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Voluntary Winding Up

Winding up by the creditors or members without any intervention of the Court is called 'voluntary winding up'. In voluntary winding up, the company and its creditors are left free to settle their affairs without going to the Court, although they may apply to the Court for directions or orders if and when necessary.

A company may be wound up voluntarily under the circumstances given hereunder :

1. when the period fixed for the duration of the company by the articles has expired or the event has occurred on the occurrence of which the articles provide that the company is to be dissolved and the company in a general meeting has passed a special resolution to wind up voluntarily; or

2. the company has passed a special resolution to wind up voluntarily. Thus a company may be wound up voluntarily at any time and for any reason if a special resolution to this effect is passed in its general meeting.

When a company has passed a resolution for voluntary winding up, it must within 14 days of the passing of the resolution gives notice of the resolution by advertisement in the official Gazette and also in some newspaper circulating in the district where the registered office of the company is situated.

Commencement of Voluntary Winding up

A voluntary winding up is deemed to commence at the time when the resolution for winding up is passed [Sec. 486]. The date of the commencement of the winding up is important for several matters such as liability of past members and fraudulent preferences, etc..

Consequences of Voluntary Winding up

The consequences of voluntary winding up are :

1. From the commencement of voluntary winding up, the company ceases to carry on its business, except so far as may be required for the beneficial winding up thereof [Sec. 487].

2. The possession of the assets of the company vests in the liquidator for realisation and distribution among the creditors. The corporate state and powers of the company shall, however, continue until it is dissolved (Sec 456 and 487).

3. On the appointment of a liquidator, all the powers of the board of directors cease and the liquidator may exercise the powers mentioned in Sec. 512 including the power to do such things as may be necessary for winding up the affairs of the company and distributing its assets. The liquidator appointed in a members' voluntary winding up is merely an agent of the company to administer the property of the company for purposes prescribed by the statue.

Kinds of Voluntary Winding up​

Voluntary winding up may be :

  • A members' voluntary winding up; or
  • A creditors' voluntary winding -up.

Members' voluntary winding up

A members' voluntary winding up takes place only when the company is solvent. It is initiated by the members and is entirely managed by them. The liquidator is appointed by the members. No meeting of creditors is held and no committee of inspection is appointed. To obtain the benefit of this form of winding up, a declaration of solvency must be filed.

Declaration of solvency

Section 488 provides that where it is proposed to wind up the company voluntarily the directors or a majority of them, may, at a meeting of the board, make a declaration verified by an affidavit that the company has no debts or that it will be able to pay its debts in full within a period not exceeding 3 years from the commencement of winding up as may be specified in the declaration. Such declaration shall be made within five weeks immediately preceding the date of the passing of the resolution for winding up and shall be delivered to the Registrar before that date. It shall also be accompanied by a copy of the auditors on the Profit and Loss Account and the Balance Sheet of the company prepared upto the date of the declaration and must embody a statement of the company's assets and liabilities as on that date.

Where such a declaration is duly made and delivered, the winding up following shall be called members' voluntary winding up. Where the same is not duly made, it shall be called creditors' voluntary winding up. Sections 490-98 of the Act deal with provisions applicable to members' voluntary winding up. They are as follows :

1. Appointment and Remuneration of Liquidator

On the passing of the resolution for winding up, the company must in a general meeting appoint one or more liquidators and fix his or their remuneration. Any such remuneration cannot be increased at all, not even with the sanction of the Court and the liquidator cannot take charge of his office unless the remuneration is so fixed [Sec. 490].

2. Powers of the Board on Appointment of Liquidator

On the appointment of a liquidator, all the powers of the board and of a managing or whole-time director, and manager, if there be any of these, shall cease, except for the purpose of giving notice of such appointment to the Registrar or in so far as the company in a general meeting or the liquidator may sanction the continuance thereof [Sec. 491].

3. Office of the Liquidator Falling Vacant

If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in a general meeting may fill the vacancy [Sec. 492].

4. Notice of Appointment to Registrar

The company must, within 10 days of the appointment of the liquidator, or the filling up of the vacancy, as the case may be, give notice to the Registrar of the event. Default renders the company and every officer (or liquidator) who is in default liable to fine upto Rs. 100 for every day of default [Sec. 493].

5. Calling Meeting of Creditors

If the liquidator at any time is of opinion that the company is insolvent, he must summon a meeting of the creditors, and lay before the meeting a statement of the assets and liabilities of the company [Sec. 495]. Thereafter the winding up proceeds as if it were a creditors' voluntary winding up and not a members' voluntary winding up [Sec. 498].

6. Calling General Meeting at the End of one Year

In the event of the winding up continuing for more than one year, the liquidator must call a general meeting of the company at the end of the first year from the commencement of the winding up at the end of each succeeding year, or at the first convenient date within three months from the end of the year or such longer period as the Central Government may allow, and must lay before the meeting an account of his acts and dealings and of the conduct of the winding up during the preceding year [Sec. 496].

7. Final Meeting and Dissolution

As soon as the affairs of the company are fully wound up, the liquidator makes up an account of winding up, showing how the winding up has been conducted and how the property of the company has been disposed of. He then calls a general meeting, of the company and lays before it accounts showing how the winding up has been conducted. This is called the final meeting of the company.

The meeting must be called by advertisement :

(a) specifying the time, place and object of the meeting ; and

(b) published not less than one month before the meeting in the official Gazette, and also in some newspaper circulating in the district where the registered office of the company is situated.

