Presidency College of Management Science

Subject : Company Law

Level : MBA

Prepared By:
CA. Bishal Bhattarai

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 Unit Ten
2

LIQUIDATION AND WINDING UP

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 Liquidation and Winding Up
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 A company is a juristic person (Legal person) that comes into
existence by way of incorporation and can be dissolved by
undertaking winding-up process as per the provisions of the
Companies Act, 2063
 Whether a company is solvent or insolvent, obligations to
customers, suppliers and employees must be brought to a close
(wound up). All the company’s affairs are put in order prior to
liquidation.
 The winding up process is the last stage in the life of a company,
wherein its existence is dissolved and all its assets are used to
satisfy the creditors and shareholders.
 Winding up means the total process to bring the company to an end
while liquidation is just a part of this complete process, which is
basically realization of assets and discharging the liabilities.

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 Liquidation and Winding Up
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 The process involves realization of assets and the amount that one
gets is used to pay the debts while the remaining amount is
distributed amongst the members as per their respective rights.
 When a company makes the decision to go out of business, it
generally cannot simply close its doors the instant it makes that
decision. Most businesses have long-term obligations to it creditors,
employees, suppliers and customers as well as landlords and
various other parties.
 A company will have to take time to end these relationships and
handle any obligations it has to various stakeholders before it can
close its doors.
 Winding up of a company is the process whereby its life is ended
and its property is administered for the benefit of its creditors and
members.

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 Liquidation and Winding Up
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 The court appoints an administrator, called a ‘liquidator’, who takes

control of the company, takes possession of its assets and finally
distributes any surplus among the shareholders in accordance with
their respective rights.
 Winding Up involves ending all business affairs whilst Liquidation
involves selling off company assets.

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 Reasons for winding up a company
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 Company has ceased business activities

 Management deadlock
 Oppression – (mismanagement)
 Corporate or financial restructuring of the group to which the company belongs
(Merger/ amalgamation)
 Minimize tax liabilities or maximize tax advantages for the group to which the
company belongs
 Breach of statutory provisions, including offences committed
 Company acting outside its scope of activities

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 Types of Liquidation
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Members’ Voluntary Liquidation (MVL)

Compulsory Liquidation

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 Members’ Voluntary Liquidation (MVL)
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Chapter 10, Sec 162 of Companies Act, 2063

By passing SR on General meeting or as mentioned

in AOA/MOA/Consensus Agreement
Conditions:
 Company is solvent- able to pay its debt
 No cases is pending on review of its insolvency
 Director of company made a declaration that company can
fully pay its debts and obligations within one year
 Such declaration is presented in meeting of shareholders
 Send such SR to OCR within 7 days

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 Process of Voluntary Liquidation
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 Pass SR
 Appoint a Liquidator- having valid license under law
 Fix remuneration of Liquidator
 Give information of appointment of Liquidator within 7 days
 Directors will handover power and operation of company to
liquidator
 Services of employees is terminated
 Liquidator may appoint employee to support and assist him
 Liquidator has to finish duty within prescribed time or request for
extension of period
 An auditor is also required to be appointed with appointment of
liquidator

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 Process of Voluntary Liquidation
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 While the liquidator commences proceeding of liquidation and
found that the company is insolvent and unable to discharge its full
liabilities shall make an application to have review of insolvency of
the company under the Insolvency Act.
 Power of liquidator to take into his custody and under his control
property of company.
 The liquidator shall exercise all powers and duites during the
liquidating proceeding.
 At the completion of liquidation proceedings, to prepare a report on
the properties recovered, payments made to the creditors and
distribution made to the shareholders on behalf of company,
and submit such report certifying that the company has been
liquated, accompanied by the auditor's report, to the Company
Registrar.
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 Process of Voluntary Liquidation
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 Upon received by the Company registrar Office of a report on the
liquidation of company, Office shall strike the name of the company
from its register and publish in a national daily newspaper a notice
that such company has been dissolved.

 Any creditors/shareholders shall make complaint against the

liquidator in the Court if any illegal or wrongful action has been
done by such liquidator.

 If a liquidator found that any director, officer, shareholder or

employee of a company has committed a fraud or deception
against the company, the liquidator may take necessary legal
action against such person.

