The Various Grounds Of Winding-Up Of Company
Various Grounds of Winding-Up of a Company
Winding-up (also called liquidation) is the process of dissolving a company by selling its assets to pay off creditors and distributing any remaining funds to shareholders.
Winding-up can be voluntary (initiated by the company itself) or compulsory (ordered by a court).
Common Grounds for Winding-Up a Company
1. Inability to Pay Debts
If the company is unable to pay its debts when due, it may be wound up.
This can be proved by:
Creditor demanding payment of ₹1,000 or more and company failing to pay within 3 weeks.
Execution of a decree against the company remains unsatisfied.
If company is generally unable to meet its debts.
2. Special Resolution by Shareholders
The company’s members may pass a special resolution to voluntarily wind up the company.
This usually happens when the company has fulfilled its purpose or continuation is not feasible.
3. Expiration of the Period Fixed in the Memorandum
If the company was formed for a specific period, it is wound up once the period expires.
Unless members resolve to continue, winding-up follows.
4. Failure to Commence Business
If the company does not commence its business within one year of incorporation or suspends business for a whole year, it can be wound up.
5. Just and Equitable Grounds
The court may order winding-up if it is just and equitable to do so.
Examples:
Deadlock in management making it impossible to continue.
Loss of substratum or purpose for which company was formed.
Fraud, misconduct, or mismanagement affecting company affairs.
6. Default in Filing Annual Returns or Accounts
Continuous failure to comply with statutory requirements may be a ground for winding-up.
7. Reduction of Members Below Statutory Minimum
For public companies, if members fall below the statutory minimum (usually 7 members) for a certain period, it may lead to winding-up.
Summary Table
| Ground | Explanation |
|---|---|
| Inability to pay debts | Company unable to meet financial obligations |
| Special resolution by members | Members voluntarily decide to wind up |
| Expiry of fixed duration | Company formed for fixed period which has ended |
| Failure to commence business | Company not started business within prescribed time |
| Just and equitable grounds | Court discretion due to deadlock, fraud, or mismanagement |
| Default in statutory compliance | Non-filing of returns, accounts |
| Reduction in number of members | Number of members falls below legal minimum |
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