By: Sana Mahewish

Winding up (which is more commonly called liquidation in Scotland) is proceeding for the realisation of the assets, the payment of creditors, and the distribution of the surplus, if any, among the shareholders, so that the company may be finally dissolved. Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

A company is an artificial person created by law. As such it cannot die a natural death. Therefore, any company, when found necessary, can be liquidated. It is not necessary that only insolvent company should be liquidated. Even a solvent company can also be liquidated. Insolvency proceeding are not applicable to a company and there liquidation proceedings are applied to a company. Liquidation of a company is different from the insolvency.

In the event of liquidation of a company it assets are realized, uncalled capital is collected and these proceeds are used for settlement of the claims of creditors. In case there is any surplus, it is returned to the shareholders of the company in accordance with their rights, The person who is entrusted with the job of realizing assets and paying liabilities in a systematic manner, is called liquidator. The appointment of liquidator is made depending upon the mode of winding up.

A company can be wound up in three ways: 1. Compulsory winding up by the Court; 2. Voluntary winding up : (i) Members' voluntary winding up; (ii)Creditors' voluntary winding up; 3. Voluntary winding up subject to the supervision of the Court

A company may be wound up by an order of the Court. This is called compulsory winding up or winding up by the Court. Section 433 lays down the following grounds where a company may be wound up by the Court.

1.Special resolution: A company may be wound up by the Court if it has, by a special resolution, resolved that it be wound up by the Court. 2.Default in filing statutory report or holding statutory meeting: If a company has made a default in delivering the statutory report to the Registrar or in holding the statutory meeting, a petition for winding up of the company may be presented to the Court. A petition on this ground may be presented to the Court by a member or Registrar (with the previous sanction of the Central Government) or a creditor. The power of the Court is discretionary and generally it does not order for winding up in first instance. The Court may, instead of making an order for winding up, direct the company to file the statutory report or to hold the statutory meeting but if the company fails to comply with the order, the Court will wind up the company.

3.Failure to commence business within one year or suspension of business for a whole year: Where a company does not commence its business within one year from its incorporation or suspends its business for a whole year, a winding up petition may be presented to the Court. The Court will not order for winding up on the grounds, if : (a) suspension of business is due to temporary causes; and (b) there are reasonable prospects for starting of business within a reasonable time.

4.Reduction of membership below the minimum: When the number of members is reduced, in the case of a public company, below 7 and in the case of a private company, below 2, a petition for winding up of the company may be presented to the Court. 5.Company's inability to pay its debts: A winding up petition may be presented if the company is unable to pay its debt. 'Debt' means definite sum of money payable immediately or at future date.

6.Just and Equitable : The Court may also order to wind up of a company if it is of opinion that it has just and equitable that the company should be wound up. Winding up by the Court on 'just and equitable' grounds may be ordered in the cases given below : a) When the substratum of the company has gone. b) When there is oppression by the majority shareholders on the minority, or there is mismanagement. c) When the company is formed for fraudulent or illegal objects or when the business of the company becomes illegal. d) When there is a deadlock in the management of the company. e) When the company is a 'bubble', i.e. it never had any real business.

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.

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; 2. or 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.

Voluntary winding up may be : (a) A members' voluntary winding up; or (b) A creditors' 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.

In creditors' voluntary winding up, it is the creditors who move the resolution for voluntary winding up of a company, and there is no solvency declaration made by the directors of the company. In other words, when a company is insolvent, that is, it is not able to pay its debts, it is the creditors voluntary winding up.

Voluntary winding up may be under the supervision of the Court. At any time after a company has passed a resolution for voluntary winding up, the Court may make an order that the voluntary winding up shall continue, but subject to such supervision of the Court. The Court may give such liberty to creditors, contributories or others to apply to the Court and generally on such terms and conditions as the Court thinks just.