Winding up, also known as liquidation, is the process by which a company’s affairs are brought to an end, its assets are realized and distributed among creditors and shareholders, and its legal existence is terminated.
There are various modes of winding up a company, and the choice of mode depends on the circumstances and the specific grounds for winding up.
In India, the modes of winding up are primarily governed by the Companies Act, 2013.
Voluntary Winding Up
- Voluntary winding up occurs when the members or shareholders of the company decide, by passing a special resolution, to wind up the company voluntarily.
- It can be done for various reasons, such as achieving the company’s objectives, financial difficulties, or a decision by the members.
- In voluntary winding up, a liquidator is appointed by the shareholders to oversee the process. The liquidator realizes the company’s assets, settles its debts, and distributes any surplus among the shareholders.
Compulsory Winding Up by the Court
- Compulsory winding up is initiated by the court, often in response to a petition filed by a creditor, shareholder, or regulatory authority.
- Grounds for compulsory winding up include:
- Inability to pay debts (insolvency).
- Just and equitable grounds (e.g., oppression of minority shareholders).
- Failure to commence business within a year of incorporation.
- Public interest or regulatory concerns.
- Breach of company law or fraudulent activities.
- When the court orders compulsory winding up, it appoints an official liquidator to manage the winding-up process.
Winding Up Under the Supervision of the Court
- This mode is an intermediate option between voluntary winding up and compulsory winding up.
- It allows the court to supervise the winding-up process, typically when there are concerns about the liquidator’s conduct or the protection of creditors’ interests.
- The court may appoint an official liquidator to oversee the winding up, but it may also allow the company’s liquidator to continue under its supervision.
Members’ Voluntary Winding Up (MVL)
- MVL is a type of voluntary winding up in which the directors of a solvent company make a declaration of solvency.
- The declaration of solvency attests that the company can pay its debts in full within a specified period (usually 12 months) from the commencement of winding up.
- MVL is commonly used for situations like the completion of a specific project or the restructuring of the company.
- The company’s assets are used to pay off creditors, and any remaining surplus is distributed among shareholders.
Creditors’ Voluntary Winding Up (CVL)
- CVL is a voluntary winding up initiated by the company’s shareholders, but it is driven by the company’s financial difficulties and insolvency.
- The shareholders pass a special resolution to wind up the company, and a liquidator is appointed.
- The primary goal of CVL is to maximize the realization of assets to pay off creditors. Any surplus is then distributed among shareholders.
