One of the circumstances under which a Company (Public or Private) may be wound up by the Court is for its inability to pay its debts. Initiating winding up proceedings against a defaulting Company is one of the most common legal methods adopted by creditors to recover their dues from errant Companies. Winding up of a company referred to the process whereby all the affairs of the company are wound up, all its assets are realized, its liabilities paid off and the balance if any is distributed to its shareholders in proportion to their holding in the company. When the company has been wound up, it is dissolved by order of the Court i.e. its existence ceases. In the words of Prof. L.C.B. Cower; "Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator, is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights".

As per Section 434 of the Companies Act, 1956, a Company shall be deemed to be unable to pay its debts if a creditor, to whom the Company is indebted in a sum exceeding Rs. 500/-, serves upon the Company, at its registered office, a notice calling upon the Company to pay its dues, and the Company, for three weeks after the receipt of the notice, neglects to pay the sum. Although there is no format prescribed, in which the notice is to be served, care has to be taken to ensure that the notice is served at the Company's registered office and that the notice also indicates that winding up proceedings would be initiated, in case the dues are not paid.

The Court having jurisdiction to entertain the winding up petition is generally the High Court having jurisdiction in relation to the place at which the registered office of the Company concerned is situate. However, the District Court subordinate to such High Court can also have jurisdiction provided such jurisdiction is conferred upon it under Section 10(2) of the Companies Act. The Court fee payable on the presentation of a winding up petition, as far as the Karnataka High Court is concerned., is Rs. 100/-.

It is however to be kept in mind that the debt which the Company has neglected to pay, is not disputed or denied by the Company. A Company cannot be said to have neglected to pay its debts in such circumstances. In such cases, the proper remedy would be to initiate recovery proceedings against the Company in competent Civil Courts. 

Winding up of a Company
Winding up of a company referred to the process whereby all the affairs of the company are wound up, all its assets are realized, its liabilities paid off and the balance if any is distributed to its shareholders in proportion to their holding in the company. When the company has been wound up, it is dissolved by order of the Court i.e. its existence ceases. In the words of Prof. L.C.B. Cower; "Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator, is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights".

Winding up and Dissolution
The terms "Winding up" and "Dissolution" are sometimes erroneously used to mean the same thing. However, they are quite different in their meanings. Winding up is a process whereby all assets of the company are realized and used to pay off the liabilities and members. Dissolution of the company takes place after the entire process of winding up is over. Dissolution puts an end to the life of the company. A dissolution order passed by the Court is like the Death Certificate of the company.

Modes of Winding Up

A Company may be wound up in any of the following modes:

1. By the Court i.e. compulsory winding

2. Voluntary winding up, which may be

(a) Member's voluntary winding up;

(b) Creditor's voluntary winding up;

3. Winding up subject to supervision of the Court

Winding up by the court
A petition for winding up the company must be filed before the court for winding up under supervision of the Court. It is primarily the High Court, which has the jurisdiction to wind up companies in relation to the place at which registered office of the company is situated. However, the Central Government may empower on any District Court to exercise that jurisdiction, in order to reduce the burden of the High Court, only in respect of small companies with the paid-up capital of not more than Rs. one lakh of rupees and having their registered office within that district. The High Court may regulate the conduct of such proceedings before the District Court. It may even direct a District Court to retain and continue winding up proceedings which that District Court had no jurisdiction to handle. It may also withdraw any winding up process in a District Court from that Court and proceed with the winding by itself, or transfer it to another District Court.

The following are the situations where a company may be wound up by the Court: -
1. If the company has passed a special resolution of its being wound up by the Court. It may be mentioned here that without such act cannot be done by the directors themselves. It can be done only if a resolution to this effect has passed at a general meeting of the company. The members can however ratify the act of directors already done.

2. If the company makes default in delivering the statutory report to the Registrar or in holding the Statutory Meeting. A petition under this ground can be made either by the Registrar with the previous approval of the Central Government or by a contributory or after 14 days after the last day on which the statutory meeting should have been held.

3. It does not commence business within one year from its incorporation or it suspends business for a whole year.

4. The number of its members falls before the minimum required i.e. 2 in case of a private company and 7 in case of a public company.

5. It is unable to pay its debts. A company will be deemed to be unable to pay its debts if: -

(i) If a creditor to whom the company owes more than Rs.500/- has served a notice on the company in writing demanding that his debt be settled and the company has failed to pay or secure or compound that debt within 3 weeks.

(ii) If it is proved to the satisfaction of the Court that the company cannot pay its debts

(iii) If an execution or other process has not been satisfied by the company.

6. The Court is of the opinion that its is just and equitable to wind up the company. E.g.

(a) Where the whole object of the company was fraudulent

(b) Where the substratum of the company is gone.

(c) Where the company is a "bubble"

(d) Where the company is insolvent

(e) Where there has been mismanagement of funds by the directors

(f) Where there is honest difference a director and the other directors

(g) Where there was a deadlock in the management of a public company.

Persons entitled to petition in a winding up by Court: The following persons may petition the Court for winding up: -:

The following persons may petition the Court for winding up: -
1. The Company

2. Any creditor of the Company

3. Any contributory / shareholder. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of its fully paid shares. While every member of a company becomes a contributory, not every contributory is a member. Besides members, any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory.

4. The Registrar may petition for winding up in the following circumstances: -

(i) If default is made in delivering statutory report or holding the statutory report.

(ii) If the company does not commence its business within one year from its incorporation or suspends its business for a whole year.

(iii) If it appears to him either from the financial position of the company as disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts.

(iv) Where the Registrar is authorized by the Central Government to petition for winding up the company.

(v) Where the number of members of the company fall below the statutory minimum.

(vi) Where it is just and equitable that the company be wound up.

