CHAPTER-1

INTRODUCTION

Meaning

Winding up 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 a 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.
During the process of winding up the company still exists and has
corporate powers until dissolution. 2 Till dissolution the property of the
company remains vested in the company.

It is worth noting that the company is not dissolved immediately

on the commencement of the winding up proceedings. As a matter of
fact, the winding up of a company precedes its dissolution i.e. the
winding up is the prior stage and the dissolution, the next. On the
dissolution, the company is no more in existence, and its name is struck
off by the Registrar from the register of companies. But on the winding
up, company’s name is not struck off from the register. Thus, in
between, the winding up and dissolution the legal status of the
company continues and it can be sued in a Tribunal of Law.

A company cannot be made insolvent but in certain respects

winding up has many effects or res similar to those of bankruptcy, or
insolvency, for example in regard to the cessation of the business, rules
as to set off, as to secured debts or that all creditors are to be paid pari
passu out of the assets. However, there are marked distinctions between

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winding up and bankruptcy, which are :
1. In bankruptcy the property of the debtor is divested from him and
rests in the official receivers or the official assignee, while in a
winding up the property of the company is not divested from it.
2. An individual can be declared insolvent only when he is unable to
pay his debts, whereas a company cannot be declared insolvent even if
it is unable to pay its debts. It can only beg wound up and this can be
done even when it is solvent.

3. The doctrines of relation back and reputed ownership do not apply to

winding up.

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 CHAPTER-II

MODES OF WINDING UP

The following chart explains the various modes in which a company

may be wound up.

Winding up

Compulsory winding up Voluntary winding up initiated

by the Tribunal initiated by by resolution of the company
petition to the Tribunal in general meeting

Members’ voluntary winding up Creditors voluntary winding up

WINDING UP BY TRIBUNAL

A company may be wound up by an order of the Tribunal. This is

called compulsory winding up. The Tribunal will make an order for
winding up on an application by any of the person enlisted in

Grounds for Compulsory Winding-up (Section 433)

1. Section 433 lays down the following grounds where a company

may be wound up by the Tribunal
2. Special resolution [Sec 433(a)];
3. Default in filing statutory report, or holding statutory meeting
[Sec 433 (b);
4. Failure to commence business within time [Sec 433 (c)];
5. Reduction of membership [Sec 433 (d)]; ‘
6. Inability to pay debts [Sec 433 (e)]'

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30 British India General Insurance C0, Re, AR ) 40 Comp Cas 554.
See also British Burmah Petroleum Co v Kohinoor Mills, (1980) 50
Comp Cas 544 Bom, where the debt was evidenced by two letters of
doubtful authenticity; Yashodan Chit Fund (P) Ltd, (1980) 50 Comp
Cas 356, Bom, non-payment of rent pending fixation of standard
rent; Ronaq Singh v Ambala Bus S yndicate, (1980) 50 Comp Cas
349 P&H, agreement to receive payment in instalments; Premier
Vegetable Products Ltd v United Asian Bank, (1980) 50 Comp Cas
680 Raj, a company receiving goods but not accepting bill of
exchange, not allowed to say that there was no debt because the bill
had not been accepted; Maharashtra Small Scale Industries Corpn v
Trawlers (P) Ltd, (1980) 50 Comp Cas 674 Bom, inability to pay
workmen; U. V. Shenoy v Karnataka Engineering Products, (1981)
51 Comp Cas 116 Kant. company allowed to defend dishonour of
cheques on the ground that the goods supplied were of inferior
quality. Fred Hausman v Bio-Solar (P) Ltd, (1987) 61 Comp Cas 714
Del, machinery delivered in damaged state, claim for price, disputed
debt. Where the company showed liability only to the extent of one-
fourth of the amount claimed and the petitioner showed nothing, the
petition was dismissed. Gangadhar Narsinghdass Agarwal v Timble
(P) Ltd, (1992) 74 Comp Cas 246 Bom. Where the company paid the
amount which was due and disputed the rest of the claim, the
petition was dismissed. SN Steel Corpn v Dany Dairy and Food
Engrs, (1992) 73 Comp Cas 357 All. The company has to
substantiate the defence of payment. M. V. Paulose v City Hospital
(P) Ltd, (1992) 73 Comp Cas 362 Ker. No privity of contract with
the company, hence no right to sue, B. Vishwanathan v Seshayee
Paper & Boards Ltd, (1992) 73 Comp Cas 136 Mad. The existence of
an arbitration agreement does not take away the right of petition.

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Goetz India Ltd v Pure Drinks (New Delhi) Ltd, (1994) 80 Comp
Cas 340, 363 P&H.

31 Kripal Singh v Sutlej Land Finance (P) Ltd, (1989) 66 Comp Cas
841, 844. See R. P. Bansal v Bansal & Co, AIR 1995 Del 234,
claimant did not indicate the state of account and the company
submitted a detailed counter-claim ruling out the petitioner; Tata
Davy Ltd v Steel
Strips Ltd, AIR 1995 P&H 1, nothing of the claim was left after
deduction of amounts for poor quality of goods supplied. Elmeh
India v Hi-Sound Corder (P) Ltd, (1995) 83 Comp Cas 135 Mad,
deposit account not produced.

