Effect of a Winding Up Order: Section 278

The effect of a winding up order is set by four sections working together, and none of them is about liquidating anything. Section 278 makes the order everybody's. Section 279 shuts down litigation against the company. Section 280 gathers the disputes into one forum. Section 277 sends the notices and, in one sentence, discharges the staff. This page reads all four as printed in the Companies Act, 2013.

What is the effect of a winding up order on creditors and contributories?

It converts one person's petition into everyone's remedy. Section 278 reads, in full: 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.

The consequence is practical. A creditor who never petitioned does not need his own order, and a contributory who opposed the petition is inside the same process as the one who brought it. Which of the six classes in section 272(1) actually filed the petition stops mattering for whom the order runs in favour of, whatever else it decides.

Section 283 then moves the property. Sub-section (1) requires the Company Liquidator or provisional liquidator, on the Tribunal's order, to forthwith take into his or its custody or control all the property, effects and actionable claims to which the company is or appears to be entitled. Sub-section (2) goes further: Notwithstanding anything contained in sub-section (1), all the property and effects of the company shall be deemed to be in the custody of the Tribunal from the date of the order for the winding up of the company. Custody vests in the Tribunal by deeming, whether or not the liquidator has physically taken anything.

What happens to pending and future litigation?

It stops, unless the Tribunal lets it run. Section 279(1) applies When a winding up order has been passed or a provisional liquidator has been appointed, so the stay can bite before any winding up order exists. From that point 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.

Two features of that sentence are worth marking. The bar runs in both directions, by or against the company, so the liquidator cannot simply continue the company's own suits either. And leave can come with conditions, since it is subject to such terms as the Tribunal may impose.

The proviso puts a clock on the gatekeeping: any application to the Tribunal seeking leave under this section shall be disposed of by the Tribunal within sixty days. Section 279(2) then carves out the apex courts: Nothing in sub-section (1) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court.

Which court hears what, once the order is made?

The Tribunal, on a jurisdiction clause that overrides other law. Section 280 was substituted by Act 31 of 2016, section 255 and the Eleventh Schedule, with effect from 15 November 2016, and now reads that the Tribunal shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of:

• (a) any suit or proceeding by or against the company;
• (b) any claim made by or against the company, including claims by or against any of its branches in India;
• (c) any application made under section 233, headed Merger or amalgamation of certain companies, which covers a scheme between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed;
• (d) any question of priorities or any other question whatsoever, whether of law or facts, including those relating to assets, business, actions, rights, entitlements, privileges, benefits, duties, responsibilities, obligations or in any matter arising out of, or in relation to winding up of the company.

The closing words of the section make the timing irrelevant: the jurisdiction holds whether such suit or proceeding has been instituted, or is instituted, or the claim or question has arisen or arises, or the application or scheme has been made or is made or submitted, or is submitted, before or after the order for the winding up of the company is made. Clause (d)'s reference to questions of priorities is what brings a preferential payments dispute into the same forum as the winding up itself.

Who gets told, and what does the order do to the staff?

Section 277 handles both, and the second answer sits in a single sub-section.

Intimation. Under sub-section (1) the Tribunal has a period not exceeding seven days from the date of passing of the order to intimate the Company Liquidator or provisional liquidator and the Registrar. Under sub-section (2) the Registrar shall make an endorsement to that effect in his records, notify in the Official Gazette that the order has been made, and, in the case of a listed company, intimate the appointment or order to the stock exchange or exchanges where the securities of the company are listed.

Discharge. Sub-section (3) reads: The winding up order shall be deemed to be a notice of discharge to the officers, employees and workmen of the company, except when the business of the company is continued. No separate notice is required, and the exception is narrow: it applies where the business is continued, which section 290(1)(a) permits so far as may be necessary for the beneficial winding up of the company.

What is the winding up committee, and what does it do?

It is a monitoring body the liquidator has to ask for. Section 277(4) requires the Company Liquidator, within three weeks from the date of passing of winding up order, to apply to the Tribunal for constitution of a winding up committee to assist and monitor the progress of liquidation proceedings. Its membership is fixed by the sub-section at three: (i) Official Liquidator attached to the Tribunal; (ii) nominee of secured creditors; and (iii) a professional nominated by the Tribunal.

Section 277(5) makes the Company Liquidator the convener of the meetings and lists the nine liquidation functions the committee assists and monitors: taking over assets; examination of the statement of affairs; recovery of property, cash or any other assets including benefits derived therefrom; review of audit reports and accounts; sale of assets; finalisation of list of creditors and contributories; compromise, abandonment and settlement of claims; payment of dividends, if any; and any other function the Tribunal may direct. The statement of affairs filed under section 274 is therefore examined by the committee, not only by the liquidator.

Reporting is monthly. Under sub-section (6) the liquidator shall place before the Tribunal a report along with minutes of the meetings of the committee on monthly basis duly signed by the members present, and that continues till the final report for dissolution of the company is submitted. Sub-sections (7) and (8) then route the endgame through the committee: the liquidator prepares the draft final report for its approval, and the approved report goes to the Tribunal for passing of a dissolution order, which is the section 302 dissolution machinery.

From what date do the effects run?

Two different dates are in play, and they are not interchangeable.

Section 357 states that the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up. Look-back periods keyed to commencement therefore start earlier than the order does, including the contributory holding test in section 272(2) and the one year cesser rule for past members in section 285(3)(a), which the list of contributories applies.

So the effect of a winding up order is best read as four separate switches thrown on one day: the order becomes the whole body's under section 278, litigation freezes under section 279, every related question lands before the Tribunal under section 280, and the staff are discharged under section 277(3) unless the business goes on. The grounds the order was made on do not change any of them.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.