NATIONAL LAW INSTITUTE UNIVERSITY BHOPAL

The Various Grounds of Winding Up of Company

Submitted To Prof. Ishaq Qureshi

Submitted By Nidhi Jain LL.M. IInd Semester. Roll No. - 2010LL.M. 41

Declaration

The text reported in the project is the outcome of my own efforts and no part of this project has been copied in any unauthorized manner and no part in it has been incorporated without due acknowledgement.

Nidhi Jain Roll No. 2010 LL.M. 41

Introduction
Winding up of a company represents the last stage in its life. In the words of Professor Gower:Winding up of company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called liquidator, is appointed and he takes control of the company collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights. 1 The assets of the company are disposed of, the debts are paid off out of the realised assets (or from contributions from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The company is not dissolved immediately at the commencement of winding up. Its corporate status and power continue. Winding up precedes dissolution.

Objective:

To understand the concept of winding up. To analyse the various grounds of winding up. To study the effect of winding up.

Research methodology
This Research Project titled the various grounds of winding up has been written using the doctrinal or principled method of research, which involves the collection of data from secondary sources, like articles found in journals and websites.

1 THE PRINCIPLES OF MODERN COMPANY LAW,647 (3rd Edn, 1969)

MODES OF WINDING UP There are two modes of winding up of a company, viz., 1. Winding up under the order of the Tribunal2 2. Voluntary winding up, which itself of two kinds, namely: (1) Members voluntary winding up, and (2) Creditors voluntary winding up.

1. WINDING UP BY THE TRIBUNAL Winding up of a company under the order of a Court is also known as compulsory winding up.
GROUNDS FOR COMPULSORY WINDING UP (Section 433)

A company may be wound up by the Court in the following cases: 1. Special resolution of the company If the company has, by special resolution, resolved that it be wound up by the court. The court is, however, not bound to order winding up simply because the company has so resolved. The power is discretionary and may not be exercised where winding up would be opposed to the public or companys interests.
2 Substituted for court by companies (second amanement )act,2002 (11 of 2003),

In Bombay Metropolitan Transport Corpn Ltd v. Employees3 where the company itself was the petitioner and the financial position of the company was eroded, the court ordered for its winding up in public interest. 2. Default in delivering the statutory report to the Registrar or in holding statutory meeting If a company has made a default in delivering the statutory report to the registrar or in holding the statutory meeting, it may be ordered to be wound up. A petition on this ground can be made either by the Registrar or by a contributory. In the latter case the petition for winding up can filled only after the expiry of 14 days from the day on which the statutory meeting ought to have been held [Section 439 (7)]. If it is brought by any other person e.g., a creditor ,it must be filed before the expiration of fourteen days after the last day on which the statutory meeting ought to have been held. The Court may, instead of making a winding up order, direct that the statutory report be delivered or that a statutory meeting be held. The Court may order the costs to be paid by any persons who are responsible for the default [section 443 (3)]. 3. Failure to commence, or suspension of, business The Court exercises power in this case only if the company has no intention of carrying on its business or if it is not possible for it to carry on its business. If a company has not begun to carry on business within a year from its incorporation or suspend its business for a whole year, the Court will not wind it up if (a) There are reasonable prospects of the company starting business within a reasonable time, and (b) There are good reasons for the delay, i.e., the suspension of business are satisfactorily accounted for and appear to be due to temporary causes.

3 (1991) 71 Comp Cas 473 Bom.

4. Reduction in membership If, at any time, the number of members of a company is reduced

in the case a public company, below seven or in the case of a private company, below two, the company may be ordered to be wound up by the Court. 5. Inability to pay its debts A company may be wound up by the Court if it is unable to pay its debts. The test is whether the company has reached a stage where it is commercially insolvent that is to say, that its existing and probable assets would be insufficient to meet the existing liabilities. Commercially insolvent means that the company is unable to pay debts or liabilities as they arise in the ordinary course of business. When is a company unable to pay its debts? According to section 434, a company shall be deemed to be unable to pay its debts in the following cases: 1.Statutory Notice: If a creditor to whom the company is indebted for a sum exceeding one lakh rupees has served on the company at its registered office, a demand for payment and the company has for three weeks thereafter neglected to pay or otherwise satisfy him, the company is unable to pay its debts. But here the debt must be presently payable and the title of demand be complete, bonafide and substantial and not a disputed title. 2. Decreed debt unsatisfied: If execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part the company is deemed to be unable to pay its debt. 3. Commercial insolvency: A company is deemed to be unable to pay its debts, if it is proved to the satisfaction of the Court that the company is unable to pay its debts. In determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company also.
6. Just and equitable

