WINDING UP OF COMPANIES

Winding up of a company is the stage, whereby the company takes its last breath. It is a process by which business of the company is wound up, and the company ceases to exist anymore. All the assets of the company are sold, and the proceedings collected are used to discharge the liabilities on a priority basis. This chapter deals with concept and various modes of winding up. The topics covered are: Introduction Winding up and !issolution "odes of winding up Winding up by the #ourt $oluntary winding up Winding up sub%ect to supervision of #ourt !istinction between voluntary winding up and winding up under the supervision of #ourt #ommencement of winding up Winding up of unregistered companies &'T(: Wherever the term )#ourt* is being used in the chapter, that will be substituted by )Tribunal* in accordance with vide #ompanies +,econd Amendment- Act, .//. w.e.f. a date yet to be notified.

INTRODUCTION

#orporate #ollapse implies business failure of the company, which may occur due to inade0uate capital, fraudulent business practices, management inexperience and incompetence, failure to respond to change, recession, obsolescence, excessive gearing etc. The #ompanies Act, 1234, provides various remedies to deal with such business failures such as arrangement, reconstruction, amalgamation, winding5up. Winding5up of a company is a process of putting an end to the life of a company. It is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is left, it is distributed among the members in accordance with their rights. In the words of 6rof. 7.#.8. ,ower, Winding5up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An li0uidator is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights. Thus Winding5up is the process by which management of a company*s affairs is taken out of its directors* hands, its assets are reali9ed by a li0uidator and its debts are reali9ed and liabilities are discharged out of proceeds of reali9ation and any surplus of assets remaining is returned to its members or shareholders. At the end of the winding up the company will have no assets or liabilities and it will, therefore, be simply a formal step for it to be dissolved, that is, for its legal personality as a corporation to be brought to an end.

The main purpose of winding up of a company is to reali9e the assets and pay the debts of the company expeditiously and fairly in accordance with the law.

:owever, the purpose must not be exploited for the benefit or advantage of any class or person entitled to submit petition for winding up of a company. It may be noted that on winding up, the company does not cease to exist as such except when it is dissolved. The administrative machinery of the company gets changed as the administration is transferred in the hands of the li0uidator. (ven after commencement of the winding5up, the property and assets of the company belong to the company until dissolution takes place. 'n dissolution the company ceases to exist as a separate entity and becomes incapable of keeping property, suing or being sued. Thus in between the winding up and dissolution, the legal status of the company continues and it can be sued in the court of law

Company cannot be Adjudged In o!"ent The winding up of a company is not the same thing as the insolvency of a company, for the general rule in regard to winding up is that if the members of a company desire that the company should be dissolved or if it becomes insolvent or is otherwise unable to pay its debts, or if for any reason it seems desirable that it should cease to exist it is wound up. It is obvious that a company may be wound up even when it is perfectly solvent, e.g. for purpose of reconstruction. ;urthermore, a company can never be declared bankrupt although it is unable to pay its debts. It can only be wound up, of course, some provisions of insolvency laws are made applicable to companies in li0uidation +,ee ,ections <<., <<4, <==, 3.> to 3?1 and 3?< to 3?= of the #ompanies Act). Thus, we may put the proposition that in so far as inability to pay debts is concerned, a bankruptcy of an individual under the insolvency law is the same thing as a winding up of a company under the company

law but a company can also be wound up for reasons other than mere inability to pay its debts. ;ollowing are some of the differences between the effects of insolvency of an individual or a firm and winding up of a company 1. In the case of insolvency, the whole of the insolvent*s property is taken out of his hands and rests in the #ourt +under the 6rovincial Insolvency Act, 12./- or the 'fficial Assignee +@nder the 6residency towns Insolvency Act, 12/2-. In winding up, on the other hand, the property remains vested in the company, sub%ect to its being administered for the purposes of winding up as the company retains its complete existence. Its legal death comes only when it is formally dissolved. .. In insolvency, an insolvent individual can obtain his discharge and continue living and working free from the burden of his debts. A company in li0uidation cannot obtain its discharge and continue free from the burden of its debts. The li0uidator winds up its affairs and then terminates it through dissolution. ?. Although in the administration of the assets of an insolvent company the insolvency rules apply, they are, however, not identical with those of insolvency. ;or example, the reputed ownershipA clause of insolvency law has no application in the case of a company in li0uidation. <. In the case of an individual, the administration of his property by the 'fficial Assignee or the 'fficial Beceiver occurs only if he is declared an insolvent by the #ourt. 8ut the assumption of the directors* powers by the li0uidator occurs even if the company is fully solvent. 7i0uidation or winding up, even of an solvent company can be proceeded with the aid of the court, as in voluntary winding up.

