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Winding up of Company
Section 425 of the Companies Act, 1956, deals with the winding up of companies. Winding up of company is a legal procedure to dissolve the company and put an end to its life. The company ceases to be a 'going concern'. The term winding up is defined as, 'the process by which the life of a company is ended and its property is administered for the benefit of its members and creditors.' During the process of winding up, the assets of the company are sold and all the debts of the company are paid off. An administrator, called the liquidator, is appointed to take control of the winding up process of the company. If any surplus is left, the liquidator would distribute it among the owners of the company in accordance to their rights. In case the assets are insufficient, the owners may have to compensate if the agreement so specifies.
Any company does its business under the regulations set by the Act. It needs to follow the provisions of the act and work in accordance to the memorandum and articles set to govern the company's activities. It has to consider the interests of its owners, creditors as well as the public. If the company trespasses any of the provisions of the act, it may lead to winding up of the company. A company may have to face winding up proceedings on many accounts. The company could be wound-up either by a tribunal (through court) or voluntarily by the members of the company.
A sick or potentially sick company can file a petition for voluntary winding up of company. The company must seek clearance for closure from the government. A company referred to the Board of Financial and Industrial Reconstruction can be wound-up after the order is passed by the board. Once the amount of settlement (assets minus liabilities) is determined, the permission of RBI is taken to make the final settlement to the owners of the company.
Compulsory winding up of a company may arise owing to many issues. Winding up application can be filed against the company on the grounds of unlawful activities, or inability to pay the debts, or reports are not filed as provided or not followed memorandum and articles etc. It is greatly affected by the circumstances and facts of the case. However, in the view of public, winding up of company is seen as the company being financially not good. So, the company must try to avoid the situations which lead to a wrong impression on the minds of the public.
After the entire affair is completed, the company is dissolved and its name is removed from the register of companies. The company's legal personality comes to an end and it ceases to exist.
As per Section 425 of the Act, the modes of winding up are:
- Winding up by the court.
- Voluntary winding up,
- Members' Voluntary winding up.
- Creditors' Voluntary winding up.
- Winding up subject to supervision of the court.
Winding Up By The Court.
Voluntary Winding Up.
Winding Up Subject To Supervision Of Court.