Winding Up Petition Under the Companies Act: Grounds and How It Differs From IBC

Winding up is the legal process by which a company is brought to an end and its assets are sold to pay its creditors. Until the Insolvency and Bankruptcy Code, 2016, an unpaid creditor could petition for winding up on the ground that the company could not pay its debts. That landscape has changed, and many creditors and shareholders are unsure which route is open to them.

Who Hears a Winding Up Petition?

Under the Companies Act, 2013, winding up of a company by the Tribunal is a matter for the National Company Law Tribunal. The provisions are in Sections 270 to 365. Earlier, winding up petitions were heard by High Courts under the Companies Act, 1956. Pending cases were transferred to the NCLT, and new petitions are filed before the NCLT bench with jurisdiction over the registered office, which for Tamil Nadu is the NCLT Chennai Bench.

What Are the Grounds Under Section 271?

Section 271 lists the circumstances in which the Tribunal may wind up a company. The grounds include:

• A special resolution of the company that it be wound up by the Tribunal
• Acting against the sovereignty, integrity or security of India, or against public order, decency or morality
• Fraudulent conduct of the company's affairs, or formation for a fraudulent or unlawful purpose
• Default in filing financial statements or annual returns for five consecutive financial years
• The Tribunal's opinion that it is just and equitable that the company be wound up

The ground of inability to pay debts, which was the usual creditor's ground under the earlier law, no longer sits in Section 271 in the same way. That subject was moved into the IBC when the Code was enacted, and the Code's Eleventh Schedule made consequential amendments. A creditor who wants to proceed against a defaulting company must therefore usually do so under the IBC, which has its own threshold and procedure.

Who Can File?

Section 272 permits a petition by the company, by any contributory (a shareholder or person liable to contribute), by the Registrar, by a person authorised by the Central Government in the case of certain grounds, and by the Central or a State Government in the case of the sovereignty and public order ground. The Registrar and the government generally rely on the grounds of fraud, non-filing and public interest. A shareholder who petitions usually relies on the just and equitable ground.

What Does Just and Equitable Mean?

This ground is used where the company's substratum has gone, or where the relationship between the members has broken down so that the company cannot function. It is most often applied to closely held companies that are run like partnerships, where members trust and participate in management, and one is excluded or the deadlock is complete. The courts treat it as an exceptional remedy, and the Tribunal can instead choose a less drastic remedy, which is why many shareholder disputes proceed under the oppression provisions. Our guide to oppression and mismanagement explains how that remedy works and why it is often preferred.

How Does Winding Up Differ From IBC?

The two regimes have different purposes and operate differently:

• Purpose: winding up ends the company; the IBC aims first at resolution and revival, with liquidation as a last resort
• Trigger: Section 271 grounds for winding up; default above ₹1 crore for the IBC
• Control: a liquidator in winding up; a resolution professional and creditors' committee in the IBC
• Outcome: sale of assets in winding up; a possible revival plan under the IBC

Because the IBC process is time-bound and creditor-driven, it has become the main route for creditors. A petition under the Companies Act that is, in substance, an attempt to recover a debt is unlikely to succeed, and courts have been wary of its use to get around the IBC threshold. For debts below the threshold, the better route is a recovery suit, as explained in our overview of recovering dues from a company that is not paying.

What Happens After a Winding Up Order?

When the Tribunal orders winding up, it appoints an official liquidator or company liquidator, who takes custody of the assets, examines the company's affairs and claims, and distributes the proceeds in the statutory order of priority. Secured creditors, workmen's dues and the costs of liquidation have priority, and unsecured creditors, including trade creditors, come later and often recover little. From the date of the winding up petition, any disposal of the company's property or transfer of shares can be void, so a petitioner can ask for interim orders to preserve assets. On a winding up order, suits against the company generally require the leave of the Tribunal.

What About Strike-Off and Voluntary Winding Up?

Not all closures are by the Tribunal. A solvent company can be wound up voluntarily under the IBC's provisions for voluntary liquidation, and a defunct company can apply to be struck off under Section 248. These routes are for companies that have no disputes and can settle their affairs. If a creditor has a claim, a voluntary closure should not extinguish it, and creditors should object if a company seeks to be struck off while owing them money.

Choosing between insolvency, winding up and a recovery suit depends on the debt, the dispute and the company's condition. Our NCLT & Corporate Litigation practice advises on all three, and you can request a consultation. For the insolvency route in detail, see our guide to IBC Section 9.