WINDING UP AND DISSO#UTION

The terms CWinding upA and C!issolutionA are sometimes erroneously used to mean the same thing. 8ut according to the #ompanies Act, 1234, the legal implications of these two terms are 0uite different and there are fundamental differences between them as regards the legal procedure involved. The main points of distinction are given below:

1. The entire procedure for bringing about a lawful end to the life of a company is divided into two stages )winding up* and )dissolution*. Winding up is the first stage in the process whereby assets are reali9ed, liabilities are paid off and the surplus, if any, distributed among its members. !issolution is the final stage whereby the existence of the company is withdrawn by the law.

.. The li0uidator appointed by the company or the #ourt carries out the winding up proceedings but the order for dissolution can be passed by the #ourt only,

?. According to the #ompanies Act the li0uidator can represent the company in the process of winding up. This can be done till the order of dissolution is passed by the #ourt. 'nce the #ourt passes dissolution orders the li0uidator can no longer represent the company.

<. #reditors can prove their debts in the winding up but not on the dissolution of the company.

3. Winding up in all cases does not culminate in dissolution. (ven after paying all the creditors there may still be a surplusD company may earn profits during the course of beneficial winding upD there may be a scheme of compromise with creditors while company is in winding up and in all such events the company will in all probability come out of winding up and hand over back to shareholdersEold management. !issolution is an act which puts an end to the life of the company. As such winding up is only a process while the dissolution puts an end to the existence of the company. @nless and until it has been set aside under ,ection 332 of the Act, it prevents any proceedings being taken against promoters, directors or officers of the company to recover money or property due or belonging to the company or to prove a debt due from the company. When the company is dissolved, the statutory duty of the li0uidator towards the creditors and contributories is gone, but if he has committed without complying with the re0uirements of the Act, he is liable to damages to the creditors.

MODES OF WINDING UP

A company registered under the #ompanies Act, 1234 may be wound up in any of the following modes: 1. 8y the #ourt i.e. compulsory winding upD .. $oluntary winding up, which may be either +a- "embers* voluntary winding upD or +b- #reditor*s voluntary winding upD ?. Winding up sub%ect to the supervision of the #ourt. ,ection <.3 of the #ompanies Act, 1234 lays down the above three modes of winding up and provides that the provisions of the Act with respect to winding up shall apply, unless the contrary appears, to the winding up of a company in any of these three modes. In every winding up, a li0uidator or i0uidators is or are appointed to administer the property of the company and he or they must apply the assets of the company, first, in the payment of the creditors in their proper order, and then, in distributing the residue among the members according to their rights.

WINDING UP $% T&E COURT TRI$UNA# Winding up by the #ourt or compulsory winding up is initiated by an application by way of petition to the appropriate #ourt for a winding up order. A winding up petition has to be resorted to only when other means of healing an ailing company are of absolutely no avail. Bemedies are provided by the statute on matters concerning the management and running of company. The extreme and irretrievable step of winding up must be resorted to only in very compelling circumstances. [Daulat Makanmal Luthrki v. Solatire Hotels (1993) 76 Comp. Cas. 1! ("om. HCD)#. It is primarily the :igh #ourt which has the %urisdiction to wind up companies under ,ection 1/ of the #ompanies Act, 1234 in relation to the place at which registered office of the company concerned is situated except to the extent to which %urisdiction has been conferred on any !istrict or !istrict #ourts subordinate to the :igh #ourt. The #entral Fovernment may empower any !istrict #ourt to exercise that %urisdiction, presumably to reduce the burden of the :igh #ourt, only in respect of small companies with the paid5up capital of not more than one lakh of rupees and having their registered office within the !istrict, with a view to achieving expeditious and efficient disposal of winding up proceedings. The Act, therefore, under ,ections <?3 to <?>, confers wide powers upon the :igh #ourt to regulate the conduct of such proceedings. Accordingly the :igh #ourt which is the winding up #ourt may direct a !istrict #ourt to retain and continue winding up proceedings which should not really have been commenced in that #ourt +,ection <?=-. It may also withdraw any winding up which is in progress in a !istrict #ourt from that #ourt and proceed with the winding up itself, or transfer it to another !istrict #ourt +,ection <?4-, arid with respect to all proceedings subse0uent to its own order of winding up, direct them to be had in a !istrict #ourt or with the consent of any other :igh #ourt, in such :igh #ourt or in a !istrict