32 The Supreme Court in Amalgamated Commercial Traders (P) Ltd

v ACR Krishnaswami, (1965) 35 Comp Cas 456, laid down that
conditional declaration of dividend does not create a debt and the
company could dispute its liability. Following this in Sharma
Enterprises v J N Hotels (P) Ltd, (1994) 1 Bihar LJR 576, it was
held that where in a pending money suit against the company, the
latter raised a good counter-claim, a petition for winding up for that
very debt was not sustainable. Another decision emphasizing that
the company’s counter-claim should be prima facie valid and put-up
bona fide is Federal Chemical Works Ltd, Re, (1964) 34 Comp Cas
963; Trilok Chand v Swastika Strips (P) Ltd, (1995) 82 Comp Cas
423 P&l-l, liability to pay on take-over, goodwill overvalued,
genuine dispute. Trend Designs Ltd, Re, (1998) 29 Corpt LA 135
Ker, a company cannot be said to be unable to pay its debts if it has
substantial profits and current assets; a company cannot be expected
to discharge a debt which it does not admit on bona fide grounds.

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33 AIR 1950 EP 142; K. S. Trivedi & C0 v Ashok Leyland Ltd,
[1989] 3 Comp LJ 351, neither the amount nor due date given with
certainty; Hindustan Sanitary and Hardware Stare v J C T
Electronics Ltd, (1990) 67 Comp Cas 585 Punj, where the company
paid off a major.

The petitioner claimed to be a creditor of the defendant company.

The company never disputed that the amount claimed was wrong.
They only said that they had some kind of a counter claim, which
the court found to be of a very nebulous character. All they said was
that the accounts required scrutiny and that the petitioner was not
presently entitled to the sum claimed, but why, it was not clearly
stated. The court, therefore, held that there was no bonafide dispute
with regard to the sum due.

Similarly in Harinagar Sugar Mills Co v Pradhan,34 SUBBA RAO J

(afterwards CJ) allowed a petition as “the alleged dispute as to the
liability of the company to the joint family was not bonafide but was
only a art of a scheme of collusion between the company and the
karta of the family.

It is also necessary that the creditor should have delivered a de land

under his hand at the registered office of the company.“ “Statutory
notice is a highly formal and important document and it would
appear to follow that the provision of the Act as to its seryice upon
the company must be strictly observed.”37 Thus,

part of the claim and secured the balance by a bank guarantee;

Ultimate Advertising and Marketing Co v G B Laboratories, (1990)
66 Comp Cas 232 All, where the principal paid off and only interest
amount disputed, order not granted, here the court also added that

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winding up is in the discretion of the court and the same may be
refused even if all the grounds are made out; Goyal Electro Steel, 67
Comp Cas 305 Raj, goods received in damaged state; Joti Prasad
Bala Prasad v A C TDevelopers (P) Ltd, (1990) 68 Comp Cas 601
Del, bonafide disputes about goods supplied to the company;
Aluminum Extrusions and Industrial Components (P) Ltd v Central
Paints Ltd, (1990) 68 Comp Cas 477 MP, vague plea of dispute.
Debts arising out of settlement of accounts in a family company.
Hence bona fide defence ruled out. Deepa Anant Bandekar v
Rajaram Bandekar (Sirigao) Mines Ltd, (1992) 74 Comp Cas 42
Bom. The company did not pay rent from day one and replied to the
petition saying that it had applied for fixation of standard rent, held
not bonafide in Sharda Bhandari v Ananya Electronics Ltd, (1993)
78 Comp Cas 167 Delhi. Payment of arrears of lcase money due on
premises taken over by the company, allowed to be raised before the
company court, Devendra Kumar Jain v Polar Forgings and Tools
Ltd, (1993) 1
Comp LJ 184 Del: (1993) 1 Punj LR 67.
34 [1966] 2 Comp LJ 17.
35 Where a company had accepted a number of bills of exchange
and in defence the company only said that the acceptances were
conditional, but offered no proof of such conditions, it was held that
winding up could not be refused. United Western Bank Ltd, (1978)
48 Comp Cas 378; Universal Consortium of Engineers Ltd, Re,
(1983) 54 Comp Cas 33 Cal, no proof of debt offered: Madan Debi
Kundalla vAlpine Dairy Ltd, (1983) 54 Comp Cas 41 Cal, defence of
defective goods raised a long time after the supply, not tenable.
Where the company first acknowledge the debt and disputed it for
the first time at the hearing, that was not the symptom of a bona fide

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dispute. Bajrangbali Engg Co Ltd, Re, [1990] l Comp Ll 243: AIR
1989 Cal 356. A claim which required to be substantiated by
evidence is fit for a civil suit, Malhotra Steel S yndicate v Punjab
Chemi Plants, (1989) 65 Comp Cas 546 P&H. Company paying half
the debt, petition allowed because the other half was of more than
Rs 500, United Asian Bank v Jaipur Oil Products Ltd, (1989) 66
Comp Cas 438; Surendra Packers v Punjab Land Development and
Reclamation Corpn Ltd, ( 1989) 66 Comp Cas 883 P&H, company
raising no points.
36 S. 434(2).
37 See RANKIN C] in Japan Cotton Trading Co v Jajodia Cotton
Mills, AIR 1927 Cal 625, and see also Janbazar Manna Estate Ltd,
Re, AIR 1931 Cal 692: 133 IC 321; Laxmi Sugar Mills v National
Industrial Corpn, (1968) 1 Comp LJ 292 Punj. Where the particulars
of the notice changed because of payments to creditors, the notice
became technically incompetent, a new petition was not allowed to
be founded on such notice, Shantilal Khushaldas v Jayabala, (1994)
Mh LJ 432.

