The Complete Guide to Winding up a Company: A Step-by-Step Process

Winding up of a Company: An Overview

Introduction:

The winding up of a company refers to the process of ending the existence of a company by closing down its operations, selling off its assets, and distributing the proceeds to its creditors and shareholders. This process is usually initiated when a company is no longer able to pay its debts or has become insolvent. The winding-up process is also known as liquidation or dissolution. The winding-up process can be a voluntary process initiated by the shareholders or a compulsory process initiated by a creditor or the government.

A company comes into existence through a legal process and it comes to an end through the legal process of winding up its affairs. Winding up or liquidation is the process by which the management of the company’s affairs is taken out of its director's hands, its assets are realized by a liquidator, and its debts are paid out of the proceeds of realization. If any balance remains in the hands of the liquidator, it is divided among the members of the company in accordance with their rights under the articles.

Types of Winding up of a Company:

A company can be wound up in any of the following three ways: 

(A) Procedures for Winding up a Company by the Court 

Compulsory winding up is a process in which a court orders the winding up of a company. This can be done on the application of a creditor, a member, or the company itself. A company may be wound up by an order of the Court. This is also called compulsory winding up. According to Section 305, a company may be wound up by the Court in the following cases: 

If the company has, by special resolution, resolved that it may be wound up by the Court. It may be noted here that the power of the Court is discretionary and it may refuse to pass an order for winding up if it finds that this would be against the public interest or the interest of the company as a whole. 

According to Section 305(8) of the Companies Ordinance, 1984, the company may be ordered to be wound up by the Court under the following cases: 

The power of the Court is discretionary and instead of making a winding-up order, the Court may direct that the statutory report shall be delivered or that the statutory meeting or annual general meeting shall be held.

If the company does not commence its business within a year from its incorporation or suspends its business for a whole year, it may be ordered to be wound up. Here, again the power of the Court is discretionary and will be exercised only when there is a clear indication that the company has no intention to Carry on business. 

(d) Reduction in Membership 

If the number of members is reduced, in the case of a private company, below 2, and in the case of a public company, below 7, the company may be ordered to be wound up, Sec. 305(d). 

(e) Inability to Pay Debts 

A company may be ordered to be wound up if it is unable to pay its debts. A Company shall be deemed to be unable to pay its debts in the following three cases: 

(f) Unlawful and Unauthorized

A company may be wound up by Court under the following circumstances:

• (i) Fraudulent Activities: A company may be ordered to be wound up by the Court if it is formed for or is carrying on or has been carrying on unlawful or fraudulent activities. 
• (ii) Unauthorized Business: A company may be wound up by Court if it is S carrying on a business that is not authorized by the memorandum.
• (iii) Oppression: A winding-up order may be made if the company has been guilty of oppression towards any of its members or any person concerned with the formation of minority shareholders.
• (iv) Maintenance of Proper and True Accounts: A company may be wound up if it is run and managed by persons:
• Who fail to maintain proper and true accounts, and 
• Who commits fraud, misfeasance, or malfeasance in relation to the company. 
• (v) Avoidance of Law and Directions: A company may be wound up if it is managed by persons s who refuse to act according to the requirements of the memorandum, articles, and the Companies Ordinance, 1984 Moreover, it may also wound up if such persons do not obey the directions of the Court, registrar or the authority, Sec. 305(f). 

(g) Ceases to Enlist

A listed company may be wound up by the order of the Court when it ceases to be a listed company.

(h) Just and Equitable 

If the Court is of the opinion that it is just and equitable that the company should be wound up, it may order the Company to be wound up. What is just and equitable depends upon the circumstances of each particular case. An order may be made under the following cases:

(i) Petition For Winding Up

The following persons can make a petition to the Court to get an order for the winding up of a company:

(B) Procedures for Voluntary Winding Up 

A voluntary winding up is the most common and popular form. It is different from compulsory winding up. In voluntary winding up, the company and its creditors are free to settle their affairs without going to Court. The members and creditors sit together and put to an end the difficulties and disputes which may have arisen in connection with the running of the company's business.

(a) Circumstances of Voluntary Winding Up

A company may wound up voluntarily:

(b) Commencement of Winding Up.

A voluntary winding up shall be deemed to commence at the time of the passing of the resolution for voluntary winding up.

(c) Types of Voluntary Winding Up

There are two types of voluntary winding up, namely:

I. Members Voluntary Winding Up

If a declaration of solvency is made and delivered to the registrar it will be known as a member's voluntary winding up. The procedure for member's voluntary winding up is as follows:

(i) Declaration of Solvency

In the case of a solvent company, the directors make a declaration that they have made full inquiry into the affairs of the company and they have formed the opinion that the company has no debts, and it will be able to pay all its debts, if any, in full within 12 months from the commencement of the winding up.

