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Company Law Unit 5 Winding Up
Company Law Unit 5 Winding Up Notes cover all the exercise questions in UGC Syllabus. Company Law Unit 5 Winding Up provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.
Winding Up
COMPANY LAW
| VERY SHORT QUESTION & ANSWERS |
1. Who can file a petition for winding up under section 272?
(a) Company.
(b) Contributory.
(c) Registrar.
(d) All of the above.
Ans: (d) All of the above.
2. ___________ has powers to wind up a company under Companies Act 2013.
Ans: Tribunal.
3. Upon receipt of petition for winding up, the Tribunal shall pass an order within ____________ days of presentation of petition.
Ans: 90.
| SHORT QUESTIONS AND ANSWERS |
1. What are the various modes which a company can be dissolved under Companies act?
Ans: Winding up is one of the manners in which a company comes to an end of its existence but it is interesting to have a look over various modes of dissolution of a company under Companies act 2013.
(i) Compulsory winding up under the Insolvency and Bankruptcy Code, 2016 (due to inability to pay debts).
(ii) Compulsory winding up under section 271 of the Companies Act, 2013 (reason other than inability to pay debts).
(iii) Dissolution in a scheme of merger under section 230 to 240 of the Act, 2013.
(iv) Dissolution by striking off the name of a defunct company under Companies Act, 2013.
2. Who can file a petition for winding up?
Ans. According to Section 272, a petition to the Tribunal for the winding up of a company shall be presented by-
(i) The company.
(ii) Any contributory or contributories.
(iii) All or any of the persons specified in clauses (a) and (b).
(iv) The Registrar with previous approval of Central Government.
(v) Any person authorized by the Central Government on that behalf. or
(vi) In a case falling under clause (b) of section 271, by the Central Government or a State Government.
| LONG QUESTIONS AND ANSWERS |
1. What are the circumstances in which a company may be wound up by a Tribunal?
Ans: According to Section 271 of Companies Act, 2013, a company may, on a petition under section 272, be wound up by the Tribunal,-
(i) If the company has, by special resolution, resolved that the company be wound up by the Tribunal.
(ii) If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.
(iii) If on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up.
(iv) If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years.
(v) If the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
2. State the powers of Tribunal when a winding up petition is made.
Ans: On receipt of a petition for winding up under section 272, NCLT can make following orders:
(a) Dismiss it, with or without costs.
(b) Make any interim order as it thinks fit.
(c) Appoint a provisional liquidator of the company till the making of a winding up order.
(d) Make an order for the winding up of the company with or without costs.
It is important to note that the Tribunal shall pass its order within 90 days from the date of presentation of the petition.
(a) Where a petition for winding up is filed before the Tribunal by any person other than the company, the Tribunal shall, if it is satisfied that a prima facie case for winding up of the company is made out, by an order directing the company to file its objections along with a statement of its affairs within 30 days of the order in such form and manner as may be prescribed.
(b) However, the Tribunal may allow a further period of 30 days in a situation of contingency or special circumstances.
(c) The Tribunal may direct the petitioner to deposit such security for costs as it may consider reasonable as a precondition to issue directions to the company.
According to Section 275 of the companies act, where the Tribunal makes an order for winding up of a company, the Tribunal shall appoint the Company Liquidator for the purpose of winding up of the company.
The Company Liquidator shall be either-
(a) The Official Liquidator appointed by the Central Government as per section 359. or
(b) A person who is registered as an insolvency professional under the Insolvency and Bankruptcy Code, 2016.
3. State the duties of the liquidator during the process of winding up?
Ans: Under Section 209 of Companies Act, 2013, the liquidator shall have following duties:
(i) Reporting to NCLT:
(a) Submission of report by Company Liquidator: Where the Tribunal has made a winding up order, the liquidator shall, within sixty days from the order, submit to the Tribunal a report containing following particulars.
(i) Nature and details of assets of company.
(ii) Amount of capital issued, subscribed and paid up.
(iii) Debts due from the company.
(iv) Guarantee, if any.
(v) Such other particulars as may be prescribed.
(b) Submission of periodical reports to Tribunal: The Company Liquidator shall make periodical reports to the Tribunal and in any case make a report at the end of each quarter with respect to the progress of the winding up of the company in such form and manner as may be prescribed.
(ii) With respect to Records:
(a) The Company Liquidator shall keep proper books in such manner, as may be prescribed, in which he shall cause entries or minutes to be made of proceedings at meetings and of such other matters as may be prescribed.
(b) The Company Liquidator shall maintain proper and regular books of account including accounts of receipts and payments made by him in such form and manner as may be prescribed.
