Voluntary and Compulsory Liquidation of a Corporate Entity

Bad debts are significantly increasing in India. In India, the process of resolving insolvency is very slow and time consuming on comparison with other countries. This slow process of resolving the insolvency makes the economy of India weak. The corporate debts are 56% of the total bad debts. These issues are solved by the introduction of Insolvency and Bankruptcy Act, 2016. This research paper specifically deals with the different types of winding up of any company. This research paper further describes different modes of winding up of the companies and procedure for winding up of the company under the new regulations

1.     Introduction:

A company is created by the legal procedure and when it wants to wind up and finishes its life in a lawful manner. When the existence of the company is vanished then its property is used for the benefits of its members and creditors. An administrator also known as liquidator is appointed to calculate the remaining assets of the company and pay its remaining debts and distribute its remaining debts between its creditors and members. Legal procedure for winding up of a company is given in company act of 1956 and 2013. The winding up of companies can be done in two ways:

  1. Compulsory winding up of company by the order of the court.
  2. Voluntary winding up of company by its creditors and members.

In the voluntary winding up of the company, the creditors and members of the company are allowed to settle their differences without the interference of the court.

2.     Liquidation of a Company:

Winding up of a company means a process by which operation of a company come to an end and its assets and properties are distributed between its members and creditors. An administrator also known as liquidator is appointed to collect the assets, pay the company’s remaining debts and if any extra assets are there then it will be distributed among the creditors and members. At the end of this process, the company shall not have any assets and liabilities. When the process of winding up of the company becomes complete then the company is said to be dissolved. When the company dissolves, its legal personality as a corporation is destroyed.[1]

3.     Winding up of a company:

 The result of the registration of the company is that it transforms the business of the company as a legal entity, having legal rights and obligations which are distinct from its member’s.[2] The company incorporated and it becomes a separate legal entity as a natural person.[3]  The Company appoint the liquidators from the penal set up by the Central Government about the winding up the affairs of the Company.[4] Hence it is the duty of the liquidators distributes the assets of the Company. Furthermore, the liquidation is the last step to wind up the troubled Company it involves the congregate its assets and redistribute it.

4.     Different types of winding up of companies

4.1  Winding up of foreign company

The foreign company running it is business in India it does not substantially it incorporated under the Indian Company Act, and fall within the jurisdiction of the Indian court. it may be wind up under some particular situations if:

a. It is dissolved or stops its business in India, or running it is business only for the winding up purpose. 

b. It is unable to pay its debts 

c. If the tribunal determine in its opinion that it’s just and equitable and it should be winding up.[5]


4.2  Winding up of Banking Company:

Parts III and IIIA of Banking Regulation Act, 1949 provides particular mechanism for the winding up of the banking companies, if no provisions mention the winding up of these Companies than Companies provisions operates in order to wind up such company.

4.3  Winding up of sick company:

The sick company Act, 1985 was enacted with the object to determine sick or seriously sick company and expedient determination by the board experts to take preventive and remedial or other manner. The section 4 of the said Act, the board of industrial and financial established to apply the jurisdiction and discharge the function under said Act. Section 20 provides that sick company must be wind up on the report of the board by the High Court according to the Company Act, 1956 [14]. The High Court of the Andhra Pradesh held that winding up petition is not sustainable the reference previously registered with the Board for Industrial and Financial Reconstruction.

4.4  Winding up of Government Company:

The company having either 51 or more shares of the government are called the government company, which registered under the Company Act, 1956 and the procedure of the winding up of it alike to the normal winding up of the company. Having said that Court consider the interest of the public hence its primary purpose to provides the service to public.

5.     Modes of winding up of company:

5.1  Compulsory winding up by the court:

The section 433 of the company Act 1956 deals with the situation under which a company can be compulsory wind up: 

1. If special resolution being passed which stated the Company should wound up by tribunal 

2. In the case of default is made to sending the statutory report to the Registrar or holding the statutory meeting 

3. Company failed to began its business within the one year from its registration or postpone its affairs for entire year. The power to the court with regard to is discretionary it cannot be used unless there is indication that company does not have the intention to carry out its business. 