where the amount due was incorrectly stated in the notice, the
petition failed.” Notice should be served at the company’s registered
office. Where the registered office was not functioning and a
different address was being given for correspondence, a service at
that address, and not at the registered office, was held to be not a
good service for the purposes of a winding up petition.” Notice sent
to the administrative office of the company instead of the registered
office was held to be not effective service.4° Where a company
contested the claim on the ground that the documents in question
were not signed in accordance with the articles and, therefore, the
company was not liable, that was held to be a bona fide dispute

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disentitling the claimant from winding up order.“ It may not be
necessary to specify in the notice any particular section of the Act,
but the notice must give some indication that in the event of non
compliance, steps would be taken for an order of winding up. Where
the petitioner had not mentioned in his notice the period within
which he must be paid and only asked for payment at an early date,
it was not considered to be a valid notice for winding up order 4 2

Once the requirements of a creditor ’s petition are fulfilled and there

is a non-compliance with the statutory notice, winding up may be
ordered and the company will not be heard to say that the petitioner
is acting mala fides, or that he has an altemative remedy or that the
company is solvent or that the majority of the creditors are opposed
to winding up“ or that the petition was presented only to save the
period of limitation. 4 4

38 Ofit Lynx Ltd v Simon Carves India Ltd, (1971) 41 Comp Cas
174: AIR 1973 Cal 413. A time- barred claim cannot be the basis of
a petition, but where the company acknowledged the debt in its
balance sheet that was held to be sufficient both as a proof of the
debt and as an extension of the period. Pandam Tea C0 v Darjeeling
Commercial Co, (1977) 47 Comp Cas 15 Cal. Where the notice did
not mention the date within which payment should be made or
mentions a period less than 21 days, it may still be a valid notice,
because the Act gives the company a 21 day waiting period. See
S ytron (India) Ltd, Re, ( 1990) 69 Comp Cas 767 Cal; N. K. Gossain
& Co (P) Ltd v Dytron (India) Ltd, (1990) 69 Comp Cas 757 Cal.
39 Vysya Bank Ltd v Randhir Steel and Alloys (P) Ltd, (1993) 76
Comp Cas 244 Bom: (1991) Mah LI 1578 distinguishing Fortune
Copper Mining Co, Re, (1870) LR 10 Eq 390, where the

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registered office of the company was pulled down and service
elsewhere was held to be sufficient.
40 N. L. Mehta Cinema Enterprises (P) Ltd v Pravin Chandra P.
Mehta, (1991) 70 Comp Cas 31 Bom. A notice served on the
company’s administrative office would have been regarded as
good if it were not short in terms of time, Manganese Ore (India)
Ltd v Sandur Manganese & Iron Ores Ltd, (1999) 98 Comp Cas 755
Kant, services at the company's registered office is not merely a
technical formality, it has to be strictly complied with, P S V P
Vittal Rao v Progressive Construction P Ltd, (1999) 2 Comp LJ 228
AP. The notice coming back with the postal remark ‘refused’ was
held to be good service, Raj Kumar v Organic Chem Oils Ltd,
(1998) 93 Comp Cas 386 P&H. A notice to the managing director
has been held to be no good, N Gopalkrishnan vAsianet Satellite
Communications Ltd, [2000] 1 Comp LJ 285. Notice sent by Legal
Aid & Advice Board on its own behalf and not on behalf of a
creditor was held to be incompetent, Bichitrananda Panda v Orissa
Construction Ltd, (1999) 97 Comp Cas 345 Ori. Service of notice by
registered post followed by publication in newspapers was held to
be sufficient compliance with Rule 32 of the Companies (Court)
Rules, 1956, Doshi Leather Cloth Mfg Co Ltd, Re, [2000] 23 SCL
225 Bom.
41 Sofisule (P) Ltd, Re, (1977) 47 Comp Cas 438 Bom.
42 Paromjit Lal Bhadwar v Prem Spg and Wvg Mills, (1986) 60
Comp Cas 420 All.
43 Advent Corpn Ltd, Re, (1969) 2 Comp LJ 71; Seksaria Cotton
Mills, Re, (1969) 2 Comp L] 155 Bom.
44 V. K. Jain v Richa Laboratories (P) Ltd, (1993) 78 Comp Cas 283
Delhi: (1994) 1 Comp Ll

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But even so the power of the court is discretionary. The utility of
this discretion is amply illustrated by the decision of the Bombay
High Court in As new Drums Co Ltd, Re“5. A company’s
indebtedness aggregated to over Rs 78 lakhs of which the petitioner
had a claim of only Rs 11,350. He fulfilled the requirements of the
statutory notice. The company prayed for time so as to enable it to
draw a scheme of compromise with all its creditors. The court
stayed the petition to enable the company to call a meeting of its
creditors, but subject to the condition that the company shall not
deal with or dispose of its assets in the meantime. 4 6

The discretion of the court has been revitalised by the Supreme

Court in M. Gordhandas & C0 v Madhu Woollen Industries (P) Ltd.”
The court found that the debts were not only disputed, but were also
falsely shown in the accounts by the petitioners when they were
themselves the directors. The other creditors were opposed to
winding up. Explaining the weight that ought to be attached to this
fact Ray J (later CJ) said 4 8

The wishes of the creditors will be tested on the~ground whether the

case of the persons opposing the winding up‘ is reasonable,
secondly, whether there are matters which should be inquired into
and investigated if a winding up order is made. It is also well-
settled that a winding up order will not be made on a creditor ’s
petition if it would not benefit him or the company’s creditors
generally.

