced is known as a summary procedure. The new norms which will be applicable from April 1, 2020, will reduce the burden of the National Company Law Tribunal by enabling summary procedures for liquidation to be filed with the Central Government.

What are the eligibility criteria for a Company to be considered as a Small firm for Winding up?

The Companies specified under Section 361(1) of the Companies Act, 2013 are eligible for winding up under this procedure. The following type of companies are considered as small firms:

  • Companies having an asset value not exceeding Rs. One crore.
  • The company which has taken a deposit and the total outstanding deposits do not exceed twenty-five lakh rupees.
  • The company of which the total outstanding loan, including all the secured loans, does not exceed fifty lakh rupees.
  • The company having turnover up to fifty crore rupees.
  • The company of which the paid-up capital does not exceed one crore rupees.

What is the Summary Procedure for Liquidation/Winding up of Small Companies?

The steps for winding up have been mentioned below:

  • Appointment of an Official Liquidator.
  • The Liquidator to control the company, assemble its assets and distributes any surplus amount amongst the members according to their rights and liabilities.
  • The Liquidator by way of Advertisement or any other mode publishes a notice for proving the debts.
  • Account and Auditors report being placed before the Central Government by the Liquidator.
  • Company Liquidator to sell the property or asset belonging to the company for paying off the debts.
  • Inspection of the file by a duly authorized officer of the Central Government as per Rule 191 of the company (Winding-Up) Rules. The Director or Officer of the winding-up Company shall be entitled, free of charge, at all the reasonable times to inspect the file of proceedings of the liquidation, and to take copies or extracts from any document therein on payment at the rate of five rupees per page, to be furnished with such copies or extracts.
  • The dissolution of a company takes place when all the assets and liabilities of a company are wound up.
  • The official Liquidator acts through a recognized reporting system under the supervision of the Central Government.

Powers and functions of Official Liquidator, in Summary, or Winding up of Company

The following are the powers and functions of the official Liquidator:

  • The Company Liquidator shall maintain the Registers and books of accounts in which it shall mention the minutes of all the proceedings and resolutions passed at any meeting of the creditors or contributories or of the advisory committee.
  • Filing and audit of the Company Liquidator’s accounts. The final accounts of the Company Liquidator shall be filed as soon as the affairs of the company have been fully wound up.
  • The Official Liquidator shall dispose of all the assets in the manner as described in the Companies (Winding-Up) rules 165 to 167.
  • A referred in Section 349, of the Companies Act 2013, the monies received by the Official Liquidator shall be paid by him into the public account of India in the Reserve Bank of India as mentioned in that section not later than the next working day of the said Bank.
  • As per section 363 of the Companies Act 2013, the creditors shall prove their claim in the manner prescribed under Rules 100 to 125 of the Companies (Winding-Up) Rules.

Need Help or Advice? Contact Enterslice

If your company is being wound up or you are planning to wind up your Company, speak to us! We will provide you with an alternative to compulsory liquidation. Our professionals will advise you with the best possible solutions available to help you get out of this process, hassle-free. 

Conclusion

Petitions for winding up of small companies are subject to various conditions, including the thresholds on turnover and paid-up capital. A large part of the procedure is made applicable to regular companies. But still, there is ambiguity regarding whether summary winding up will be fast-tracked by merely shifting the Jurisdiction of the Central Government. An essential factor for summary winding up is that the Central Government through the Regional Director will provide all the required approvals, hence shortening the overall winding up timelines. 

Our Recommendation: MCA Simplifies Winding up Rules for Small Firms

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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