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 Functions, duties and powers of liquidator
(Powers)
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 To institute or defend any case or legal action on behalf of the
company
 To appoint employees to assist in the discharge of his or her
functions
 Where any installment on any share of the company is due, to
make a call on the shareholder for payment of such
installment
 To do and execute, or cause to be done and executed, all
such acts and deeds or documents as required to be done
and executed on behalf of the company and in the name of
the company and use the seal of the company for that
purpose

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 Functions, duties and powers of liquidator
(Powers)
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 To borrow loans against security of the assets of the company

 Where the liquidator considers that the sale and disposal of any property
or termination of any contract or liability will render benefits to the
company, to sell and dispose of such property or terminate such contract
or liability;
 To enter into compromise with any creditor of the company or any person
who claims to be a creditor of the company in relation to the claim made
by such creditor or person;
 To enter into compromise with any person against whom the company
may make a claim in relation to any loan, liability or any other claim;
 To sell the assets of the company and distribute the proceeds of such
sale, and
 To perform, or cause to be performed, all such other acts as may be
necessary to liquidate the company.

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 Functions, duties of liquidator
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 To collect, protect and sell the assets of the company
 To examine the business and financial situation of the company
 To accept debt claim of any creditor
 To distribute the proceeds of sale of the assets of the company subject to
the order of priority determined for the payment of liability
 To call and conduct the meeting of creditors;
 To prepare a report on his or her acts and actions and present it to the
Office
 To facilitate the cancellation of registration of the company;
 and
 To examine or inquire into whether any director or employee or
shareholder of the company or any person has committed any fraud,
cheating or deception against the company or its creditors and institute
necessary legal action against such person.

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 Winding-up (Cancellation of Registration) by
decision of Company Registrar
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 The Company Registrar Office may cancel the registration of a company
in the following circumstance:
 Promoter make application showing reason of failure to commence
business
 Company fail to submit return as per sec 80 for 3 consecutive years
 Office has a reasonable ground to believe that the company is not
carrying on its business or the company is not in operation
 Prior to cancelation, OCR shall give notice with reason and ask why registration of
company shall not be cancelled and publish notice in national news paper
 Company has to replay within 2 month
 If not replied or reply is not reasonable, OCR will cancel the registration of such
company, send notice to company and publish in newspaper
 The liability of company will remain with officers and shareholders and assets will
be realized and paid to creditors.
 If company fails to pay debt due to the reason of work of officer or shareholders,
they will be personally held liable.
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 Restoration of registration of company of
which registration was canceled
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 If shareholders/creditors make application within 5 years of cancellation of
registration, with reasons for restoration, court may allow restoration in
given cases:
 If it appears that the registration of the company was canceled while such company was carrying on its
business
 If the Court considers it to be just to restore the name of the company for the proper management of the assets
and liabilities of such company
 If restored, it is deemed to be existed from original date of incorporation
 In issuing an order, the court may issue such orders and make an order to make
such arrangements as it may consider appropriate and necessary for restoring the
company and all other persons into the status quo ante as if the registration of the
company were not canceled
 If company is liable to pay fine, it will be restored only after paying fine
 The property distributed to the shareholders at the time of cancellation (or net
proceeds if sold) shall be reverted to the company.

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 Winding-up by the Order of the Court
(Compulsory) Insolvency Act, 2063
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Key Points:
 Compulsory winding up occurs when a company is forced, by law and
usually by a court order, to appoint a liquidator, sell off its assets and
distribute the proceeds to its creditors.
 The company should be in insolvent & such insolvency should be
declared by the Board or in the transaction of the company the company
fall on insolvency
 Before liquidating a company, the Court see the possibility of arrangement
of reconstruction of company, for that the Court appoint the Inquiry Officer
and the Reconstruction manager
 The practitioner licensed liquidator is being appointed by the Court.
 The liquidation process is under supervision and control by Court

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 Procedural or Steps
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 Application to be made by only the following parties to the Court:

