Winding Up vs. Bankruptcy

Before we start over Winding Up and Bankruptcy, let us understand the meaning and then the difference between the two. Starting here with the term “Winding Up”, it is simply a process of dissolving a company during which the company ceases to do its business as usual. The life of the company is brought to an end and the property is administered for the benefit of its members and creditors.

Administration of property here refers to the appointment of a liquidator who realizes the assets and properties of the company and applies them in payment of its debts. Upon satisfaction of debts, the remaining amount often known as the surplus amount is applied for returning the sums to its members which they have contributed to the company as specified in the Article of Association of the company.

Moreover, winding up does not bring the legal existence of the company to an end instead it continues to exist as a legal entity i.e., the name of the company still appears in the Register of Companies. However, after the process of winding up is completed, the legal existence can come to an end only if the Court orders dissolution of the company. Subsequently, the day-to-day affairs of the company cease to exist, and the name gets struck from the Register of Companies which in other words means no business can be conducted in the name of that company.

On the other hand, when we talk about bankruptcy, what comes to our mind is a person’s inability to pay his outstanding debts. It is something that people do not want to talk about. In India, there is a social stigma attached to this term. Similarly, when a company or an organization is unable to honor its financial obligations or make payment to its creditors, it goes bankrupt and files for bankruptcy. As soon a bankruptcy is filed, it puts an automatic stay on all your creditors.

The court might accept or reject the application filed for bankruptcy after analyzing whether all the conditions for filing bankruptcy have been fulfilled or not. Upon acceptance of the application, the property goes in the hand of the receiver duly appointed by the court. Once the process of compromise or distribution of assets among the creditors is completed, the court discharge you from the state of bankruptcy, and you are all set to build yourself again.

Coming to the difference between these two, both are completely different. One of the significantly contrasting features of the two is that in bankruptcy proceedings, the property of the bankrupt passes to a trustee appointed by a court to sell the property in order to pay off the debts of the bankrupt party. However, in a winding up of a company, all the assets of the company remain with the company until its dissolution, unless disposed of while winding up by the liquidator. A company liquidator in case of winding up by the Tribunal is appointed by the Tribunal itself whereas, in case of voluntary winding up, the company or creditor appoints the company liquidator.

If we talk about bankruptcy in India, it is very common since the risk appetite of Indian households is moderately high which exposes them to debt. This in turn gives rise to delinquencies and then bankruptcies tend to grow demanding an effective bankruptcy law that can help thousands of borrowers to repair and revive their financial lives.

Contrary to the above, winding up in India is opted by companies when they are left with no other option and there does not seem any mode through which they can be revived. It is because, in the end, the company is left with no assets and liabilities. As soon as the liquidator is appointed, all the powers of the directors, chief executives, and other officers tend to cease. Only the powers to give notice of resolution and the power of appointment of the liquidator upon winding up of the company are given to the members.

There are several other things that come under the parlance of these two terms – Winding Up and Bankruptcy but before we end up with this, it can be said that “Winding up a business is not the same as bankruptcy, although it is usually an end result of bankruptcy”.

Need compliance guidance?

Do let us know at info@cs-india.com

Share this post?

Team MN & Associates