(ii) Shareholders' Resolution

After the above declaration, the shareholders must meet and pass an ordinary - resolution or a special resolution, as the case may be, for the winding up of the company. 

(iii) Appointment of Liquidator 

The company shall appoint one or more liquidators for the purpose of winding up the affairs and distributing the assets of the company in general meeting.

(iv) Remuneration of Liquidator

The company shall also fix the remuneration to be paid to the liquidator or liquidators which cannot be increased in any circumstances. The liquidator shall not take charge of his office unless the remuneration is fixed.

(v) Resignation and Removal of Liquidator

The liquidator shall not resign before the conclusion of the winding up proceedings except for reasons of personal disability to the satisfaction of the Court. He may be removed by the Court for the reasons to be recorded.

(vi) Filling of Vacancy 

If a vacancy occurs by death, resignation, or otherwise in the office of any liquidator appointed by the company, the company in a general meeting may fill the vacancy. 

(vii) Powers of Board and Other Officers

On the appointment of the liquidator, all the powers of the board of directors, chief executive, and other officers shall expire, except if the shareholder or the liquidator gives them permission to continue.

(viii) Notice to Registrar

The company must give notice, to the registrar of the appointment of a liquidator. It must also give notice of every vacancy occurring in the office of the liquidator and of the name of the liquidator appointed to fill every such vacancy. 

(ix) Creditors Meeting in Case of Insolvency

If the liquidator is of the opinion that the company will not be able to pay debts in full within the period stated in the declaration of solvency he shall summon a meeting of creditors and lay before them a statement of the assets and liabilities of the company. 

(x) Meeting at the End of Each Year 

The liquidator shall call a general meeting of the company at the end of the first year and, if the winding up is not concluded during the first year he shall lay before the meeting all the matters about the progress of the winding up. 

(xi) Information to Registrar

A return convening of each general meeting together with a copy of notice, statement, and minutes of the meeting shall be filed by the liquidator with the registrar.

(xii) Final Meeting: 

As soon as the affairs of the company are fully wound up, the liquidator shall call a final general meeting of the company for the purpose of laying the account before it.

(xiii) Submission of Accounts and Report to Registrar

Within a week of the meeting, the liquidator shall send to the registrar, a copy of the accounts and a return of the meeting. He shall also inform about the minutes of the meeting. 

(xiv) Dissolution of Company

The registrar, on receiving the report, account, and return, shall verify and register them. After the expiry of 3 months from such registration, the company shall be deemed to have been dissolved.

II. Creditors Voluntary Winding Up:

A winding up in a case in which a declaration of solvency has not been made and delivered to the registrar is known as creditors’ voluntary winding up. The mode of creditors' voluntary winding up is adopted by insolvent companies. The procedure for a creditor's voluntary winding up is as follows: 

(i) Meeting of Creditors 

The company shall call a meeting of its creditors on that day on which a resolution for voluntary winding up is passed. The notices of the meeting shall be posted to the creditors and the shareholders at the same time. 

The directors and the chief executive will lay before the meeting a full statement of the position of the company's affairs and a list of creditors and the estimated amount of their claims.

(ii) Notice to Registrar

Notice of any resolution passed at a creditors meeting along with the consent of the liquidator shall be given by the company to the registrar.

(iii) Appointment of Liquidator

Appointment of a liquidator is made both by the members and creditors at their respective meetings. If they nominate different persons, the creditor’s nominee shall be the liquidator.

(iv) Resignation and Removal of Liquidator

The liquidator shall not resign before the conclusion of the winding-up process except for reasons of personal nature, He may be removed by the Court for reasons to be recorded.

(v) Appointment of a Committee of Inspection 

The creditors may appoint a committee of inspection consisting of five persons, The shareholders may also nominate some members to the committee. If the creditors do not accept the company's nominees, the matters may be referred to the Court. The Court's decision will be final in this respect. 

(vi) Remuneration of Liquidator 

The committee of inspection, or if there is no such committee of inspection, the creditors, may fix the remuneration to be paid to the liquidator. The remuneration once fixed cannot be increased in any circumstances,

(vii) Powers of Directors and Other Officers 

On the appointment of the liquidator, the powers of the directors, chief executive ‘and other officers cease, except for such powers as the committee of inspection, or if there is no committee, the creditors shall allow them to exercise.

(viii) Filling of Vacancy 

If a vacancy occurs, by death, resignation, or otherwise, in the office of the liquidator, the creditors in general meeting may fill the vacancy.

(ix) Acceptance of Consideration

The liquidator cannot accept shares, policies, or other like interests in consideration of the sale of a company's business or property for distribution amongst the creditors of the company without the prior consent of the Court or committee of inspection.

(x) Meeting of Members and Creditors 

Where liquidation continues for more than a year, the liquidator shall call a general meeting of the members and creditors at the end of the first year and at the end of each succeeding year. He shall lay before the meetings an account of his acts and dealings and the progress of the winding up during the year. 

