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Winding up Significance and different modes

What Really Is Winding Up?

By Muds ManagementPublished 2 years ago 4 min read
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The process of winding up a business is known as dissolving it. A company's operations halt while it is winding down. Its primary function is to sell shares, settle debts, and distribute any leftover assets to partners or shareholders. The phrase is most commonly used in the United Kingdom, where it is synonymous with liquidation, which is the process of turning assets into cash.

IMPORTANT TAKEAWAYS

A firm that is closing down ceases to conduct business as normal.

Its primary goal is to liquidate assets, repay creditors, and distribute any residual assets.

Although it is generally the outcome of bankruptcy, closing a firm is not the same as declaring bankruptcy.

How Does winding up of a company Works?

Winding up a firm is a legal procedure governed by corporate laws as well as the articles of association or partnership agreement of the company. Winding up can be mandatory or optional, and it can apply to both publicly and privately owned businesses.

Why Winding up of a company Is Compulsory?

A court order can lawfully compel a corporation to dissolve. In such circumstances, the firm must hire a liquidator to oversee the sale of assets and distribution of proceeds to creditors.

The court order is frequently initiated by a lawsuit filed by the company's creditors. They are sometimes the first to notice that a firm is bankrupt since their invoices have not been paid. In other situations, the winding-up is the ultimate stage of a bankruptcy action in which creditors attempt to collect money due by the firm. In any event, a firm may not have enough assets to completely pay all of its debtors, and the creditors would suffer economic losses.

Bankruptcy vs. winding up of a company

Winding up a firm is not the same as declaring bankruptcy, but it is generally the outcome of declaring bankruptcy. Bankruptcy is a legal procedure in which creditors try to get access to a company's assets in order to liquidate them to pay off debts. Although there are many forms of bankruptcy, the process can assist a firm is emerging as a new entity that is debt-free and often smaller.

A firm, on the other hand, can no longer do business as normal once the winding-up procedure has commenced. The only thing they can do is finish liquidating and distributing its assets. The firm will be dissolved and no longer exist at the completion of the procedure.

Different Modes of winding up of a company

By the Tribunal:

According to Section 271 of the Companies Act 2013, a company can be wound up by a tribunal under the following six conditions:

If the firm is unable to pay past-due payments;

If the business has decided to be wound up by the tribunal by a special resolution;

If the firm has behaved against India's integrity or morals, the state's security, or has harmed cordial ties with foreign or adjacent nations;

If the Tribunal orders the firm to be wound up under Chapter XIX;

If the Tribunal determines that the business has engaged in fraudulent operations or was created for illegal purposes, or if the individuals involved in the creation of the firm have previously been convicted of fraud;

If the firm fails to file financial statements or annual reports with the registrar for the previous five fiscal years in a row;

If the Tribunal determines that the company's dissolution is reasonable and equitable;

Voluntary winding up

The procedure for voluntary business winding up is outlined in the Insolvency and Bankruptcy Code, 2016, and applies to corporate entities. The decision to voluntarily wind up a corporation can be taken with the permission of its members, following which the liquidation process is initiated. Voluntary winding up is done with the intention of ceasing operations, liquidating and distributing assets, and paying off debts.

Winding up under the “The Fast Track Exit Scheme”:

On December 26, 2016, the Ministry of Corporate Affairs announced Section 248 of the Companies Act, 2013. The section controls the Registrar's authority to remove a company's name from the Register of Companies. This part provided an opportunity for defunct/idle companies to have their names removed from the Register. It is an open invitation for large corporations to close down a section of their non-operational companies in order to save yearly compliance fees.

Real-World Examples of Winding Up

Payless, the shoe store, for example, declared bankruptcy in April 2017, over two years before the company halted operations. Under court supervision, the business closed around 700 shops and returned approximately $435 million in debt. Four months later, the court granted it permission to emerge from bankruptcy. It continued to function until March 2019, when it unexpectedly closed its remaining 2,500 shops and declared bankruptcy once more. The cheap shoe store business shuttered its remaining locations in February 2019, essentially starting the winding-down process.

Other well-known American firms that have been liquidated or wound up include:

Circuit City, RadioShack, Blockbuster, and Borders are all part of the Borders Group.

All of the stores mentioned above were in serious financial trouble before declaring bankruptcy and agreed to liquidate.

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