A time-barred claim cannot sustain a winding up petition.“ Money

paid for allotment of shares and no shares being allotted, nor money
refunded, the

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270; UCO Bank vAehal Allays (P) Ltd, (1993) 3 Comp LJ 43 MP,
defenceless indebtedness to bank. Sharda Bhandari v Ananya
Electronics Ltd, (1993) 78 Comp Cas 167 Delhi, an application for
fixation of standard rent is not a defence to the liability to pay the
outstanding rent. Devendra Kumar Jain v Polar Forgings & Tools
Ltd, (1993) 1 Comp LJ 184 Del: (1993) 1 Punj LR 67, the company
paying the principal but not the interest allowed by the company
judge, a good ground of winding up. S. Kantilal & C0 v Rajaram
Bandekar (irigaa) Mines (P) Ltd, (1993) 76 Comp Cas 800 Bom,
debt due under a guarantee.
45 (1968) 38 Comp Cas 287 Bom; see also Nagree v Asnew Drums,
(1967) 2 Comp LJ 289.

46 See also Kudremukh Iron Ore C0 Ltd v Kaoky Roadways (P) Ltd,
(1990) 69 Comp Cas 178 Kant, where a carrier had become liable
for short delivery of goods and the claim was held to be capable of
sustaining a petition though its amount was not yet ascertained.
Another example of grant of time was in Rishi Enterprises, Re,
(1992) 73 Comp Cas 271 Guj, the company was in temporary
difficulties and the employment of 500 persons was at stake, the
company was also doing well in business. Star Straw Board Mfg C0
v Mahalaxmi Sugar Mills Co, (1991) 2 Punj LR 128, company
paying undisputed part of the claim, for the balance one-month
allowed at 18% interest.
47 (1971) 3 SCC 632: (1972) 42 Comp Cas 125: AIR 1971 SC 2600;
Garodia Hardware Store v Nimodia Plantations and Industries (P)
Ltd, AIR 1998 Gau 18, winding up ordered because of inability to
pay debts. The agreement for sale of property of the company was
not specifically enforced because that way only one person would
have got all the benefit. Tolani Shipping Co Ltd v Saw Pipes Ltd,

12
 (1998) 28 Corpt LA 160 Delhi, complicated and disputed claims not
to be accepted as the basis of a petition.
48 At p. 132. Followed by the Bombay High Court in Focus
Advertising (P) Ltd v Ahoara Black (P) Ltd, (1975) 45 Comp Cas
534 Bom, where though all the conditions of a creditor's petition
were satisfied, the bulk of creditors were opposed to it.
49 K. C. Pangunni v OL Wandoor Jupiter Chits, (1981) 51 Comp Cas
453 Ker. Acknowledgement extends time and the fact of a debt being
mentioned in the company's balance sheet amounts to
acknowledgment. Darjeeling Commercial C0 Ltd v Pandam Tea C0
Ltd, (1983) 54 Comp Cas 814 Cal. Land sold by company under
deception and taking advance,

applicants’ petition for winding up filed at a time when the claim

to refund had become time-barred was held to be not maintainable.5°
For refund of money lost because of misrepresentations in the
prospectus adequate remedies are available under S. 62 of the
Companies Act. It is hardly necessary for the allottee to come in under
jurisdiction for winding up. 5 1

An arbitrator ’s award can be the basis of a petition even if it has

not been made a rule of the court.52 There have been contrary
decisions also.53 Where there was a pending petition against an award
for its setting aside, it was held that the petition for winding up should
wait for the outcome of the petition against the award.“ The court can
take up the petition again after the award becomes an evidence of an
established debt.55 An arbitrator has no jurisdiction to order winding
up.“ The existence of an arbitration agreement does not oust the
jurisdiction of the court.”

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 An emp1oyee’s claim for compensation for premature termination
of employment is not a debt unless it is first ascertained by a court and
converted into a decree.”

7. Just and equitable [Sec 433 (f)].

8. Default in filling P/L account B/S or Annual Return [Sec 433
(g)].
9. Acted against Sovereignty & Integrity of India [Sec 433 (h)].
10. Sick Industrial Company u/s 424G. [Sec 433 (i)].

Section 433 (a) to (f) does not confer on any person a right to seek an
order that a company shall be wound up. Rather it is a discretionary
power of the Tribunal as the word used in sec 433 ‘is may’. Hence
merely because any of the circumstances enumerated under Section 433
exists, it dose not follow that the Tribunal is bound to order winding
up. 2

1. Special resolution of the company. [Sec 433 (a)] ‘

If the company has by a special resolution resolved that it
may be wound up by the Tribunal, the Tribunal may pass a winding
up orders.
The power of the Tribunal in such a case is discretionary
and should be exercised only where a bona fide case is made out.
The Tribunal may refuse to order winding up where it is opposed to
public or company’s interest.
If petition of winding up is filed u/s 433(a), a special resolution is
required and on the other hand if a company present that petition on
any of the grounds mentioned in section 433 (c) to (f), no such
social resolution is required.

2. Default in holding statutory meeting. [Sec 433 (b)] '

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 The company must hold the statutory meeting within 6 months
from the date on which the company is entitled to commence its
business. And before the holding of the meeting, the statutory report by
the directors must also be delivered to the Registrar for registration.
(Section 165)

If a company makes a default ‘in delivering the statutory report

to the registrar or in holding the statutory meeting, the Tribunal may
order winding up of the company either on the petition of the Registrar
or on the petition of the contributory. The petition for winding up must
not be filed before the expiration of 14 days after the last day on which
the statutory meeting ought to have been held. It may be noted that a
private company is not required to forward a statutory report under
Sec. 165 (2) therefore, a petition to ' d it up on the ground of non-
delivery to the Registrar of the statutory report shall not be entertained.