The words just and equitable are of the widest significance and do not limit the jurisdiction of the Court to any particular case. The principle of just and equitable clause baffles a precise definition. It was held in the Hind Overseas (Pvt.) Ltd. v. R.P. Jhunjhunwalla, must rest with the judicial discretion of the Court depending upon the facts and circumstances of each case.4

What is just and equitable clause:It depends upon the facts of each case. The Court may order winding up under the just and equitable clause in the following cases:
a. Loss of substratum :

The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. The substratum of a company disappears: (i) When the very basis for the survival of the company is gone. In Pirie v. Stewart. 5a shipping company lost its only ship, the remaining asset being a paltry sum of 363. A majority in number and value of shareholders petitioned for its compulsory winding up but a minority shareholder opposed this and desired to carry on the business as charterer. Held, it was just and equitable that the company should be wound up.

4 (1976) 46 Comp. Cas. 91 (S.C.) 5 (1904) 6 F. 847.

(ii) When the main object of the company has substantially failed or become Impracticable: Where a companys main object fails, its substratum is gone and it may be wound up even though it is carrying on its business in pursuit of a subsidiary object. In German Date Coffee Co., Re 6, the objects clause of the German Date Coffee Co. stated that it was formed for the working of a German patent which would be granted for making a partial substitute for coffee from dates and for the acquisition of inventions incidental thereto and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee was made from dates, but not under the protection of a patent. Held, on a petition by 2 shareholders, that the main object could not be achieved and, therefore, it was just and equitable that the company should be wound up. b. Losses: Secondly,it is considered to wind up the company when it cannot carry on business except at losses. It will be needless indeed,for a company to carry on business when there is nohope of achieving the object of trading at a profit. But a mere apprehension on the part of some shareholders that the assets of the company will be frittered away and that loss instead of gain will result has been held to be no ground. c. Oppression of Minority When the management is carried on in such a way that the minority is disregarded or oppressed. Oppression of minority shareholders will be a just and equitable ground where those who control the company abuse their power to such an extent as to seriously prejudice the interest of minority shareholders.
d. Where there is a deadlock in the management of the company:

When shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope
6 (1882) 20 Ch. D. 169.

or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground.
e. Where public interest is likely to be prejudiced.

Having regard to the provisions of section 397 and 398 (dealing with prevention of oppression and mismanagement) where the concept of prejudice to public interest is introduced, would appear that the Court winding up a company will have to take into consideration not only the interest of shareholders and creditors but also public interest in the shape of need of the community, interest of the employees, etc.

VOLUNTARY WINDING UP Voluntary winding up means winding up by the members or creditors of a company without interference by the Court. The object of a voluntary winding up is that the company, i.e. the members as well as the creditors, are left free to settle their affairs without going to the Court. They may however apply to the Court for any directions, if and when necessary. Circumstances in which a company may be wound up voluntarily A company may be wound up voluntarily (1) By passing an ordinary resolution: When the period, if any fixed for the duration of a company by the Articles has expired, the company in general meeting may pass an ordinary resolution for its voluntary winding up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company is to be dissolved, has occurred.

(2) By passing a special resolution: A company may at any time pass a special resolution that it be wound up voluntarily. No reasons need be given where the members pass a special resolution for the voluntary winding up of the company. Even the Articles cannot prevent the exercise of this statutory right.

TYPES OF VOLUNTARY WINDING UP A voluntary winding up may be a: 1. Members voluntary winding up, or 2. Creditors voluntary winding up.