(iii) With respect to meetings of creditors/contributories: The Company Liquidator-
(a) May summon meetings of the creditors or contributories, whenever he thinks fit, for the purpose of ascertaining their wishes. and
(b) Shall summon such meetings at such times, as the creditors or contributories, as the case may be, may, by resolution, direct, or whenever requested in writing to do so by not less than one-tenth in value of the creditors or contributories, as the case may be.
4. What will be the effect of winding up Order by Tribunal?
Ans: The effect of winding up Order by Tribunal shall be:
(i) Will be treated as joint petition of creditors and contributories: According to section 278 the order for the winding up of a company shall operate in favour of all the creditors and all contributories of the company as if it had been made out on the joint petition of creditors and contributories.
(ii) Stay of suits and legal proceedings: According to section 279 no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, by or against the company, except with the leave of the Tribunal and subject to such terms as the Tribunal may impose once a winding order is passed or provisional liquidator is appointed.
(iii) Application for leave of commencement or continuation of any suit: Any application to the Tribunal seeking leave for commencement or continuation of any suit or other legal proceedings shall be disposed of by the Tribunal within 60 days. It is interesting to note that any appeal pending before the Supreme Court or a High Court shall not be stayed.
5. What are the provisions relating to settle the list of contributories and application of assets by tribunal?
Ans: According to section 285, as soon as may be after the passing of a winding up order by the Tribunal, the Tribunal shall.
(a) Settle a list of contributories.
(b) Cause rectification of register of members in all cases where rectification is required in pursuance of this Act.
(c) Cause the assets of the company to be applied for the discharge of its liability.
While settling the list of contributories, the Tribunal shall include every person, who is or has been a member, who shall be liable to contribute to the assets of the company an amount sufficient for.
(a) Payment of the debts and liabilities.
(b) The costs, charges and expenses of winding up. and
(c) The adjustment of the rights of the contributories among themselves.
Liabilities of past member [Section 426]:
(a) A person who has been a member shall not be liable to contribute if he has ceased to be a member for the preceding 1 year or more before the commencement of the winding up.
(b) A person who has been a member shall not be liable to contribute in respect of any debt or liability of the company contracted after he ceased to be a member.
(c) No person who has been a member shall be liable to contribute unless it appears to the Tribunal that the present members are unable to satisfy the contributions required to be made by them in pursuance of this Act.
(d) In case of a company limited by shares, no contribution shall be required from any person, who is or has been a member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as such member.
(e) In case of a company limited by guarantee, no contribution shall be required from any person, who is or has been a member exceeding the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up but if the company has a share capital, such member shall be liable to contribute to the extent of any sum unpaid on any shares held by him as if the company were a company limited by shares.
6. State the order of priorities of discharging liabilities in case of company is it being wound?
Ans: 1. Overriding Preferential Payment [Section 326]: The payments falling under this category shall be paid in priority of all other debts. Overriding Preferential Payments include:
(i) Following workmen dues:
(a) Wages/Salaries/Commission.
(b) Accrued holiday remuneration.
(c) Compensation due under Industrial Disputes Act 1947 which are payable for a period of two years preceding the winding up order shall be paid in priority to all other debts.
(ii) The following debts shall be paid in equal proportion:
(a) Workmen’s dues.
(b) Debts due to a secured creditor.
2. Preferential Payments [Section 327]: After overriding preferential payments, the liabilities under this category shall be settled. Preferential payment includes:
(i) All revenues, taxes, cesses and rates due, within 12 months immediately before the relevant date, to-
(a) The Central Government.
(b) Any State Government. or
(c) To a local authority.
(ii) All wages or salaries due for a period not exceeding 4 months within 12 months immediately before the relevant date.
(iii) All accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any other person claiming under him.
(iv) All amounts due in respect of contributions payable under the Employees’ State Insurance Act, 1948 or any other law for the time being in force during the period of 12 months immediately before the relevant date.
(v) All amounts due in respect of any compensation or liability for compensation under the Workmen’s Compensation Act, 1923 in respect of the death or disablement of any employee of the company.
(vi) All sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the employees, maintained by the company.
(vii) The expenses of any investigation held in pursuance of Sections 213 and 216, in so far as they are payable by the company.
The debts payable under this section shall rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.
| VERY SHORT QUESTIONS AND ANSWERS |
1. _____________ is a person who is in possession of or having access to unpublished price sensitive information.
Ans: Insider.
2. Any information, relating to a company or its securities, that is not generally available, and is likely to materially affect the price of the securities is called _____________.
Ans: Unpublished Price Sensitive Information.
3. Which of the following is unpublished price sensitive information?
(a) Financial results.
(b) Dividends.
(c) Change in Capital Structure.
(d) All the above.
Ans: (d) All the above.
| SHORT QUESTIONS AND ANSWERS |
1. Define the term insider trading.
Ans: Insider trading is trading/dealing of a Company’s securities by an insider on the basis of Unpublished Price Sensitive Information.
