Winding up

Winding up, Dissolution & Liquidation of Companies: The Difference

A company tends to exist, till the time it commits the process of voluntary wind up or is legally bound to close its business completely. In relation to company closure, some people confuse the term winding up with liquidation. Winding up of company means either with the self-belief of members or on receiving legal directions, the company ends its business affairs and terminates the company’s obligations with the other world agencies.  On the other hand, the dissolution means the winding up of the company without going into all legal formalities but a shortcut way out to close down a company.

While liquidation can be called a special activity of a company, do to either discharge the company’s liabilities or on directions of any legal authority not compulsorily taking the business to an end. In short, liquidation is just selling the business assets and turning them to cash or cash equivalents to fulfill claims of the company’s creditors.

The post gives you a brief view of the key differences between the terms “Winding up”, “Liquidation”  and “Dissolution” in relation to the closure of a company.

Winding up of Companies 

A company can go completely out of its business affairs on receipt of Wind up notice from the tribunal or with the voluntary concern of the company members. In the Companies Act, Section 270 to 323 prescribes the rules and procedures applicable during the wind-up or dissolution process of the company. According to the act, a company has to wind up its business completely if :

  • It fails to pay its debts exceeding Rs 1 lakh.
  • It is unable to operate or is incapable of reviving the business of the company from losses.
  • It is formed in any fraudulent manner
  • It fails to follow due diligence related to the company with the authorities.
  • If the tribunal or the members of the company seems the opinion of wind up fit for the company in good faith.
  • If declared involvement or bankrupt under the Insolvency and Bankruptcy Code.

In case of winding up of the company by the Tribunal

The process of winding up of the company requires the filing of a petition with the tribunal after receipt of wind up notice. The tribunal issues directions for placing a liquidator to sell off assets of a business and pay off the company liabilities. After receipt of liquidator reports, the tribunal undertakes the analysis of the company’s further involvements in frauds or criminal suits pending against the company and takes the windup process further until the company is finally dissolved.

In case of voluntary winding up of a company

For voluntary winding up of company, it requires passing of a special resolution and appointment of a liquidator for selling off company assets and prepares liquidation reports of the company. With all procedures followed and reports prepared, they are to be submitted to the Registrar of Companies for removal of company name from government records and for completion of the windup/dissolution of company.

Note: The process of selling assets and paying off company liabilities is undertaken by the liquidator under the liquidation process. So, liquidation is a part of the wind-up process of a company.

Dissolution of Company

Generally, a company is wound up by making an application to the National Company Law Tribunal (NCLT) and upon satisfaction of compliance and consent of interested parties is taken, the dissolution order is sanctioned. Such an order has the following implications:

Whereas in other cases, the company has been dissolved under the scheme of reconstruction or amalgamation. Such an order has the following implications:

  • The company has not applied for winding up of the company rather taken over under the scheme of reconstruction or amalgamation.
  • The winding-up application need not be made for such dissolution.

Liquidation of Companies 

A company can only be discharged of its duties and responsibilities when it is fully dissolved with no obligations or no credit claims pending against the company. Liquidators being a part of the company’s dissolution/windup process undertake the liquidation of companies. Liquidation of a company involves selling off assets of the company, paying off its liabilities and preparation of liquidation report by the liquidator appointed, and submitting it to the tribunal or the winding-up committee for taking the windup process further.

In the Companies Act, 2013, the Sections 310 to 317, 348 to 353 and 359 to 363 governs the liquidation process and provisions related to appointment, removal, powers, duties, and actions, etc of the company liquidator.

The Difference              

Particulars Winding up of Company Liquidation of Company Dissolution of the company
1.    Meaning To completely dissolve the company and no further operations can be done in the name of the company To dispose of assets or properties or both of the company to pay off its liabilities. To completely dissolve the company and no further operations can be done in the name of the company. Or in other cases, will be carried in another company name
2.    Moderator NCLT (National Company Law Tribunal) or The Winding-up Committee of Company Liquidator (appointed by company or tribunal.) NCLT (National Company Law Tribunal)
3.    Continuity After completion of the windup process, the company cease to exist in the legal environment After completion of the liquidation process, the company is further detained for civic liabilities or further searches or analyses by different authorities’.So, the company tends to exist in the environment even after completion of the liquidation process. After an order of dissolution, the company ceases to operate.
4.    Activities included Filling of resolution/ petition, the appointment of the liquidator, receipt of declarations, preparation of reports, disclosures to Registrar of Companies, etc Appointment of a liquidator, selling off company assets, payment of liabilities and preparation of liquidation report. Filing of resolutions, declarations and other documents as required to complete the procedural formalities.

To conclude, liquidation does not alone result in the death of the company. It is necessary to complete the windup process for completion of the dissolution of the company whereas the dissolution is closing down the company without proper formalities. Hence, all these terms are interrelated but if considered in respect of time and sequence but cannot use interchangeably.

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