Powers and Duties of Company Liquidator in Voluntary Winding Up

Any organisation that is formed and registered under the Companies Act, 2013 means a company. The incorporation under this Act makes it a separate entity and gives it a separate legal status from the members forming it. So, if a company can be incorporated by following the legal procedure, then it can also be terminated under the same Act by following the prescribed procedure for its closure. The Companies Act lays out the procedure and other formalities to finish off the company business, erasing its existence completely from the books of companies.

What is Winding Up?

The process of shutting down the business or dissolving the structure of a company is called the winding up of a company. The revenues, assets, and all accumulated income or profits of the company are realised to pay the company’s debts and liabilities, and the remaining assets are then allocated amongst the shareholders.

Section 2(94A) of the Companies Act 2013 defines winding up as ‘winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable’.

During this process, the company maintains itself as a legal entity and participates in the legal proceedings but stops to undertake its business activities. Winding up is also referred to as liquidation and the main purpose of liquidation is to ensure that the company is wound up in an orderly fashion with due regard to its stakeholders like creditors, employees , shareholders, etc as well as their interests.

There are three modes in which a company may be wound up and these modes are specified in Section 270 of the Companies Act, 2013. These modes are as follows:

1. Compulsory Winding Up

Where the company is directed to be wound up by the Company Court or Tribunal in its order, then it is a compulsory winding up. It is also called as ‘winding up by the Tribunal’ and is often noticed in cases of insolvency or failure on the part of the company to fulfil its legal obligations. Earlier, such matters were ruled by the courts, but after the commencement of the new Companies Act, 2013, the roles of the courts were replaced by the National Company Law Tribunal (NCLT) and all matters related to companies were transferred to the NCLT. The Tribunal initiates an order to compulsorily wind up a company upon a petition filed by the company itself, Registrar of Companies, Contributor, etc.

Such an order is issued by the Tribunal if the company –

1. is unable to pay its creditors and clear their debt balances or unable to meet its debt obligations
2. has passed a special resolution to the effect that it should be wound up by the Tribunal
3. undertakes any business or the purpose for which it is formed is unlawful or is engaged in any fraudulent conduct of activities
4. commits any act against the integrity and sovereignty of India or offends any public order
5. fails to hold or makes a default in holding its statutory meeting or has not filed its statutory report for five consecutive years
6. conducts the affairs of its business in a manner prejudicial to the interests of the company, shareholders or the public
7. presents just and equitable grounds before the Tribunal to issue such an order.

2. Voluntary Winding Up

When the decision of winding up the company is taken by members without requesting the Tribunal to issue any order or direction for its winding up, it is a case of voluntary winding up. In other words, the company voluntarily applies to wind up by way of a resolution by its shareholders and does not need any interference from the Tribunal.

3. Winding up subject to the supervision of the Tribunal

There may be certain situations or circumstances where the Tribunal might feel the need to intervene in the process of winding up, even if the application or decision to wind up is voluntary. It may do so if it is of the opinion that the prescribed procedure for winding up is not being followed properly or if there are any discrepancies observed in the formalities or if it finds the need to conduct supervision over the matters of winding up to be just and fair for the interests of the members and creditors.

Who files the Petition for Winding Up?

A petition Is basically an application requesting the Tribunal to approve and initiate the winding up proceedings of the company. Such a petition needs to be filed to the Tribunal for the winding up, whether it is compulsory or voluntary, by any party interested in the company. Any person who has or holds an interest in the company may file a petition for its closure of business.

The following parties may file a petition to wind up the company:

1. The company itself may, after obtaining the approval from its members, file the petition to wind itself up.
2. The members can file the petition after passing a resolution in the general meeting to wind up the company.
3. If the company is not able to pay the debts of the creditors on time or within the prescribed time, then the creditors can go ahead with filing a petition to wind up the company.
4. Any other contributory, besides the members and creditors, can file the said petition. Under Section 2(26) of the Act, a contributory is ‘a person who is liable to contribute to the assets of the company in case it is wound up’.
5. State Government or Central Government if it is of the view that it is in the interest and benefit of the public to have the company closed
6. Any person authorised by the government who can file such a petition.