5. Any person authorized by the Central Government. Under section 243, if any report of an inspector appointed to investigate the affairs of the company discloses: -

(i) That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose

(ii) That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report so to do, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so.

6. The Official Liquidator attached to a Court where a company is already being voluntarily wound up and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributors or both.

Winding up of a company leads to dissolution of the company. When the Court is of opinion that the liquidator cannot proceed with the winding up for want of funds or assets or for any other reason whatsoever, and that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company be made, the Court may make an order that the company be dissolved from the date of the order, and the company is accordingly dissolved. A copy of this order has to be forwarded by the liquidator to the Registrar within 30 days and the Registrar is required to record it in his books.

The Court may declare the dissolution of a company void in certain cases. The Court may at any time within two years of the date of the dissolution, make an order, on the application of the liquidator or of any other person interested and upon such terms as it thinks fit, declaring the dissolution to have been void. The person who obtains the order avoiding the dissolution must file a certified copy thereof with the Registrar within 30 days or such further time as the Court may allow. In case of default, he will be punishable with fine to the extent of Rs. 50 for every day during which the default continues.

Voluntary Winding Up
In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: -

1. When the period fixed for the duration of the company in its articles has expired

2. When an event on the happening of which the company is to be dissolved as per its articles happens

3. The company resolves by a special resolution at a general meeting to be voluntarily wound up.

A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.

Member's Voluntary Winding Up
In case of a company which is solvent and able to pay its liabilities in full and which desires to be wound up voluntarily, the majority of its directors at a Meeting of the Board must make a declaration of solvency verified by an affidavit staling that in their opinion the company will be able to pay its debts in full within such period not exceeding 3 years from the commencement of the winding up as may be specified in the declaration. Such a declaration must be made within 5 weeks immediately preceding the date of the passing of the resolution for winding up the company and be delivered to the Registrar for registration before that date. The declaration must embody a statement of the company's assets and liabilities as at the practicable date before the making of the declaration. Any director making a false declaration shall be criminally liable to imprisonment as well as with fine extending up to Rs. 5,000.

The company must appoint liquidators for the purpose of winding up and fix their remuneration at a general meeting. On the appointment of the liquidators, the Board of directors, managing director and manager of the company cease to have any management power. The liquidator may transfer or sell the assets of the company and pay off its liabilities. If the winding up proceedings continue for more than one year, the liquidator must call a general meeting at the end of each year the liquidation continues. At the last meeting, the accounts of the liquidator must be approved by the members. Such accounts must be filed by him with the registrar of Companies and the Official Liquidator attached to the Court having jurisdiction over the company.

The Registrar on receiving such accounts must register them. The Official Liquidator on receipt of the accounts and other relevant details must make a report to the Court if he is of the opinion that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest. The company shall be deemed to be dissolved from the date of submission of such report. If the Official Liquidator makes a report that the affairs of the company have been conducted in a manner prejudicial to the interest of its members or to public interest, the Court may direct the Official Liquidator to make further investigation of the affairs of the Company. On receipt of the investigation report, the Court may make an order of dissolution or may make such order as it deems fit and proper ion the given circumstances.

Creditors' Voluntary Winding Up
Where the company is not solvent or where the declaration of solvency of the company is not made and delivered to the Registrar in a voluntary winding up, it amounts to creditor's voluntary winding up.

In this case all the provisions of a member's voluntary winding up apply except that instead of the members, it is the creditors who appoint the liquidator, approve the accounts and regulate the winding up proceedings. The creditors may appoint a Committee of Inspection consisting of not more than 5 creditors in order to regulate and supervise the winding up proceedings.

Powers of the Court in case of voluntary winding up
1. It may appoint the Official Liquidator or any other person as liquidator where the appointed liquidator is not acting.

2. It may remove the liquidator and appoint the Official Liquidator or any other person as liquidator on justifiable cause being shown.

3. It may determine the remuneration of the liquidator when the Official Liquidator is appointed as a liquidator

4. It may amend, vary, confirm or set aside the arrangement entered into between a company and its creditors on an appeal made by any creditor or contributory within 3 weeks of the completion of the arrangement

5. On an application of the Liquidator or contributory or creditor, it may determine any question arising in the winding up of a company and it may exercise, as respects the enforcing of calls, the staying of suits or other legal proceedings or any other matter, all or any of the powers which the Court might exercise if the company were being wound up by the Court.

6. It may set aside any attachment, distress or execution started against the assets of the company after the commencement of the winding up on such terms as it thinks fit on an application made by the liquidator, creditor or contributory if the Court thinks fit.

7. It may order a public examination of any person connected with the promotion or formation of the company or any officer connected with the company.

Winding up subject to the supervision of court
When a company has by special or ordinary resolution resolved wind up voluntarily, the Court may make an order that the voluntary winding up shall continue, but subject to such supervision the Court and with such liberty for creditors, contributories or others to apply to the Court and generally on such terms and conditions, as the Court thinks just.

The application for such intervention of the Court may be made by a creditor, contributory or the voluntary liquidator, when there are irregularities or frauds in the voluntary winding up.

The effect of such an order is: -
1. The liquidator may exercise his powers for liquidation subject to terms and conditions imposed by the Court.

2. The Court obtains jurisdiction over suits and legal proceedings as in case of compulsory winding up by the Court.

3. The supervision order also confers the power on the Court to make calls or to enforce calls made by the liquidators and to exercise all other powers which it would have in case of compulsory winding up by the court.

4. The supervision order when passed, acts as a stay of actions and other proceedings against the company.

5. When an order has been made for winding up subject to supervision of Court and an order is afterwards made for winding up by the Court up, the Court has power to appoint any person as either provisional or permanent liquidators, in addition to, and subject to the control of the Official Liquidator.

6. The Company cannot be dissolved except by order of dissolution by the Court.