However, the Tribunal may instead of making a winding up order,

direct that the statutory report shall be delivered or that a meeting shall
be held. If the company fails to comply with the order then the Tribunal
will wind up the company.

3. A Failure to Commence Business.

Where a company does not commence its business within a year

from its incorporation, or suspends its business for a whole year, the
Tribunal may order for its winding up. [Sec 433 (c)]. The power of the
Tribunal is discretionary and will be exercised only where there is a
fair indication that the company has no intention to carry on the
business. Where the suspension of the business is temporary or can be
satisfactorily accounted for, the Tribunal will refuse to make an order.
No order of winding up will be made if the company satisfies the

15
Tribunal that the business of the company has been temporarily
suspended on account of some difficulties to carry it on, and that it has
intention to resume the business when it can be carried on profitably.

A company will not be wound up if it abandons one of its several

businesses, unless that business is the main object of the company.
Even if the work of all the businesses has been suspended, even then it
will still be o en to the Tribunal to examine whether it will be possible
for the company to continue its business. Where the business of the
company can legitimately be carried on both abroad and in India and it
carried on business abroad only, there will be carrying on of business
within the meaning of the Act, No winding up order will be made solely
on the ground that the company has not transacted any business in this
country? Similarly if a holding company ceases to be active in its
business but its subsidiary is doing the very business for which it was
formed, it cannot be said that the former has suspended its business for
a whole year.

Example : The business of the company remained suspended for more

than six years because of financial difficulties, and there was no hope
of recovery from such deplorable financial position as the
Government of Orissa which was the major contributor also refused
to help the company. The (now Tribunal) ordered for the winding up
of the company. [Re. Orissa Trunks and Enamel Works Ltd. (1973) 43
Comp. Cas. 503.

4.Reduction of members below minimum. [Sec 433 (d)]

Where the number of members is reduced below 7 in the case of

a public company and below 2 in case of a private company, the
Tribunal may order the winding up of company.

16
 It may be noted, if the company carried on its business with
reduced members for more than 6 months, the members will be
personally liable for the payment of company’s debts contracted during
that period. (Section 45) l.

This ground for winding up is meant to enable member to escape

personal liability for the company’s debts which he will incur under
section 45 of the Act. -

It is rarely an order is made under this clause. The Tribunal

leaves the company to have a voluntary winding up.

5. Inability to pay debts. [Sec 433 (e)]

The Tribunal may order for the winding up of a company if it is

unable to pay its debts. The basis of an order for winding up under this
clause is that the company has ceased to be commercially solvent i.e.,
it is unable to meet its current demands, although the assets when
realised may exceed its liabilities. Thus, inability to pay debts is to be
taken in the commercial sense. The test of inability to pay debts’,
therefore, is Whether the company can pay its existing liabilities so
long as it is a going concern. If the company is not in a position to
meet its existing liabilities, a petition for winding up is 5. Inability to
pay debts. [Sec 433 (e)] maintainable even if it may have very valuable
assets not presently realisabli7 According to section 434 of the Act a
company shall be deemed to be unable to pay, its debts in the following
cases.

a. Statutory notice

if a creditor to whom the company owes a sum of Rs. 500 or

more has served on the company a notice for payment and the company

17
has for three weeks neglected to pay or otherwise satisfy him. In
computing the time for three weeks the day on which the notice is
dispatched and the day on which it is served should both be exc1uded.

A notice of demand giving less than three weeks time does not
make the demand ineffective. It only postpones the right of action to a
date falling after the expiry of three weeks. But where the company
bona fide disputes the debts, and the Tribunal is satisfied with the
defence of the company, the Tribunal will not order for its winding up.

b. Decreed debt

If execution or other process issued on a decree or order of any

Tribunal in favour of a creditor is returned unsatisfied in whole or in
part.

1. Paramjit Lal Badhwar v Prem Spg & \Qg Mills Ltd. (1986) 60 Comp.
cases
2. Re Capital Fire Insurance Association (1882) 21 Ch. D 209.
3. Re Eastern Telegraph Company (1947) 2 ALL E.R. 104.

C. Commercial insolvency

it is proved to the satisfaction of the Tribunal that the company

is unable to pay its debts and in determining whether a company is
unable to pay its debts, the Tribunal will take into account the
contingent and the prospective liabilities of the company. What has to
be proved under this clause is not whether the company’s assets exceed
its liabilities, but whether it is unable to meet its current demands. If a
company is unable to meet its current liabilities, it is commercially
insolvent and liable to be wound up.
Example : The liabilities of a company amounted to Rs. 1,41,00,000

18
and its assets were not worth more than Rs. 60,00,000. It was held on
a petition for winding up by a debentureholder that the company was
not only commercially insolvent but hopelessly insolvent, and that an
order for winding up was made. [Bachhraj _ Factories Ltd. v. Hirjee
Mills Ltd. 57 Bombay L.R. 373].

Just and equitable. [Sec 433 (f)]

The last ground on which the Tribunal can order the winding up
of a company is when the Tribunal is of the opinion that it is just and
equitable that the company should be wound up. This clause gives the
Tribunal a very wide power to order winding up wherever the Tribunal
considers it just and equitable to do. The Tribunal will consider such
grounds to wind up a company for just and equitable reasons as are not
covered by the preceding five clauses. What is just and equitable will
depend upon the facts of each particular case. The Tribunal while
winding up a company under this clause will have to take into
consideration not only the interests of the shareholders and creditors
but also public interest in the shape-of needs of community, interests of
the employees etc.

