What is Voluntary Winding up of Companies?

Ashish M. Shaji

01 Dec, 2020

We must know that Companies Act 2013 provides the necessary option to companies for voluntary winding up of companies without the intervention of NCLT.

What is meant by voluntary winding up of companies?

There may be a time when a company cannot be run further and in the best interest of the company, the members may decide to end the operations of the company thus ending the life of a company. This voluntary end of operations of company is called in legal language as Winding up.

Winding up of a company may not necessarily be done because of financial distress. It may be done because of some other business reasons.

Who can be a Liquidator during the Winding-up Procedure?

We can categorize liquidator as follows

• Official and Provisional Liquidator (Appointed by NCLT^[1]).
• Private Liquidator (Appointed by members or creditors).

Conditions for voluntary winding up of companies

An entity is required to fulfil the following conditions in order to wind up the company voluntarily:

• A declaration from the majority of directors of company verified by an affidavit declaring that they have done inquiry into the affairs of the company and have formed an opinion that the company has no debt or that the company will be able to pay off its debt in full of the proceeds of assets to be sold in the voluntary liquidation;
• And the fact that the company is not liquidated to defraud any person.

This declaration should be accompanied with documents like audited financial statements and record of business operations for the last two years or for the period after its incorporation. A report of the valuation of the assets of the company should also be provided.

 Procedure for Voluntary Winding up of Companies

The following steps are involved in the process of voluntary winding up:

• Such company should pass a special resolution in a general meeting within 4 weeks of declaration stating that the company is voluntarily liquidating and is appointing a professional who will act as liquidator.
• The company is required to notify the Registrar of Companies in 7 days time of passing resolution or creditor’s approval.
• Thereafter the liquidator shall make a public announcement and call upon stakeholders to submit their claims and provide last date of submission of claim.
• The liquidator shall collect or receive claims of creditors within 30 days period from the commencement of liquidation process.
• The liquidator will verify the claims in 30 days from the last date claims receipt.
• After verification of claims, liquidator may admit or reject claim in whole or in part.
• Liquidator will then make a list of stakeholders on the basis of claims accepted.
• The liquidator shall then determine the value of claims admitted.
• When the affairs of the corporate person are wound up completely and its assets liquidated, the liquidator will then make an application to the adjudicating authority for dissolution of the corporate person.
• The adjudicating authority on application filed by the liquidator, shall pass an order that the corporate debtor is dissolved from the date of the order and accordingly the corporate debtor shall be dissolved.

What are the benefits of timely winding up of companies?

The following are the benefits:

• Directors and other company officials are free from all creditor liabilities as well as pressure.
• It helps in avoiding legal action against the company.
• If the company has entered into a lease for some time during liquidation process, it shall terminate all terms and conditions of lease. 
• There are benefits for creditors as well as they will be eligible for default payment in terms of proposition of credits provided by all creditors.

Conclusion

Voluntary winding up of companies will cause a shutdown of business operations of that company. The mandatory requirements of winding up should be complied with. In case you have any doubt regarding the same, contact Enterslice.

Read our article: Companies Amendment Act, 2020 – Key Features