#ourt subordinate to that :igh #ourt, whereupon the #ourt in respect of which such direction is given shall be deemed to be the #ourt with all powers and %urisdiction of the :igh #ourt under the Act +,ection <?3-. 7astly, the :igh #ourt can pass orders under any of the foregoing sections at any time and at any stage, whether or not an application in that behalf is made by any of the parties to the proceedings +,ection <?>-. There must be strong reasons to order winding up as it is a last resort to be adopted. Temporary difficulty cannot be ground for li0uidating company when company is on path of revival. D. $shokan v. S. %. &e''iar ( Sons ( )) )*) SCL (+er. HC D").

G'ound on ()*c) a Company may be (ound up by t)e Cou't A company under ,ection <?? may be wound up by the #ourt if +a- the company has passed a special resolution of its, being wound up by the #ourtD or +b- default is made in delivering the statutory report to the Begistrar or in holding the statutory meetingD or +c- it does not commence business within a year from its incorporation or suspends business for a whole yearD or +d- the number of its members in the case of a public company is reduced below seven and in the case of a private company, below twoD or +e- it is unable to pay its debtsD or +f- the #ourt is of the opinion that it is %ust and e0uitable that it should be wound up. +g- if the company has made a default in filing with the registrar its balance sheet and profit and loss account or annual returns for any five consecutive years. +h- if the company has acted against the interests of the sovereignty and integrity of India, the security of the ,tate, friendly relations with foreign ,tates, public order, decency or morality, and +i- if the tribunal is of the opinion that the company should be wound up under the circumstances specified in ,ection <.<F provided that the tribunal shall make

order for winding up of a company under clause +h- on application made by the #entral Fovernment or a ,tate Fovernment.

The winding up petition is not a legitimate means of seeking to enforce payment of debt, which is bonafide disputed by the company.

,n Shakti $-en.ies /. Manshuk "hai ,n'ustries Lt'. [( ))7)0 7* SCL 33 (&$1)0 'e.i'e' on 1*.2. ))60 6etitioner firm filed a winding up petition against the respondent company for the recovery of a debt which was disputed by the respondent company. The 6etition was dismissed.

T)e *n tant ca e (a o+ bona +*de d* puted debt, E"en +'om t)e pet*t*on +o' (*nd*ng up- *t (a e"*dent t)at +o' t)e payment o+ R , ./-0/-///- t)e pet*t*one' +*'m ag'eed to pu'c)a e )a'e o+ t)e 'e pondent company,

T)e p'*nc*p!e - on ()*c) t)e Cou't )ou!d act * d* po *ng o+ (*nd*ng up pet*t*on- may be deduced t)u 1 2*3 *+ t)e debt * not d* puted on ome ub tant*a! g'ound- t)e Cou't may ma4e t)e o'de'- 2**3 *+ t)e debt * bona +*de d* patc)ed- t)e'e cannot be 5neg!ect to pay6 (*t)*n t)e mean*ng o+ ect*on 7882*32a3 and pet*t*on +o' (*nd*ng up * not ma*nta*nab!e- 2***3 d* pute (*t) 'ega'd to payment o+ *nte'e t * not a bona fide d* pute- 2*"3 t)e de+ence o+ 'e pondent company )ou!d be *n good +a*t)- one o+ ub tance and !*4e!y to ucceed *n po*nt o+ !a(,

