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Author - Associate Sanjani Shah</strong

Any commerce, trading or business needs structured and efficient procedures for closing as much as for start-ups. Worldwide, the structured procedure of insolvency help business owner to close down non-viable business and start-up a new business. This safeguard, the human and economic resources of a country are uninterrupted streamlined to structured use, thereby increasing the overall efficiency of the financial resources.

Liquidation is an affair through which a company that is doing business can cease operation, and its survival comes to an end. It often happens due to bad governance, poor business growth, and fraud; hence companies or business owner is unable to pay its dues and in consequences need to sell its assets to pay off the dues. Though, this could be a non-compulsory act as well where law safeguards that all the debts of a business or company in existence is paid before it comes to an end or shutdown.

Section 33 of the insolvency and bankruptcy code 2016, the liquidation process can be initiated.

Closing up or winding up of a business or company is not the same as the bankruptcy of a company. Where Indian law, does not characterise bankruptcy, it assigns winding up or closing up under the Indian Companies Act, 1956 (“the Act”). The major principal difference between bankruptcy and winding up is that in a bankruptcy or insolvency preceding the property of the bankrupt passes to an administrator or trustee who is appointed by a court to sell the property of the bankrupt party. However, in a closing up of a business or company, all the property, assets of the company remains with the company unless its disbandment, or otherwise sell-off in the course of closing up by the owners.

An Indian company registered under the Act becoming insolvent, it is “winding up” that is applicable. These provisions pertain equally to all business or company registered under the Act, whether it is a listed company, a public limited company as well as private limited company. The provisions of the Act direct the entire winding-up process.

The term ‘winding up’ and ‘dissolution’ are quite different in their meaning. A process whereby all property or assets of the company are reimbursed and used to pay off the financial obligation is known as winding up of a company. The dissolution of the company takes place after the entire process of winding up is completed. It puts an end to the company.

Under section 425 of the Act, a business or company may be closing up in any of the following ways:

1. By the court. A winding-up order (compulsory closing up).
2. Passing of a resolution for discretion winding up at a general meeting of members (voluntary closing up).
3. Voluntary closing up but under the supervision of the court.

Closing up or winding up of a company is the process whereby its property or asset is liquidised for the benefit of its creditors and members. The administrator appointed by the court called “liquidator”, who takes charge of the company, takes custody of the assets and lastly distributes any surplus among the stakeholders in accordance with their shares.

In the case of voluntary closing up, the whole process takes place without the court’s supervision. When closing up is completed then applicable documents get submitted before the court for taking the order of termination. The members of the creditors may do this voluntary closing up.

The Indian systems provide neither a favourable to speedy and effective rehabilitation nor to close down or exit. The operation for rehabilitation is regulated by the Sick Industrial Companies (Special Provision) Act, 1985. It does not give a balanced or effective structure for all shareholders. The procedure of closing up and selling of property is costly, undue lengthy and results in almost dissolution of asset value.

The management of closing the company should be replaced by an eligible administrator appointed by the Tribunal in a conference with the secured assignee with board authority to administer the property in the interest of all the shareholders. An individualistic Administrator would be able to give the best treatment to the assets and protect its value and take other necessary resolutions in the best interest of the business.

The law should provide for the Administrator to be able to arrange and file a project for an annulment of the company if the business is viable in which case the beneficiaries and previous management should have an opportunity to comment on the project. The administrator should have the same commitment as the management to secure the beneficiary with the right of information and supervision.