1. MEMBERS VOLUNTARY WINDING UP

Declaration of solvency In a voluntary winding up of a company if a declaration of its solvency is made in accordance with the provisions of section 488, it is a members voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the

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company has no debts or that it will be able to pay its debts full within 3 years from the commencement of the winding up. The declaration shall be verified by an affidavit. The declaration shall have effect only when it is (a) Made within five weeks immediately before the date of the resolution, and delivered to the Registrar for registration before that date; and (b) accompanied by a copy of the report of the auditors of the company on (i) the profit and loss account of the company from the date of the last profit and loss account to the latest practicable date immediately before the declaration of solvency, (ii) the balance sheet of the company, and (iii) a statement of the companys assets and liabilities as on the last mentioned date. A winding up in the case of which a declaration has been made and delivered is referred to as a member voluntary winding up and a winding up in the case of which a declaration has not been so made and delivered is referred to as a creditors voluntary winding up.

2. CREDITORS VOLUNTARY WINDING UP: A voluntary winding up of a company in which declaration of its solvency is not made is referred to as a creditors voluntary winding up. Members and creditors voluntary winding up compared
1. Declaration of solvency: In case of a members voluntary winding up, there is

declaration of solvency. In case of a creditors voluntary winding up, there is no such declaration.
2. Appointment of liquidator: In a members voluntary winding up, the liquidator is

appointed by the company and his remuneration is fixed by the company. In a creditors

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voluntary winding up, he is appointed by the creditors and his remuneration is fixed by the committee of inspection or, if there is no such committee, by the creditors.
3. Committee of inspection: There is no committee of inspection in a members voluntary

winding up; in a creditors voluntary winding up the creditors may appoint a committee of inspection.
4. Powers of liquidator: In a members voluntary winding up, the liquidator can exercise

certain powers with the sanction of a special resolution of the company; in a creditors voluntary winding up, he can do so with the sanction of the Court or the committee of inspection or of a meeting of the creditors.

Recent position:
The recent judgements regarding the winding up presents the current position of winding up. In Rasik Lal S. Mardia v. OL of Mardia Chemicals LTD,Court applied the principle of natural justice. Since during the course of winding up,th protection of interest of all concerened and the protection of property of the company is the main concern of the court,court held that although the powers and authority are vested in the official liquidator to represent the company in liquidation,the Act does not dabar the promotors,shareholdera of guarantor from rendering

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proper and effective assistance to the official liquidator. Preventing persons from the assisting official liquidaotr would be violative of pinciples of natural justice.7 It has rightly been observed in Ratna Commercial enterprises P. Limited v. Vasu Tech. Ltd,that winding up was not a mode of recovery of debt or amount payable by company. It was the discretion of the court to order winding up which should be the last resort.

Conclusion

Winding up i. e. to bring to a conclusion or an end by putting in order is the process by which the life of a company is ended and its property is administered for the benefit of its members and creditors. It represnts the last stage in life of the company but it should be used as the last resort.

7 (2009)149 Comp cas278 (Guj)

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After analyzing and observing various legal propositions and situations it is found that the right to apply for winding up is the creature of statute and not of contract, and the winding up orders passed by the court are not judgments in rem. But it should be marked that the winding up proceeding are greatly affected by the facts and circumstances of a particular case. The machinery of winding-up cannot be used as a pressure tactics, where a suit has already been instituted for recovery of debt, under such circumstances, the proceeding are in the nature of parallel proceedings in respect of the same cause of action. As a result, such course should not be considered by the court more so to avoid conflict of jurisdiction of findings by two parallel courts of competent jurisdiction. Thus at last it can be said that a genuine case has to be made out rejecting the malafide contention, in the interest of good faith and justice.

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Bibliography
Books:

Gowers Principles of Modern Company Law, Paul. Davies. A Ramaiya,Guide to the Companies Act, Sixteenth Edition Rprint,2006. Singh Avtar, Company Law, Fifteenth Edition,2007, Eastern book Company, Lucknow.

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Statutes used: Company Law,1956

Websites used:
www.mca.gov.in www.jestore.com http://www.legalserviceindia.com

www.companyliquidator.gov.in

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