Voluntary winding up occurs when a company is no longer profitable or its owners decide to cease its operations. However, winding up a company is not a simple matter of abandonment; it involves detailed legal procedures to ensure the company is closed legally and that no penalties are imposed on its directors and the company itself.
Several options are available to close a company, including selling the company, removing its name from the register of members, voluntary winding up, and compulsory winding up. In this article, we will focus on the process of voluntary winding up.
1. Who Can Voluntarily Wind Up a Company
Under Section 59(1) of the Insolvency & Bankruptcy Code, 2016, corporate entities are eligible for voluntary winding up. A corporate person can be:
- A Company
- A Limited Liability Partnership (LLP)
- Any other entity incorporated with limited liability under any applicable law
It’s important to note that “Financial Service Providers” are not considered corporate persons. Any entity that has not committed any defaults can initiate voluntary winding up.
2. Procedure for Voluntary Winding Up
The following steps outline the procedure for voluntary winding up:
a. Declaration by Majority of Directors:
The company must obtain a declaration from the majority of its directors confirming that the company either has no debts or can pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation. This declaration should also state that the company is not being liquidated to defraud anyone.
For Indian directors, this declaration must be on a stamp paper of INR 100. If the directors signing the declaration are based in a foreign country, the declaration must be duly notarized and apostilled.
This declaration should be accompanied by:
- Audited financial statements and records of the company’s operations for the previous two years or since its incorporation.
- A report on the valuation of assets, if any, prepared by a registered valuer.
b. Special Resolution by Shareholders:
Within four weeks of the directors’ declaration, the company must pass a special resolution in a general meeting, resolving to liquidate the company voluntarily. An insolvency professional should be appointed as the liquidator. If the company is winding up due to the expiry of the period specified in its Articles of Association or due to any event as specified in the Articles of Association, an ordinary resolution should be passed instead of a special one.
c. Approval by Creditors:
If the company owes any debts, creditors representing two-thirds in value of the company’s debt must approve the resolution passed by the shareholders within seven days of such resolution.
d. Notification to Registrar and IBBI:
The company must notify both the Registrar of the Company and the Insolvency and Bankruptcy Board of India (IBBI) about the voluntary winding up within seven days of passing the members’ resolution or receiving approval from creditors, if required. The liquidation process is deemed to have started from the date of passing the members’ resolution, subject to creditor approval. The company should cease its operations from the liquidation commencement date, except as necessary for the beneficial winding up of its business.
To make this notification, the company should file the following forms with the Registrar:
- MGT-14 for the Board and special resolution.
- GNL-2 for the Declaration of Solvency and Appointment of the Liquidator.
e. Liquidation by Official Liquidator:
The official liquidator, who should be an independent insolvency professional, carries out the liquidation process according to the Insolvency & Bankruptcy Code, 2016, and the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. The liquidator should open a bank account for the corporate person and distribute proceeds to stakeholders after deducting liquidation costs.
f. Dissolution of Corporate Person:
Upon completion of the winding up process and liquidation, the liquidator applies to the Adjudicating Authority (National Company Law Tribunal) for the dissolution of the corporate person. The Adjudicating Authority issues an order for the company’s dissolution, which takes effect from the date of the order. A copy of this order is sent to the authority under which the company is registered within 14 days of the order.
In conclusion, voluntary winding up is a legal process that must be carefully followed to close a company in India. It involves a series of steps, declarations, approvals, and notifications to ensure the process is conducted lawfully and without penalties for the company and its directors.