Companies may be wound up in accordance with the provisions of the Companies Act and the Companies Winding up Rues. Winding up of a company may be either by court, voluntarily, or subject to the supervision of Court.
Winding up by Court –
A company may be wound up by Court, if the company has, by special resolution, resolved that the company be wound up by the Court, the company is unable to pay its debts as defined in the Companies Act, the company does not commence its business within year from its incorporation or suspends its business for one year, or the Court is of the opinion that it is just and equitable that the company should be wound up.
Briefly, an application to Court for the winding up of a company is by way of Petition presented either by the company or by the creditor(s), contributory(ies) (i.e., shareholders) of the company and supported by an affidavit verifying the facts contained in such petition. Parties either supporting or objecting to the application to wind up the company are provided the opportunity to make submissions to court.
The Court may appoint a liquidator provisionally at any time after receiving the winding up application to maintain the status quo of the company. The powers of the directors of the company cease upon the appointment of a provisional liquidator.
In the matter of a winding up by Court, a company shall be deemed to be unable to pay its debts where-
- a creditor by assignment or otherwise, to whom the company is indebted in a sum exceeding Rs.50,000/- then due, has served on the company by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due and the company has from 3 weeks from the date of so leaving, neglected to pay the sum or to secure or compound it to the reasonable satisfaction of the creditor;
- execution or other process issued on a judgment, decree or order of any Court in favour of the creditor of the company, is returned unsatisfied in whole or in part; or
- it is proven to the satisfaction of the Court that the company is unable to pay its debts and in determining whether the company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
The procedure for the filing of a winding up Petition is prescribed by “The Companies Winding Up Rules 1939”.
The application for the winding up of a company would necessarily give rise to the appointment of a Liquidator by Court entrusted with inter alia liquidating the assets of the company, making compromises and/or arrangements with creditors of the company and the settling of all liabilities and the division of any surplus assets amongst the contributories of the company.
Voluntary Winding Up –
A company may be wound up voluntarily where, inter alia, –
- the company resolves by special resolution that the company be wound up voluntarily; or
- where the company resolves by special resolution to the effect that it cannot by reason of its liabilities continue its business and that it is advisable to wind up.
Where it is proposed to wind up a company voluntarily, the Directors of the company, or in the case of a company having more than 2 Directors, the majority of the Directors may at a meeting of the Directors, make a statutory declaration to the effect that they have made a full inquiry into the affairs of the company and that they are of the opinion that the company will be able to pay its debts in full within such period not exceeding 12 months, from the date of commencement of the winding up as may be specified in the declaration.
Such declaration should be made within 5 weeks immediately preceding the date of the passing of such resolution for winding up of the company and should be delivered to the Registrar of Companies for registration by that date embodying a statement of the company’s assets and liabilities as at the latest practicable date before the making of such declaration.
Thereafter, the company at a general meeting shall appoint one or more liquidators for the purposes of winding up its affairs and distributing the assets of the company. On the appointment of a liquidator(s), all the powers of the directors shall cease, except so far as the company in general meeting or the liquidator sanctions the continuance thereof.
If the company sought to be wound up is a BOI approved company, prior notification would have to be given to the BOI prior to the filing of an application for the voluntary winding up of its affairs.
This is only an overview of the applicable law, and should not be relied upon as legal advice or recommendation by D. L. & F. De Saram, a leading law firm in Sri Lanka. If you require our advice, please be good enough to contact us on [email protected]