It is important to note that relief based on the just and equitable

clause is in the nature of a last resort when other remedies provided in
the Act are not sufficient to protect the general interest of company?

Further the Tribunal may refuse to make an order for winding up

if it is of the opinion that some other remedy is available to the
petitioner and he is acting unreasonably in seeking to have the
company wound up instead of following that other remedy.
Following are the instances where the Tribunals have dissolved the
companies under the just and equitable class.

19
(i) Loss of substratum. It is just and equitable to wind up a
company where the company’s main object or substratum is
gone. The substratum of a company is deemed to be gone
when—(a) the subject-matter of the company is gone, or (b)
the object for which it was incorporated has substantially
failed, or (c) it is impossible to carry on the business of the
company except at a loss, or, meet the existing and the
possible assets are insufficient to meet the existing liabilities
of the company.

(ii) Deadlock in management. When there is a deadlock in the

management of a company, it is a proper case for winding up
under the just and equitable clause.

(iii) Oppression of minority. Where the majority shareholders

have adopted an aggressive or oppressive policy towards the
minority, it is a sufficient ground for winding up of the
company under this clause.

(iv) Fraudulent purpose. Where the company was conceived and

brought forth in fraud, or for illegal purposes, it is just and
equitable to wind up a company.

(v) Incorporated or Quasi Partnership. Where a private

company consisting of members of one or more families or a
group of friends, is really in nature of partnership business,
any circumstances justifying the dissolution of a partnership
(such as misconduct of one or more partners) will constitute
just and equitable ground for winding up of the company
though they may not constitute sufficient grounds for winding
up under the provision of the Companies Act.

20
 (vi) Where the company is a bubble and has no business to carry
on, it was wound up.

(vii) Where the‘ company was insolvent and was being carried on
for the benefit of the debentureholders, who had taken
possession, a winding up order was made.
In the following cases, the Tribunals have declined to make a
winding up order on “just and equitable grounds.”

a. Where there were allegations of groupings among shareholders. 3

1. Balchandra Dharm jee Makaji v Alcock Ashdown & Co. Ltd. (1972)
Comp. cases 190.
, 2. Hind overseas Pvt. Ltd. v R.P. Jhunjhunwalla AIR 1976 S.C. 565.
3. S.S. Rajkumar v. Perfect Castings Private Ltd. (1968) 38 Comp.

(b)Where it was found that the substratum had not wholly gone and the
majority of the shareholders opposed winding up.

(c) Where there were allegations of mismanagement or

misappropriation of funds by directors

(d) Where the company was running at a loss. 3

(e) Where the petitioner had an alternative remedy. 4

In the case of a winding up petition on the just and equitable

ground, while the petitioner will not be allowed to travel beyond the
petition, one further point to be noted is whether the ground exists at
the time of hearing the petition. The Tribunal will decide the question
of winding up on the facts existing at the time of hearing the petition
and not merely on the date of the petition. If the facts which existed at
the time of presenting the petition had subsequently melted away, that
would be a case for ordering winding up. 5

21
7. Default in filling P/L account B/S or Annual Return [Sec 433 (g)].

As per new section introduced in the Companies (Second Amendment)

Act, 2002, where the company has made a default in filing with the
Registrar its balance sheet and profit and loss account or annual return
for any five consecutive financial years, the Tribunal may order for its
winding up.

8. Acted against Sovereignty & Integrity of India [Sec 433 (h)].

As per new section introduced in the Companies (Second Amendment)
Act, 2002, where the company has acted against the interests of the
sovereignty and integrity of India, the security of the State, friendly
relations with foreign States, public order, decency or morality; the
Tribunal may order for its winding up.

Provided that the Tribunal shall make an order for winding up of

a company under clause (Ii) on application made by the Central
Government or a State Government.

9. Sick Industrial Company u/s 424G. [Sec 433 (i)].

As per new section introduced in the Companies (Second

Amendment) Act, 2002, the Tribunal is of the opinion that the company
should be wound up under the circumstances specified in section
424G : that is winding up of sick industrial company, the Tribunal may
order for its winding up.

PETITION FOR WINDING UP

The Tribunal does not choose to wind up a company of its own

motion. It has to be petitioned. Section 439 of the Companies Act

22
enumerates the persons who can file a petition to the Tribunal for the
winding up of a company. The following persons can file a petition:

1. The company.

2. Any creditor or creditors including any contingent or prospective

creditor or creditors.

3. Any contributory or contributories.

4. All or any of the aforesaid parties, together or separately.

The Registrar.

5. Any person authorised by the central government under section

234.

Company’s petition [Sec 439 (1) (a)]. A company itself cannot

file a petition for winding up. But it can do so only when the company
has passed a special resolution to that effect. The directors have no
power to present a petition for winding up unless they have been
authorised by the members by passing a special resolution at the
general meeting of the company.° However, where the company is
found by the directors to be insolvent due to circumstances which
ought to be investigated by the Tribunal, the directors may apply to the
Tribunal an order of winding up, even without obtaining the sanction of
the company in general meeting.7 jr It is rare for companies to file
petitions for winding up since if desired, they have only to pass a
special resolution for voluntary winding up under section 484 of the
Act.

Mohan Lal v. Chuiiilal (1969) 32 Comp. Cas. 970.