What is Voluntary Winding Up?

The process of winding up results in the closure of a company and its name is then struck off in the Register of Companies as maintained with the Registrar on completion of the said process. Voluntary winding up, as discussed earlier, refers to the orderly procedure undertaken by the company itself to wind up its business by liquidating its assets.

Voluntary winding up under the Companies Act of 2013 was regulated by Section 304 until it was omitted by the Insolvency and Bankruptcy Code, 2016 (IBC). After the IBC came into effect, voluntary winding up was controlled by the IBC. A company may opt to wind up voluntarily if it is solvent or it is able to pay its debts. A type of procedure in which the process of winding up is initiated by the contributory of the company rather than by order of the Tribunal as in the case of compulsory winding up. Such winding up may take place when the company is solvent; that is, it is able to pay off the debt or insolvent, which means it is unable to pay off the debts. Further, there are two modes of this kind of winding up under the company law:

• Voluntary winding up by members

This is in the case where the company is solvent and the members decide to wind up the company and close its business by agreeing to pass a resolution to that effect in their general meeting. A Declaration of Solvency must be prepared and authorised by the directors of the company stating that each of the directors has enquired and inspected the financial state of the company, that he is satisfied with its ability to meet all its liabilities and that if any claims are made, they shall be paid off within a period of 12 months from the date of signing this declaration. Liquidation is carried out by a liquidator who is appointed by the shareholders to manage all the aspects of the process, including the sales of assets and distribution of the remaining funds back to the shareholders.

• Voluntary winding up my creditors

This happens at the time of an insolvency event, that is when the company is insolvent and is unable to pay its debts on the day they fall due. Though the process is initiated by the shareholders, the role and involvement of the creditors are the key throughout. The directors convene a meeting of the creditors where the creditors have the right to appoint a liquidator or establish a committee to oversee the process. The role of the liquidator is to sell the company’s assets, pay off debts with creditors, and distribute any remaining funds to shareholders.

In both the aforementioned cases, once the winding up is complete, the business of the company is closed and permanently removed from the Register of Companies.

Who is a Liquidator?

When a company is decided to be closed, a petition for winding up is filed by any or all of the contributors together. After the petition is submitted and approved by the Tribunal, a liquidator is appointed. Such appointment by the Tribunal is irrespective of the type of winding up, whether compulsory or voluntary.

A liquidator is appointed under Section 275 of the Act to oversee the process of liquidating the company. The liquidator sells the company’s assets, pays off all its debts, and distributes any remaining funds or assets among its shareholders. Regardless of whether the Tribunal initiates the winding-up proceedings or they proceed voluntarily, the liquidator is an essential person throughout the process. The liquidator is in charge of realising the company’s assets, discharging the company’s liabilities and distributing any surplus to those entitled to it. When the liquidation process has been fully completed, the liquidator must then apply to the Tribunal for an order of dissolution.

A liquidator is defined under Section 2(23) of the Companies Act, 2013 as a person appointed by NCLT as company liquidator in accordance with the provisions of Section 275 for winding up of the company. He is the person entrusted by an order of the NCLT with the responsibility to wind up the affairs of the company.

No matter whether the winding-up process is started by the Tribunal or by voluntary means, the company liquidator has a very important place in the course. He is in charge of liquidating (selling) the company’s assets, settling the outstanding liabilities, and giving the remaining proceeds to the stakeholders. Following the finalisation of the process, the liquidator seeks an order of dissolution from the Tribunal.

Powers and Duties of a Liquidator

When a liquidator is appointed to wind up a company, their main job is to manage the process of closing the company by using its assets to pay off debts and distribute any remaining funds to shareholders. He has to ensure that the liquidation procedure thoroughly follows the prescribed rules and covers all the checks, ranging from stopping the business functions to resolving outstanding disputes to finally dissolving the company.

