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The Concept of Liquidation/Winding Up in India
Lubinisha Saha, Advocate, J Sagar Associates, New Delhi, India and Rohit Kumar, Advocate, J Sagar Associates, New Delhi, IndiaBankruptcy and winding up
Bankruptcy of a company is not the same thing as winding up of a company. Whereas Indian law does not define bankruptcy, it defines winding up under the (Indian) Companies Act, 1956 (the ‘Act’).
The most important difference between bankruptcy and winding up is that in a bankruptcy proceeding the property of the bankrupt passes to a trustee who is appointed by a court to sell the property to pay the debts of the bankrupt party. However, in a winding up of a company, all the assets of the company still remain with the company until its dissolution, unless disposed of in the course of winding up by the liquidator.
In the event of an Indian company registered under the Act becoming insolvent, it is ‘winding up’ that is applicable. These provisions apply equally to a listed company, a public limited company as well as a private limited company. The provisions of the Act guide the entire winding-up process 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 realised 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. As the concept of bankruptcy is not of much relevance in India, for the purposes of this article, the focus is on the concept of winding up.
The terms winding-up proceedings and liquidation proceedings are used interchangeably in this article.
Meaning and types of liquidation
Winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. The court appoints an administrator,called a ‘liquidator’, who takes control of the company, takes possession of its assets and finally distributes any surplus among the shareholders in accordance with their respective rights. The objective behind the winding up of a company is to realise the assets, pay off the liabilities and distribute the surplus as expeditiously as possible.
Under section 425 of the Act, a company may be wound up in any one of the following three ways:1
(a) by the court2 making a winding-up order (compulsory
winding up);
(b) by passing of an appropriate resolution for voluntary
winding up at a general meeting of members (voluntary winding up); and
(c) voluntary winding up subject to supervision of the court.
Voluntary winding up
In the 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 or the creditors.
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