Rajajniundhry Electric Supply Corporation Ltd. v. A. Negeshwara Rao.
AIR 1956 S.C. 213.

23
Krishna Iyer & sons v. New Manufacturing Co. (1965) 1, Comp. LJ.
179.
Lok Natli Gupta v. Credits Private Ltd. (1968) I, Comp. LJ. 2.53.
Re. Fieldes Bros. Ltd. (1970) I, All E.R. 923.
Re Patiala Banaspati Company AIR 1953 Pepsu 195.
State of Madras Electric Transways Ltd. AIR 1956 Mad 131.

Creditors petition [Sec 439 (1) (b)]. A creditor can also apply for the
winding up a company. The term creditor is not limited to one to whom
a debt is due at the date of the petition. Every person who has a
pecuniary claim against the company whether actual or contingent is a
creditor under section 439. The word ‘creditor ’ includes a secured
creditor, debentureholder, the trustee for debentureholder, an assignee
of a debt, an executor or a deceased creditor, judgement creditor,
receiver, etc. The Tribunal will not order the winding up of the
company where the debt is bona fide disputed. Where a creditor ’s
petition is opposed by other creditors, the Tribunal may ascertain the
wishes of the majority of the creditors before making any order for
winding up.

Where a petition is brought by a contingent or prospective

creditor or creditors, it shall not be admitted before the leave of the
Tribunal is obtained. Such leave shall be granted only when the
Tribunal is satisfied that there is a prima facie case for winding up the
company and reasonable security for costs has been given.

The central or state government or municipal authority whom any

tax or public charges are due from the company is also treated as a
creditor and can present a winding up petition.‘ However, a
policyholder in a life insurance company is neither a creditor nor a

24
contributory to the company nor a company’s worker union is a creditor
and as such cannot file a petition for winding up under this clause. 2

A foreign creditor can also apply for winding up. A company did
not pay commission to its foreign agent. He asked for winding up. The
company's defence that Reserve Bank permission was necessary did not
appeal to the Tribunal. It was a part of the company’s duty to make
necessary arrangements.

A creditor whose debt is disputed on some substantial ground

cannot generally get a winding up order. The Tribunal may either order
the petition to stand over until the validity of the debt can be debt or
may dismiss the petition.

But in England the rule has been re-affirmed by BUCKLEY J in a

case,73 where he said:

In my judgment it remains a rule of this court that where a fully

paid shareholder petitions for compulsory winding up he must show, on
the fact of his petition, a prima facie probability that there will be
assets available for distribution amongst the shareholders.

Following this, PLOWMAN J rejected a contributory’s petition

on the ground that the company was “hopelessly insolvent”.7“

A shareholder filed a petition for ag winding up order on the

ground that he had been misled by representations in the company’s
prospectus. The court returned his petition with the remark at an
alternative remedy was available to him under Section 62 of the Act.75

Contributory’s petition. [Sec 439 (1) (c)]. The term

contributory’ means every person liable to contribute to the assets of a
company in the event of its being wound up. It includes the holder of

25
any shares which are fully paid up and includes any person alleged to
be a contributory.
A contributory shall be entitled to present a petition for winding up
only

(a) when the number of members is reduced below 7 in the case

of a public company and below 2 in the case of a private company. or
(b) when he holds shares which were originally allotted to him or (c)
has held shares for six out of the eighteen months prior to the
commencement of winding up or the shares have devolved on him
through the death of a former holder.

The object of making these provisions is to pr vent a person from

buying shares to qualify himself with the sinister motive of wrecking
the company.

Example : A transfer had been executed and, stamped and dated in

June 1967. The company did not register it until October 1968. A
petition presented by the shareholder in December I 968, for winding
up was held to be not maintainable as the petitioner had not held the
shares of sir months as required by the Act. [Re. Gattapardo Ltd.
(1969) 2 All. E.R. 344].

Registrar’s petition [Sec. 439 (1)(e)]. The registrar is entitled

to present a petition for winding up of a company on the follow ing
grounds only.
(i) if default is made in delivering the statutory report to the registrar
or in holding the statutory meeting :
(ii) if the company does not commence its business within a year of its
incorporation or suspends its business for a whole year;
(iii) if the number of its members is reduced in the case of a public

26
company below seven and in the case of a private company below two.'
(iv) if a company is unable to pay its debts; and
(v) if the Tribunal is of the opinion that it is just and equitable that the
company be wound. The registrar is not entitled to make a petition on
the ground that the company is unable to pay its debts unless it so
appears to him from the financial condition of the company as

1. Mohammed Amin Bros. Ltd. v. Dominion of India, A.I.R 1952, Cal

323.
2. Mohan Lal v. Cuttack Electric Supply Co. Ltd. A.I.R. 1964, Ori 191.
3. Eurometal Ltd vs. Aluminium cables and Conductors P Ltd. (1983)
53 comp Cas 744 Calcutta.

disclosed in its balance sheet or from the report of a special auditor

appointed under section 233-A or an inspector appointed under section
235 or 237. In all the above cases the registrar must obtain the previous
sanction of the central government before making the petition, for
winding up. The central government shall not give such permission
unless opportunity has been given to the company to make its
representations. On obtaining the sanction of the central government,
the registrar must present the petition for winding up within a
reasonable time otherwise the Tribunal will refuse to recognise the
sanction as a valid sanction.

A petition for winding up on the ground that a default is made by

the company in delivering the statutory report or in holding the
statutory meeting can be presented only by the registrar or by a
contributory. Such a petition must be presented after the expiry of
fourteen days after the last day on which the statutory meeting ought to
have been held.

