Voluntary winding up of a company is the process by which the company ceases to operate in orderly and controlled manner. This results in ceasing up operations and winding up the business voluntarily. It is started by the shareholders or members of the company when they find the company is not profitable. Procedure for voluntary winding up the company is given in Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016.
Passing a Resolution for Voluntary Winding Up
Voluntary process of winding up starts with the process by passing a resolution for the same. It shall be passed by shareholders or the members of the company by a special resolution. Special resolution requires approval of atleast 75% of shareholders of the company. This resolution should also be passed by the general meeting of the company.
Appointing Liquidator
After the resolution of voluntarily winding up the company is passed, appointing liquidator is the next step. Liquidator is an individual who’s appointed for winding up the affairs of the company. Liquidator could be a person or firm of chartered accountant or sometimes company secretaries. Shareholder or Members shall approve the appointment of company’s liquidator at general meeting. Liquidator shall be appointed within 30 days of passing the resolution for voluntarily winding it up.
Notice to Creditors:-
After the liquidator is appointed, the next step is issuing a notice to creditors and contributors of company. Contributory are those individuals liable for contributing towards the company’s asset while winding it up. This shall be published in newspaper and sent to all the creditors of company.
This specifies the date on which the company will wind up and the details of the liquidator.
Verification:-
Once this notice is issued, liquidator shall verify the claim of creditor and contributors of the company. Liquidator shall invite the creditors for submitting the claims in writing. These claim shall be submitted in a particular period, this is generally 30 days from date of notice. Liquidator shall verify claims and list out the claims which are admitted and the claims which are rejected.
Realisation of Assets and Payment of Liabilities:-
After this next step is realising the assets of the company and paying off the liabilities. Liquidator shall take possession of company’s assets and selling them for taking realisation of the maximum value. Proceeds of this sale of assets shall be used for paying off the liabilities. Liabilities of company shall be paid off in following order:-
- Secured creditors
- Workmen’s dues
- Other debts and liabilities
If there are not enough assets for paying all liabilities of company then creditors shall be paid in proportion to the number of their claims.
What Is Winding Up?
When a company decides that its time to close the business this process is called winding up. It starts by selling off the company’s assets; it includes everything from property to inventory and converting these holdings in cash. This cash is allocated for settling outstanding debts and fulfilling financial obligations. Noteworthy aspect is the subsequent allocation of surplus funds or assets between the company’s stakeholders. It includes creditors and shareholders. Its primary aim is distributing the remaining resources equally.
Winding up is a proactive decision by company management. It depends on the financial status, this could be classified into
- Members Voluntary Liquidation(MVL) for Solvent Companies
- Creditors Voluntary Liquidation (CVL) for those in Financial Distress.
Considering external factors, sometimes legal, could mandate a court order or involuntary winding up because of financial instability or legal non-compliance.
Types of Company Windup:-
Voluntary Winding Up:-
- Members’ Voluntary Liquidation (MVL):- Started when the company is solvent and members decide for stopping the operations.
- Creditors’ Voluntary Liquidation (CVL):- This happens when company is unable in meeting the financial obligations and the creditors decide to wind up the business.
Compulsory Winding Up:-
- Court-Ordered Liquidation: Started by a court because of reasons such as insolvency, inability in paying debts or breach of any statutory compliance.
Top Reasons for Winding Up:-
- Financial Insolvency:- Inability in meeting the financial obligations and paying debts.
- Operational Failure: Continuous loss in sustaining the business operations.
- Directorial Disputes: Internal Conflict between the company directors which affect the decision making.
- Obsolete Business Model: Failure to adapt the changing condition of market or technological advancements.
- Breach of Legal Requirements: Violating statutory regulations which lead to legal actions.
- Fraud or Mismanagement: Conducting any Fraudulent activity or Gross Mismanagement.
Distributing Remaining Assets:-
Once liabilities of a company are paid off remaining assets shall be distributed between the shareholders or members of the company. This Distribution shall be done in the proportion according to the holdings or membership. If there are any assets which couldn’t be distributed it shall be transferred to appropriate authority.
Conclusion
It is important to note that the procedure for voluntary winding up can vary depending on the type of company and the specific circumstances involved. In some cases, additional steps may be required, such as obtaining approval from regulatory authorities or court approval for the winding up process. As such, it is always advisable to seek the guidance of a legal professional when initiating the voluntary winding-up process.
One of the critical benefits of voluntary winding up is that it allows the company to avoid going through the lengthy and costly insolvency process. It also provides an opportunity for the company to wind up its affairs in an orderly and controlled manner.
FAQs:
1. Who is a Liquidator?
Liquidator is an appointed individual who oversees the winding up process this ensures fair asset distribution between the creditors and shareholders.
2. What is the Importance of Liquidation?
Its ensures a proper closure, settling the debts, distributing the assets and legally dissolving a company which protects the interests of the stakeholders.
3. Difference between Windup and Strike-off of Company?
It’s a formal process of closing a company, settling the debts and distributing the assets. Whereas Strike off is a simple process for removing non operational companies in the register.
4. Who can Initiate Voluntary wind-up?
Shareholders could start voluntary winding up by various mechanisms like Member’s Voluntary Liquidation (MVL) after deciding to cease a solvent company’s operations.
5. What Is Liquidation?
It means converting company’s assets in cash for settling debts and distributing the remaining funds between the creditors and shareholders.
6. What are types of liquidation?
There are two types of liquidation- Compulsory Liquidation, when the court orders cause of insolvency and Voluntary Liquidation started by the shareholders when the operation ceases.
7. Why would the Company go for Liquidation ?
Companies went into liquidation because of financial distress, operational failure, strategic decision or legal obligation which aim to settle debts and cease its operations.
8. What happens to shareholders when a company is liquidated?
Generally shareholder get a share of the remaining assets after all the creditors are paid. This amount depends on the company’s financial standing and type of liquidation.