5.2  Voluntary Winding up of Company:

Chapter III, part VII of the company Act 1956, under section 484 to 520, comprehensively provides the mechanism of the winding up the company. Company can be a voluntary wind up if it is incapable to take it is business, Orit established for the limited purpose, or it is not capable to fulfill its fiscal commitment. It the voluntary winding up of the company the whole proceeding has been done with the supervision of the Court. Moreover, when the proceeding of the winding up is completed, the pertinent documents are being presented before the Court with the view of acquire the order of dissolution of it life.

6.     Procedure of winding up under new regulations:

STEP 1: One has to submit a declaration to Registrar of Companies, stating that company will pay its dues and liquidation is not to defraud any person;

STEP 2: Within 4 weeks of such declaration, special resolution has to be passed for approval of proposal of voluntary liquidation and appointment of liquidator;

STEP 3: Within 5 days of such approval, public announcement in newspaper and website of company has to be made for inviting claims of stakeholders;

STEP 4: Within 7 days of such approval, intimation should be given to ROC and Board;

STEP 5: Submission of preliminary report containing capital structure, estimates of assets and liabilities, proposed plan of action within 45 days to a corporate person;

STEP 6: Verification of claims within 30 days and preparation of list of stakeholders within 45 days from the last date of receipt of claims;

STEP 7: For receipt of money due to corporate person, bank account needs to be open in name of corporate person having words „in voluntary liquidation after its name.

STEP 8: Sale of assets and recovery of due money, uncalled capital is realised;

STEP 9: The proceeds from realization to be distributed within 6 months from receipt of amount to the stakeholders;

STEP 10: The final report by the liquidator has to be submitted to corporate person, ROC, the Board and application to NCLT.

STEP 11: The order of NCLT regarding dissolution to be submitted within 14 days of receipt of order.

7.     Conclusion:

A company can‟t come into existence by simple means before getting incorporated the company has to faces many thing after that only the company gets commenced but after been the artificial person for a long term or period due to some wrongful act the company might falls into winding up procedure either through the voluntary winding up or by the compulsory winding up when the company faces the process of dissolution there are many procedure the company has to be followed as stated in the companies act 2013 even though the act govern them there are few folks in that also because of that the common public get cheated to cover that folks the legislature has enacted a new code called as Insolvency And Bankruptcy code by which when a company declared themselves as a insolvent they have under go through the newly enacted law and the legislature confirms the safety of the common public and safeguard their interest.





[1] Lorrainei conway, compulsory liquidation of a company, House of

Commons library, 2018

[2] Sharon sheehan, compulsory liquidation, CPA Ireland, 2013

[3] Avtar singh (2016), company law (sixteenth edition), Eastern

book company, 2016

[4] K.S.Anantharaman, company law and competition act,

LexisNexis, 2013

[5] N.D.Kapoor, Element of company law, sultan chand and co,

[6] Avtar singh (2009), company law (fifteenth edition), eastern book

company, 2009

Frequently Asked Questions:

Q.1 What are grounds for the compulsory winding up of company?

Ans: If a company is unable to pay its debts or the debts taken by the company is worth more than the assets it owns and no agreements have been made with the creditors, then the company is considered insolvent and is subjected to compulsory liquidation or compulsory winding up.

Q.2 Who conducts the process of voluntary liquidation?

Ans:T he members of the company shall after furnishing the declaration of solvency pass special resolution for the appointment of Insolvency Professional as liquidator to undertake the voluntary liquidation process

Q.3 When does the commencement of voluntary liquidation starts?
Ans: The voluntary liquidation commences from the date where special resolution is passed by the members along with the approval of creditors.

Q.4 How many companies have gone for voluntary liquidation till present?
Ans: Presently as per quarterly newsletter (April – June 2019) issued by IBBI, 452 companies have filed for voluntary liquidation till 30th June, 2019.

[1] http://www.mca.gov.in/MinistryV2/companiesact2013.html

[2] Talbot Le, Critical Company Law, (New YORK: Routledge-Cavendish, 2008),24 

3.        Griffin Stephen, Company Law Fundamental Principles,( England: Pearson 2006),1  

[4] Sealy, L., & Worthington, S. (2013). Sealy & Worthington’s Cases and Materials in Company Law. Oxford University Press  

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