In t)e add*t*ona! a++*da"*t +*!ed t)e 'e pondent company- *t (a app!*cat*on +o'm (a

tated t)at

*gned by t)e p'op'*eto' o+ pet*t*one' (*t) a o!e "*e( to

ett!e t)e out tand*ng account pu' uant to ()*c) t)e 'e pondent p'oceeded to a!!ot 9/-/// )a'e to t)e pet*t*one' and t)e ce't*+*cate (e'e d* patc)ed()*c) (e'e 'ece*"ed by t)e 'ep'e entat*"e o+ pet*t*one', T)e 'e pondent d* puted t)e debt and *t cou!d not be )e!d t)at *t neg!ected to pay t)e debt (*t)*n t)e mean*ng o+ ect*on 7882.32a3, T)e (*nd*ng up pet*t*on * not a !eg*t*mate mean o+ ee4*ng to en+o'ce payment o+ debt- ()*c) * bona +*de d* puted by t)e company,

W)o may Pet*t*on +o' t)e W*nd*ng up An application for the winding up of a company has to be made by way of petition to the #ourt. A petition may be presented under ,ection <?2 by any of the following persons. +a- The companyD or +b- Any creditor or creditors, including why contingent or prospective creditor or creditorsD or +c- Any contributory or contributoriesD or +d- all or any of the parties specified above in clauses +a-, +b-, +c- whether together or separatelyD or +e- The BegistrarD or

+f- Any person authori9ed by the #entral Fovernment in the case falling under ,ection .<?, i.e., following upon a report of inspectors. G+g- by the #entral government or state Fovt., in a case falling under clause +h- of ,ection <??. The 'fficial 7i0uidator or any of the persons mentioned above as being entitled to present a petition under ,ection <?2, will have a right to present a winding5up petition when a company is already being wound up voluntarily or sub%ect to the supervision of the #ourt, and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributories or both +,ection <</-. In Mum3ai La3our 4nion ", ,n'o 5ren.h %ime ,n'ustries 2://:3 8; SC# <:7, it was held that a trade union cannot file winding up petition for unpaid wages of workmenEemployees. They are disentitled as other legitimate and efficacious remedy under labour laws is available. In such case, filing winding up petition is abuse of law.

=u'* d*ct*on o+ Cou't +o' ente'ta*n*ng W*nd*ng up Pet*t*on In terms of the provisions of ,ection 1/ of the #ompanies Act, 1234, the %urisdiction for entertaining winding up petition vests either in the :igh #ourt having %urisdiction in relation to the place where the registered office of the company is situate or the !istrict #ourt of the area subordinate to the :igh #ourt, in which the %urisdiction has been vested either by the Act or by the #entral Fovernment by notification in the 'fficial Fa9ette. ,n 6%C ,n'ustries Lt'. v. 7arasrampuria %ra'in- (1999) 3* CL$ 32) ($ll HC)0 it was held that only :igh #ourt where the registered office is situated has %urisdiction in winding up, even if

there was agreement between parties that dispute between parties will be resolved before :igh #ourt where registered office is not situated. Begardless of where agreement is executed, #ompany #ourt having %urisdiction over the place where the registered office is situated, will have the %urisdiction to entertain a petition for winding up. L+7 Mer.hant 5inan.in-v. $i8in Li9ui' 6ases ( ))1) 1)3 Comp. Cas. 11 (6u:.). ;or the purposes of %urisdiction to wind up companies, the expression )Begistered 'ffice* means the place which has longest been the registered office of the company during the six months immediately preceeding the presentation of the $ide #ompanies +,econd Amendment- Act, .//. wet, a date yet to be notified. petition for winding up. ,n +alpana %ra'in- v. ;. CL. ,n'ustries Lt'. [(1996) 1 Comp. 4 1! #0 the 'rissa :igh #ourt refused to entertain the petition for winding up as the #ompany had its place of Begistered 'ffice at :yderabad. W)at O'de' - T)e Cou't May Pa >2SEC 7783

The court may pass any one of the following orders on hearing the winding up petition. 1. !ismiss it, with or without costs .. "ake any interim order, as it thinks fit, or ?. 6ass an order for winding up of the company with or without costs. #onse0uences of court passing an order for winding up : If the court is satisfied, that sufficient reasons exist in the petition for winding up, then it will pass a winding up order. 'nce the winding up order is passed, following conse0uences follow : 1. #ourt will send notice to an official li0uidator, to take change of the company. :e shall carry out the process of winding up, + sec. <<<-