Once the liquidator is in place, the directors usually lose their power to run the company and the liquidator takes full control of the company’s affairs, meaning the directors can no longer make decisions or act on the company’s behalf.

Let us understand the powers as bestowed upon him under the various Sections 288, 290-295 of the Companies Act, 2013 and also the duties and functions as prescribed under the Insolvency and Bankruptcy Code, 2016.

A liquidator has the power to:

1. Cross-verify the claims of the creditors to satisfy themselves or seek any clarification.
2. Take into his custody all the assets, properties and actionable claims that belong to the company and assume ownership thereof.
3. Approve the continuation of the business if it seems to be beneficial for liquidation.
4. Undertake the assessment and evaluation of the given values of the company assets and order for further valuation from a registered valuer.
5. Execute any negotiable instrument like bills of exchange or promissory notes on behalf of the company.
6. Sell any movable or immovable property or asset of the company or take measures to ensure their preservation and protection.
7. Investigate the affairs of the company or proceed with any legal, civil or criminal suit or proceeding.
8. Accept shares as consideration for the sale of part or whole of business or undertakings.
9. Collect and recover all the receivables and debts owed to the company
10. Negotiate and settle claims of any or all creditors as per his work or as he deems fit.
11. Assume, reject, or repudiate burdensome or of little or no value assets and terminate onerous contracts.
12. Hire professionals or obtain professional advice or assistance if needed.
13. Inspect the records, returns, statements, registers or books of accounts.
14. Sign and execute deeds and documents for winding up process, dispersal of assets and dismissing obligations.
15. Do such other acts and take actions as deemed fit to complete the winding up process.

The duties of a liquidator include:

1. Distribute the cash balances among the shareholders after paying off all the company’s debts and liabilities.
2. Oversee the company’s business and financial affairs.
3. Report observations of any fraudulent activity or fraud in accounts.
4. Make and submit reports to the Tribunal about the progress of the winding-up process on a monthly basis.
5. Consider the directions or suggestions given by the creditors or other contributors in their resolutions in the general meetings.
6. Maintain proper and regular books of accounts, receipts and payments made by him.
7. Furnish all the receipts, vouchers or other information as required by the Tribunal for audit, if necessary.
8. Call, hold and convene meetings of the members or creditors on the progress of winding up and make a report thereof along with the minutes of the meeting to the Tribunal.
9. Ensure the winding process runs smoothly and legitimately and no discrepancies are observed.
10. Once the winding-up formalities are complete, furnish a report stating the disposal of assets and discharge of liabilities to the Tribunal requesting to order the dissolution of the company.
11. Must observe good faith at all times and consistently take all the necessary steps for the utmost and best interest of all the stakeholders along with maintaining the trust, integrity, confidentiality and privacy of the information shared and decisions made.
12. Such other duties and functions that are deemed fit for the interest of the company and its stakeholders and for the completion of the winding up process.

Conclusion

In summary, the role of a liquidator in the winding-up process is crucial for the fair, transparent, and efficient dissolution of companies. During this course of action, it takes control of assets, manages sales that have been done on those assets, settles claims from creditors, and then returns whatever funds are left in the company to shareholders. It has to resolve all kinds of legal cases, and its actions shall meet procedural and statutory requirements; at the same time, its acts must be in the best interest of all parties.

This role of a liquidator is synonymous with much accountability and an acute balance of achieving maximum reimbursement to creditors while being sensitive to the interests of other groups, such as employees and shareholders. The liquidator needs to behave in a way that their integrity stands out. It shall literally adhere to legal frameworks but, while so doing, be transparent and just in all its operations. In a voluntary winding up, the liquidator effectively guides the company in what is termed its last phase of operation so that all financial obligations are met and the closure of the private company is orderly as well as law-compliant.