Winding up of a company : Winding up is the process of liquidating a company. While winding up, a company ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors, and distribute any remaining assets to partners or shareholders. The term is synonymous with liquidation, which is the process of converting assets to cash.
Ways of winding up
A company can be wound up in two different ways:
- Voluntary winding up of a company.
- Compulsory winding up of a company.
Voluntary winding up of a company
A voluntary liquidation is a self-imposed wind-up and dissolution of a company that has been approved by its shareholders. Such a decision will happen once a company’s leadership decides that the company has no reason to continue operating. It is not ordered by a court (not compulsory).
The purpose of a voluntary liquidation is to terminate a company’s operations, wrap-up its financial affairs, and dismantle its corporate structure in an orderly fashion, while paying back creditors according to their assigned priority.
Members’ Voluntary Liquidation (MVL): This type of liquidation is initiated by the company’s shareholders when they believe the company can pay off its debts and distribute surplus assets among shareholders. It is often used when a company reaches the end of its useful life or when shareholders want to retire.
Creditors’ Voluntary Liquidation (CVL): When a company cannot pay its debts and is insolvent, its directors may choose to voluntarily liquidate the company. A licensed insolvency practitioner is appointed as a liquidator to oversee the process and distribute the company’s assets to creditors.
Compulsory winding up of a company
A company can be legally forced to wind up by a court order. In such cases, the company is ordered to appoint a liquidator to manage the sale of assets and distribution of the proceeds to creditors.
The court order is often triggered by a suit brought by the company’s creditors. They are often the first to realize that a company is insolvent because their bills have remained unpaid. In other cases, the winding-up is the final conclusion of a bankruptcy proceeding, which can involve creditors trying to recoup money owed by the company.
In any case, a company may not have sufficient assets to satisfy all of its debtors entirely, and the creditors will face an economic loss.
Members’ Voluntary Winding-Up:
This is similar to MVL, where the company’s shareholders voluntarily decide to wind up the company, but it is not necessarily a liquidation process. It is often used when a company’s objectives have been achieved or when it is no longer economically viable.
In cases where a company has defaulted on secured loans or debts, a lender or creditor with a valid security interest may appoint an administrative receiver. The receiver’s primary duty is to recover the lender’s debt through the sale of the company’s assets.
In some jurisdictions, a company with no significant assets or liabilities can apply for dissolution without going through a full liquidation process. It is a simpler and more cost-effective way to formally close down a company.
A court can appoint a receiver to take control of a company’s assets and business operations in cases of mismanagement, financial distress, or disputes among shareholders.
Some countries allow companies to voluntarily strike themselves off the register if they are no longer trading and have no significant assets or liabilities. This is a simplified and less costly process compared to formal liquidation.
In cases involving international operations, cross-border insolvency procedures may be necessary to coordinate the wind-up of a company’s assets and liabilities in multiple jurisdictions.
Reasons for winding up of a company
There are some following reasons for winding up a company:
- Cash flow problems
- Lack of accurate accounting
- Lack of leadership
- Disagreements among key partners
What documents are required for winding up a company?
The following documents are required for winding up a company:
- Certificate of incorporation of company
- MOA and AOA of a company
- Certificate related to the closure of bank account of company
- Copy of Board resolution
- Copy of resolution of creditors stating that ¾ of members have accepted
- Statement of accounts of a company
- Winding up petition form WIN 1 and WIN 2
- Statement of Affairs of the Company in the format of WIN 4
- Affidavit of concurrence in format of Form WIN 5
- Advertisement in the Vernacular Newspaper Form WIN 6
- Appointment of provisional Liquidator in the Format WIN 7 and WIN 8
- Form STK-2 (Procedure for winding up a defunt or Dormant company)