 • A company itself
 • At least 10% creditors of total creditors of the company
 • At least 5% shareholders, out of total paid up shareholders
 • At least 5% debenture-holders out of total debenture-holders of company
 • A liquidator who has been appointed to liquidate a company
 • In the case of a company that carries on any specific type of business, a body
authorized to administer and regulate such business ( for instance insurance or banking
business)
 Application has to be accompanied by the reason for making the
application, short description of the financial condition of the
company and evidence supporting the fact that the company has
become insolvent

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 Company deemed to have become insolvent if-
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 The general meeting of shareholders adopts a resolution that the
company has become insolvent or a meeting of the board of directors of
the company makes such decision,
 The Court issue an order requiring the company to pay the debt and the
debt is not paid up within 35 days from the date of receipt by the company
of such order, then Inquiry is made by the Court to find out whether
company is falling in insolvency or not.
 If the report is summited that the company is in insolvency then the court
give order the company to pay its debt or other financial obligation.
 if the company is unable to pay its debt to its creditors/ debenture-holders
or other financial obligation as per the order made by Court, then the
liquidation process of company is proceed.
 The Court order to appoint the inquiry officer to find out the actual assets
& liabilities & financial position of the company & the liquidator submit
report stating company is insolvent (refer previous chapter for entire
process with inquiry officer)
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 Purpose of Liquidation
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 to ensure a just distribution of the company's assets among creditors and

contributories
 to terminate the company's existence by its eventual dissolution

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 Appointment of liquidator and his functions
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a) Realisation of assets
Company’s assets that may be realised by a liquidator include:
 Cash in hand and in the banks and all other financial institutions
 Book debts disclosed in the Statement of Affairs
 Sale of office fittings and properties owned by the company
 Call of unpaid capital
 Recovery of assets from dispositions made by the company.
 It must be noted that the liquidator shall not be liable to incur any
expenses in relation to a winding up unless there are sufficient available
assets.
 A creditors' meeting may be convened for the purpose of obtaining the
creditors' consent to pursue a claim that is worth pursuing and to meet the
expenses of pursuing such a claim. Such claims would include
undertaking legal proceedings for recovery of moneys

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 Appointment of liquidator and his functions
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b) Adjudication and admission of claims of the
creditors

 Creditors may file their Proofs of Debt with the liquidator once the
company is in liquidation.

 The claims are then adjudicated and admitted or rejected accordingly. If

any claim is rejected either in part or in whole, the liquidator will send a
notice of rejection to the creditor, stating his reasons for the rejection. Any
creditor who is dissatisfied with the liquidator’s decision may appeal to the
Court within 21 days to set aside the liquidator’s decision.

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 Appointment of liquidator and his functions
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c) Prosecution of company officers
 Apart from the prosecution of directors or officers who fail to file the Statement
of Affairs, delinquent directors and officers of the company in winding up can
also be held liable for a range of offences including falsification of books,
failure to keep proper accounts and fraudulent trading.
 In addition, delinquent officers can also be made personally liable in damages
for misfeasance or breach of trust against the company on the application of
the liquidator to the Court for assessment of damages against guilty officers,
and the Court may also direct that prosecution be instituted for any criminal
liability on the part of the officers found liable.
 In general, directors are not liable for company's debt. but If they have made a
personal guarantee to a company creditor/s then they may be called to pay
this under their guarantee.
 If the director has acted in breach of the insolvency legislation then they could
potentially face fines or orders to repay monies to the company.

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 Appointment of liquidator and his functions
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d) Distribution of assets
 While settling the liabilities of a company which is being liquidated under
Insolvency Act, the liquidator shall make payment of liabilities from the
available funds according to the following order of priority:
 Expenses of enquiry officer
 Expenses of restructuring manager
 Expenses of liquidator
 Wage/ Remuneration payable to staff/employees (not to director)
 Amount payable to employee / workers ( PF, Gratuity, Pension, etc )
 Government dues
 Secured Debt- to the extent amount is covered by the security
 Unsecured Debt
 Preference Shareholders
 Equity shareholders

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 Appointment of liquidator and his functions
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e) Release and dissolution
 Upon the completion of the liquidation, the liquidator applies to the Court for
the company to be dissolved and to be released as liquidator where it
discharges the liquidator from all liability in respect of his conduct in the course
of winding up.
 The company’s operations are brought to an end, and its assets are divided
up among creditors and shareholders, according to the priority of their claims

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