Within one week after the meeting, the liquidator is required to send to the Registrar and the official liquidator a copy of the accounts. He must also make a report to each of them of the holding of the meeting and of the date thereof. If at the final meeting no quorum was present, the liquidator is required to make a report that the meeting was duly called but no quorum was present at the meeting. On receipt of the accounts and the report, the Registrar will register them.

On receipt of the accounts and report, the official liquidator will make a scrutiny of the books and papers of the company and make a report to the Court stating the result of the scrutiny. If the report shows that the affairs of the company have been conducted bonafide i. e. not in a manner prejudicial to the interests of its members or to the public interest, then from the date of the submission of the report to the Court, the company shall be deemed to have been dissolved. If the official liquidator in the report has stated that the affairs of the company have been conducted in a manner prejudicial to the interest of its members or to the public interest, the Court shall direct the official liquidator to make a further investigation of the affairs of the company and on the report of the official liquidator on such further investigation, the Court may either make an order that the company shall stand dissolved with effect from the date to be specified in the order of the Court or to make such other order as the circumstances of the case brought out in the report permit [Sec. 497].

The document Voluntary (Part -1) - Winding Up, Company Law | Company Law - B Com is a part of the B Com Course Company Law.
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FAQs on Voluntary (Part -1) - Winding Up, Company Law - Company Law - B Com

1. What is voluntary winding up in company law?
Ans. Voluntary winding up in company law refers to the process of closing down a company voluntarily by its members or shareholders. It is a decision made by the company's owners when they believe that the company can no longer continue its operations or that it is no longer economically viable. This process involves settling the company's debts, liquidating its assets, and distributing the remaining funds or assets among the shareholders.
2. What are the reasons for opting for voluntary winding up?
Ans. There can be several reasons for opting for voluntary winding up of a company. Some common reasons include: 1. Insolvency: If the company is unable to pay its debts and liabilities, voluntary winding up may be chosen as a way to liquidate the company's assets and distribute the proceeds among the creditors. 2. Losses: If the company has been consistently incurring losses and its financial situation is unsustainable, the shareholders may decide to wind up the company voluntarily to minimize further losses. 3. Obsolete or unprofitable business: If the company's business has become obsolete or unprofitable, the shareholders may choose to wind up the company voluntarily to avoid further investments and losses. 4. Disputes among shareholders: In cases where there are irreconcilable disputes among the shareholders, voluntary winding up may be opted for as a way to dissolve the company and distribute its assets. 5. Retirement or death of key members: If key members or directors of the company retire or pass away, the remaining shareholders may decide to wind up the company voluntarily rather than continuing without their expertise or leadership.
3. What is the procedure for voluntary winding up?
Ans. The procedure for voluntary winding up typically involves the following steps: 1. Resolution: The shareholders must pass a special resolution to wind up the company voluntarily. This resolution must be passed by a majority of at least 75% of the shareholders' voting rights. 2. Appointment of liquidator: A liquidator, who is usually a qualified professional, must be appointed to oversee the winding up process. The liquidator is responsible for collecting the company's assets, settling its debts, and distributing the remaining funds or assets among the shareholders. 3. Notice to creditors: A notice of the company's voluntary winding up must be published in the official gazette and at least one newspaper circulating in the area where the company operates. This notice informs the creditors to submit their claims within a specified time period. 4. Settlement of debts: The liquidator must gather all the company's assets, sell them if necessary, and use the proceeds to settle the company's debts. Priority is given to secured creditors, followed by unsecured creditors. 5. Distribution of remaining assets: After settling the company's debts, any remaining funds or assets are distributed among the shareholders in proportion to their shareholding.
4. What are the consequences of voluntary winding up for the company's directors and shareholders?
Ans. The consequences of voluntary winding up for the company's directors and shareholders may include: 1. Directors' obligations: The directors of the company have a duty to cooperate with the liquidator and provide any necessary information or assistance during the winding up process. Failure to fulfill these obligations may result in legal consequences. 2. Loss of control: Once the voluntary winding up process begins, the company's directors lose control over the company's affairs. The liquidator takes over the management and decision-making authority. 3. Distribution of assets: The shareholders may receive a distribution of the company's assets or funds after settling the company's debts. The amount received depends on their shareholding. 4. Liability: In certain circumstances, the directors may be held personally liable for the company's debts if they acted fraudulently or negligently leading to the company's insolvency. 5. Dissolution: Once the winding up process is completed, the company is dissolved, and its legal existence comes to an end. The company is then removed from the register of companies.
5. What is the difference between voluntary winding up and compulsory winding up?
Ans. The main difference between voluntary winding up and compulsory winding up is as follows: 1. Voluntary winding up: Voluntary winding up is initiated by the members or shareholders of the company when they decide to close down the company voluntarily. It requires a special resolution passed by the shareholders and involves appointing a liquidator to oversee the winding up process. It is typically done when the company is financially unstable or no longer economically viable. 2. Compulsory winding up: Compulsory winding up, also known as liquidation, is initiated by an order of the court or a petition filed by a creditor, shareholder, or the company itself. It is usually done when the company is insolvent and unable to pay its debts. The court appoints a liquidator to sell the company's assets and settle its debts. Compulsory winding up is a result of a legal process, whereas voluntary winding up is a decision made by the company's owners.
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