.. The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the winding up petition or not. ?. The official li0uidator is appointed by central Fovernment + sec. <<><. The company shall relevant particulars, relating to, assets, cash in hand, bank balance, liabilities, particulars of creditors etc, to the official li0uidator. + sec. <3<3. The official li0uidator shall within six months, from the date of winding up order, submit a preliminary report to the court regarding :
o o o o o o

6articulars of #apital #ash and negotiable securities 7iabilities "ovable and immovable properties @npaid calls, and An opinion, whether further in0uiry is re0uired or not

The #entral Fovt. shall keep a cogni9ance over the functioning of official li0uidator, and may re0uire him to answer any in0uiry. Stay O'de' Where, the court has passed a winding up order, it may stay the proceedings of winding up , on an application filed by official li0uidator, or creditor or any contributory. I (*nd*ng up po *b!e du'*ng t)e pendency o+ a c*"*! u*t> ,ection <?? of the Act provides for the circumstances in which a company may be wound up by court. :ere arises a 0uestion that if there are parallel proceedings for the same sub%ect matter i.e., for the recovery of debt, where one is a civil suit and the other is for winding up of the company, should they be allowed to subsist togetherH

The act nowhere prohibits that the proceedings under the act shall or could not lie, where civil suits are pending or they subse0uently be filed. There is no provision in the Act to oust the %urisdiction of the court and decide the winding up proceedings. There would have been a provision to that effect in the Act if the legislature had intended to that effect. ,ince the winding up proceeding is not merely for the benefit of the petitioner but of all its shareholders, creditors or contributories. The pendency of a civil suit is not a bar to the admission of winding up petition based on same debt. The proceeding for winding up will not be invalidated if a suit is filed by the petitioner by way of abundant caution to save the claim getting barred by limitation. The winding up proceedings can be continued in a company court once it has come to the conclusion that it has not been a case of bona fide and tenable defence is made out. While dismissing the petition for winding up the following principals have to be relied upon by the #ourt: 1- The defence of the company is in good faith and one of substance. .- The defence is likely to succeed in point of law. ?- The company adduces prima facie proof of the facts on which the defence depends. <- Where the debt is undisputed, the #ourt will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular amount and. 3- Where, the company owes the creditor a debt entitling him to a winding up order. 8ut the exact amount of the debt is disputedD the #ourt will make the winding up order without re0uiring the creditor to 0uantify the debt precisely.

T)e +o!!o(*ng po*nt )a"e to be con *de'ed ()*!e dea!*ng (*t) (*nd*ng?up1 1- A petition presented ostensibly for a winding5up orderD but really to exercise pressure will be dismissed, and under the circumstances, may be stigmati9ed as a scandalous abuse of the process of the #ourt The modern practice has been to dismiss such petitions. If the debt is not disputed on some substantial ground, the #ourt may decide it on the petition and make the order. .- The company may be wound up even if it has large assets. The crux is to see if it is unable to meet its current demands i.e., if the current liabilities are more than the current assets. If the company is financially sound and in a position to pay its liability, it cannot be ordered to be wound up under ,ection <??+e- of the #ompanies Act. 8ut the company should establish that it is capable of discharging its existing liabilities. There is presumption of inability. ?- Although a winding up petition is an appropriate remedy and a mode of execution against a company unable to pay its debt, it is not an alternative to the ordinary procedure for reali9ation of the debts due from the company. ,ince, the creditor had already resorted to the civil suit, the court in its discretion can dismiss the petition. <- It has been observed that the pendency of a civil suit as such is not merely a ground to oppose a winding up petition.

Conc!u *on After analy9ing 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 %udgments in rem. In the absence of any prohibited provisions in the Act winding up proceedings uEs <??+e-, <?<,<?2 can be allowed even if a civil suit is already pending against the debtor company. 8ut it should be marked that the winding up proceeding are greatly affected by the facts and circumstances of a particular case. The machinery of winding5up 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 %urisdiction of findings by two parallel courts of competent %urisdiction. Thus at last it can be said that a genuine case has to be made out re%ecting the malafide contention, in the interest of good faith and %ustice.

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