2. What do you mean by trading of securities?
Ans: “Trading” means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities.
3. Define the term insider?
Ans: “Insider” means any person who is:
(i) A connected person. or
(ii) In possession of or having access to unpublished price sensitive information.
4. What do you mean by Unpublished Price Sensitive Information (UPSI)?
Ans. Any information, relating to a company or its securities, that is not generally available, and is likely to materially affect the price of the securities is a UPSI.
It includes:
(i) Financial results.
(ii) Dividends.
(iii) Change in capital structure.
(iv) Mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other transactions.
(v) Changes in key managerial personnel. and
(vi) Material events in accordance with the listing agreement.
| LONG QUESTIONS AND ANSWERS |
1. How does Insider Trading Regulations place a restriction on communication or procurement of unpublished price sensitive information?
Ans: Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 states that:
(a) No Communication or UPvC except official communication [Reg. 3 (1)]: No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
(b) No Procurement of UPSI from Insider [Reg. 3(2)]: No person shall procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
(c) Exception to the above provisions [Reg. 3(3)]: An UPSI may be communicated, provided, allowed access to or procured, in following cases:
For open offer: UPSI may be communicated, provided, allowed access to or procured if it involves an obligation to make an open offer under the takeover regulations where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company.
Other than open offer: UPSI may be communicated, provided, allowed access to or procured if it does not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute UPSI is disseminated to be made generally available at least 2 trading days prior to the proposed transaction being effected in such form as the board of directors may determine.
(d) Execution of a confidentiality and non-disclosure agreement: The board of directors shall require the parties to execute agreements to contract confidentiality and non-disclosure obligations on the part of such parties and such parties shall keep information so received confidential, except for the purpose of sub-regulation (3), and shall not otherwise trade in securities of the company when in possession of unpublished price sensitive information.
2. Can an insider trade while he is in possession of an unpublished price sensitive information?
Ans: Regulation 4 provides that in following cases an insider can trade while he is in possession of unpublished price sensitive information:
(i) Off-market Transaction between Promoters Promoters possessing UPSI can trade in securities if all the following conditions are satisfied:
(a) They have acquired such price sensitive information without breaching regulation 3.
(b) Both parties had made a conscious and informed trade decision.
(ii) If insiders are non-individual.
A non-individual insider like Banks/ Depositories of the Company etc. can trade in securities if ALL the following conditions are satisfied:
(a) The individual possessing such UPSI is different from the individual taking the decision of trading.
(b) The individual who made the decision to trade did not have any UPSI at the time of decision making.
(c) Appropriate and adequate arrangements were in place to ensure that these regulations are not violated.
(iii) Any other case: Trading is permitted if the trades were pursuant to a trading plan set up in accordance with regulation 5.
3. State the disclosures required to be made as per Regulation 7 of SEBI (Prohibition of Insider Trading) Regulations, 2015.
Ans: The Regulation 7 of SEBI (PIT) Regulations, 2015 on the requirements of disclosures is as under:
(i) Initial Disclosures:
(a) Every promoter, key managerial person and director of every company whose securities are listed on any recognised stock exchange shall disclose his holding of securities of the company as on date of these regulations taking effect, to the company within thirty days of these regulations taking effect.
(b) Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter.
(ii) Continual Disclosures:
(a) Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.
4.State the penalties for non compliance of provisions of insider trading.
Ans: The penalties for non compliance of provisions of Insider Trading are:
(i) Penalty for insider trading under Section 24 of SEBI Act: If any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder or if any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than 1 month but which may be extended to 10 years and fine which may be extended to 25 crores or both.
(ii) Penalty for insider trading under Section 15G of SEBI Act: If any insider who either on his own or on behalf of any other person, deals in securities of a listed entities on the basis of any UPSI; or communicates any UPSI to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or counsels, or procures for any other person to deal in any securities of any body corporate on the basis of UPSI, he shall be liable to a penalty of 25 crores or three times the amount of profits made out of insider trading, whichever is higher.
5. Write a note on whistle blowing mechanism.
Ans: Any insider who observes the working of a company at close quarters, such as an employee or a vendor, is a potential whistleblower. Whistleblowing is directly correlated to enhancing corporate governance in an economy. Whistleblowing mechanism ensures that the corporates do not take personally beneficial (to a selected few) decisions at the expense of other stakeholders.
As per SEBI’s Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR Regulations), every listed company is required to create a whistleblower mechanism that enables employees, their representatives, and other stakeholders to freely communicate concerns about illegal or unethical practices. Details of the policy or the mechanism itself are to be provided on the company’s website. The Audit Committee of the Board of Directors has the responsibility of reviewing the functioning of the whistleblower mechanism. The corporate governance section of the annual report must provide information about the establishment of the vigil mechanism, the whistleblower policy and that no person was denied access to the Audit Committee of the Board.