(xi) Information to Registrar 

A return of convening members and creditors meeting along with a copy of the notices, accounts, and statement, and the minutes of the meeting shall be filed with the registrar. 

(xii) Final Meeting of Members and Creditors. 

When the company has been fully wound up, the liquidator shall call a final meeting of the company and creditors and lay before them the accounts of winding up.

(xiii) Submission of Report and Account 

Within a week of final meetings, the liquidator shall file with the registrar a copy of the accounts and a return of the meetings, He shall also send the minutes of the meeting.

(xiv) Dissolution of Company

The registrar on receipt of accounts audited reports, and return of meeting verifies and registers them. On the expiry of 3 months after the registration of accounts and audit report the company shall be deemed to be dissolved.

(C) Procedures for Winding up Under The Supervision Of Court 

When a company has passed a resolution for voluntary winding up, the Court may order that the winding up shall take place under the supervision of the Court. Further, the Court may give such liberty to creditors, contributory, or others to apply to the Court and on such terms and conditions as the Court shall think just.

I. Grounds for Issuing Supervision Order

While making the order for the winding up under the supervision of the Court, the Court shall consider the following points:

II. Object of Supervision Order

The object of issuing the supervision order is to protect the interest of the members, creditors, and the company.

III. Effect of Supervision Order

When a supervision order is made for winding up, the liquidator shall have the same powers as in a voluntary winding up, subject however to any restrictions the Court may impose. In voluntary winding up, the Court does not interfere but, at the request of the creditors or the shareholders, the Court can order for inspection. The effect of this order is that the winding up of the company is conducted under the supervision of the

IV. Power to Replace Liquidator

When an order is made for winding up under the supervision of the Court, the Court can appoint an official liquidator.

V. Who May Apply

An application may be made to the Court by any creditor or contributory or registrar or a person authorized by the authority on this behalf.

Reasons for Winding up a Company:

The following are some common reasons why a company may need to be wound up:

Insolvency: If a company is unable to pay its debts and is insolvent, it may need to be wound up. Insolvency can occur when a company's liabilities exceed its assets, and it is no longer able to pay its debts.

Failure to meet obligations: If a company fails to meet its obligations, such as filing annual returns, it may need to be wound up. The government can apply to wind up a company for this reason.

Loss of business: If a company is no longer profitable and is no longer able to continue its operations, it may need to be wound up. In this case, the shareholders may initiate a voluntary winding up.

Dissolution: If a company has fulfilled its objectives and is no longer needed, it may be voluntarily wound up. The shareholders may initiate this process if they believe that the company has served its purpose and is no longer needed.

Major Steps involved in winding up a company

In short, the following are the steps involved in winding up a company:

Appointment of Liquidator:

A liquidator must be appointed to oversee the winding-up process. The liquidator is responsible for managing the sale of the company's assets, distributing the proceeds to creditors and shareholders, and filing final returns with the relevant government agencies.

 Sale of Assets:

The liquidator must sell the assets of the company to repay the creditors and distribute any remaining funds to the shareholders. The assets must be sold in a fair and reasonable manner, and the liquidator must act in the best interests of the creditors and shareholders. The liquidator may choose to sell the assets individually or as a whole, and may also consider offers from potential buyers. The liquidator must also keep proper records of the sale of assets, including the amount received and the identity of the buyer. The proceeds from the sale of the assets must be used to repay the creditors and distribute any remaining funds to the shareholders, in accordance with the priority of claims set out in the relevant legislation.

Distribution of Proceeds:

After the sale of the assets, the proceeds must be distributed to the creditors and shareholders. The creditors must be paid first, followed by the shareholders. The distribution of the proceeds must be done in accordance with the priority of claims set out in the relevant legislation.

Filing of Final Returns:

The liquidator must also file final returns with the relevant government agencies, such as the Registrar of Companies. The final returns must include a statement of the assets and liabilities of the company and the distribution of the proceeds.

Laws Governing Winding up of Companies Worldwide:

The laws governing the winding up of companies vary from country to country. In some countries, such as the United Kingdom, the winding-up process is governed by the Insolvency Act 1986. In other countries, such as Australia, the winding up process is governed by the Corporations Act 2001. In Pakistan, the winding-up process is governed by the Companies Ordinance, 1984. In the United States, the winding-up process is governed by state law, with each state having its own set of laws and procedures.

Conclusion:

Winding up a company is a complex process that requires the appointment of a liquidator and the sale of the company's assets. The proceeds must then be distributed to the creditors and shareholders, and final returns must be filed with the relevant government agencies. The laws governing the winding up of companies vary from country to country, and it is important to be familiar with the relevant laws and procedures in your jurisdiction. Whether you are a shareholder, creditor, or government agency, it is important to understand the winding-up process and how it affects your rights and obligations.

Important Questions for Law students