What is Winding Up a Company?

There are mainly two ways to wind up a company in India, by following the rules and regulations mentioned in the Companies Act:

Two ways to wind up a company are:

• Voluntary winding up a company
• Compulsory winding up a company

Lets deep dive and understand both the ways of winding up a company in detail.

1 Voluntary winding up of a company

The process of voluntarily winding up a company can be initiated when the board or directors or shareholders of the company decide to shut down the operations of the company.

For this purpose, the company must pass a board resolution and decide to dissolve the company by following the legal procedures mentioned in the company law.

Procedure for Voluntary winding up of a company

• Issue written notice for general meeting.
• Convene a Board meeting and take mutual board resolution.
• Meetings of creditors must also be conducted.
• Appointment of a company Liquidator.
• Affairs of the company need to be wound up and prepare a liquidator account.
• Call for the final General meeting.
• A special resolution must be passed for the disposal of company accounts and audit reports.
• File an application to the Tribunal for passing an order to dissolve the company.
• Within 60 days of receiving the application, the Tribunal should pass an order for dissolving the company.
• Filing of a copy of order with the registrar by the company liquidator.
• The Tribunal will send the copy of the order of dissolving the company to the registrar and then the order will be published in the Official Gazette of India that the company is dissolved.

2 Compulsory winding up a company

The process of compulsory winding up of a company is initiated by the Tribunal. There are various reasons for compulsorily winding up a company:

• Non-payment of Debts.
• Any Unlawful act by the management or the company.
• If the company is involved in fraudulent acts or misconduct.
• Non-filing of annual returns consecutively for 5 years.
• Decision of the Tribunal to wind up the company.

The process of involuntary liquidation of the company

• A petition is filed with the Tribunal to have the company wound up.
• The Tribunal has the option of accepting or rejecting the petition filed regarding the winding up of the company.
• A liquidator is then appointed.
• The liquidator will prepare a draft report to conclude operations of the company and ultimately wind it up.
• The liquidator must submit a copy of the draft report to the ROC within 30 days of it being produced.
• Upon receiving the draft report from the liquidator, the ROC may approve the wind up of the Company and will strike the name of the Company from the Register of Companies.

Top reasons why companies wind up?

• Insolvency: This term applies to winding up a company based on its lack of ability to pay its debts (liabilities) when they come due. There can be numerous causes for this to occur including poor financial management, a decline in revenue streams, high levels of debt carried by the business, and an overall reduction in the economy.
• Business Failure: If a company's business model fails to generate profits after several fiscal years of being in business, the result may be continuing losses and operational difficulties. Continued financial struggles with an inability to create enough revenue to cover expenses may lead to the conclusion that winding up that business will be the best option.
• Insufficient Financing: Businesses must have sufficient financing to maintain their operations and continue to develop as an enterprise. If a business cannot obtain the insufficient amount of funding needed via investment/loan from other financing options it may receive, it may experience financial difficulties that lead up to an eventual cessation of business operations, dependent upon how much time passes and what the other parties are willing to do regarding the company's situation.
• Legal Difficulties and Regulations: A business that fails to comply with the laws and regulations affecting it might incur penalties, fines or be subject to other legal actions. If a business has a major legal issue and is unable to pay for those particular problems, they may lose credibility in their community and may have a very difficult time regaining financial stability and will most likely need to cease its operation no longer than three (3) years later.
• Merger or Restructuring : Winding up may occur when two companies merge into one company, at which point one of the merging companies might be dissolved and a new company created. This can also happen during a restructuring when certain companies within a corporation are wound up to increase efficiency.
• Change in Industry or Market: A company can cease operations due to rapid changes in industry or market conditions. For example, technological advances tend to outdate an existing business model, and companies that cannot keep up with the industry or market may fail. Additionally, changing consumer preferences and the entry of new competitors into the market would cause traditional business models to no longer be successful, resulting in those companies needing to wind down.
• Retiring or Passing the Business Down: If a business is owned by a family, once someone in a key position (like the owner) retires, or if there is no one to follow them, it can lead to the closure of the business. A business cannot continue unless the company has a defined plan for who will lead the company and who will run it after retiring owners and key people leave.
• Weather-Related Events or Other Disasters: Various disasters, such as hurricanes, tornadoes, earthquakes, disease outbreaks, etc., can impact the ability of a business to operate successfully. If financial losses from these types of events are too great to fund recovery, winding down the business may be the only option left to the business owner.