27
Central Government petition Sec. 439 (1) (f). The central government
can also file a petition it winding up in certain cases. The petition can
be filed by the central government on the report of Inspector to apply
for winding up the company. The central government can authorise any
person including the registrar to act on its behalf for the purpose.

Where a company is being wound up voluntarily or ject to

supervision of the Tribunal, a petition for its winding up by a Tribunal
may be presented by any person authorised to do so under section 439
or the official liquidator. The Tribunal shall not make a winding up
order on the above petition unless it is satisfied that the voluntary
winding up or winding up subject to the supervision of be Tribunal
cannot be continued with due regard to the interests of the creditors or
contributories or both. (Section 440).

Statement of affairs to be filed on winding up of a company (Section

439 A).

As per new section introduced in the Companies (Second

Amendment) Act, 2002 a statement of affairs shall be filed on winding
up of a company as under :

(1) Every company shall file with the Tribunal a statement of its affairs
along with the petition or winding up.

(2) Where a company opposes a petition for its winding up, it shall file
with the Tribunal a statement of its affairs.

(3) The statement of affairs referred to in sub-section (1) or sub-section

(2) shall be accompanied

(a) the last known addresses of all directors and company

secretary of such company;

28
 (b) the details of location of assets of the company and
their value ;
(c) the details of all debtors and creditors with their
complete addresses ;
(d) the details of workmen and other employees and any
amount outstanding to them ;
(e) such other details as the Tribunal may direct.

Right of workmen to be heard in a winding up petition

the Supreme Tribunal in a majority judgement of the full. Bench in
National Textile Workers’
Union V. Ramakrishan (1982) 53 Comp. Cas. I84, held :
1. That the workers have a right to appear at the hearing of the winding
up petition whether for against it so long as no winding up order is
fnade by the Tribunal. The workers are entitled to appear and be heard
in the winding up petition both before the winding up petition was
admitted and petition until an order is made for winding up an order for
advertisement was made as also after admission and advertisement of
the winding up

Right to present winding up petition where co pany is being wound

up voluntarily (Section440)
As per new provisions introduced in the Companies (Second
Amendment) Act, 2002
(1) Where a company is being wound up voluntarily, a petition for its
winding up by the Tribunal may be presented by-

(a) any person authorised to do so under section 439 ; or

(b) the Official Liquidator.
(2) The Tribunal shall not make a winding up order on a petition
presented to it under sub-section

29
1), unless it is satisfied that the voluntary winding up cannot be
continued with due regard to the interests of the creditors or
contributories or both.

30
 CHAPTER-III

COMMENCEMENT OF WINDING UP

The winding up of a company by the Tribunal is deemed to

commence at the time of the presentation of the petition for winding
up. But where, before the presentation of the petition, a resolution has
been passed by the company, for voluntary winding up, the winding up
shall be deemed to have commenced at the time of the passing of the
resolution. Any proceedings taken in voluntary winding up will be
deemed to have been validly taken unless the Tribunal direct otherwise
on proof of fraud or mistake.

In all other cases, the winding up of a company must be deemed

to[_commence at time of the presentation of the petition for the
winding up. (Section 441). Where an order is made by a Tribunal on
more than one petition, the commencement of the winding up starts
from the earliest petition.

In may be noted here voluntary winding up shall be deemed to

commence at the time when the resolution for voluntary winding up is
passed (Sec. 486).

Pow er of Tribunal on hearing petition (Section 443)

(1) On hearing a winding up petition, the Tribunal may-
(a) dismiss it, with or without costs ; or
(b) adjourn the hearing conditionally or unconditionally ; or .
(c) make any interim order that it thinks fit ; or ii
(d) make an order for winding up the company with or without costs, or
any other order that it thinks fit:

31
 Provided that the Tribunal shall not refuse to make a winding up
order on the ground only that the gassets of the company have been
mortgaged to an amount equal to or in excess of those assets, or that
the company has no assets.
' (2) Where the petition is presented on the ground that it is just and
equitable that the company should be wound up, the Tribunal may
refuse to make an order of winding up, if it is of the opinion that some
other remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of
pursuing that other remedy.

(3). Where the petition is presented on the ground of default in

delivering the statutory report to the Registrar, or in holding the
statutory meeting, the Tribunal may-

(a) instead of making a winding up order, direct that the statutory

report shall be delivered or that a meeting shall be held ; and
(b) order the costs to be paid by any persons who, in the opinion of the
Tribunal, are responsible for the default.

Order for winding up to be communicated to Official Liquidator

and Registrar (Section 444)

Where the Tribunal makes an order for the winding up of the

company, the Tribunal, shall within a period not exceeding two weeks
from the date of passing of the order, cause intimation thereof to be
sent to the Official Liquidator and the Registrar.

Levy by way of cess and formation of Rehabilitation and Revival

Fund (Section 441)

32
 As per new section 441 introduced in the Companies (Second
Amendment) Act, 2002 following provisions have been made for Levy
by way of cess and formation of Rehabilitation and Revival Fund.

1. Levy and collection of, cess on turnover or gross receipts of

companies (Section 441A)

(1) There shall be levied and collected for the purposes of

rehabilitation or revival or protection of assets of the silk industrial
company, a levy by way of cess at such rate not less than 0.005 per
cent, and not more than 0.1 per cent. on the value of annual turnover_
of every company or its annual gross receipt, whichever is more as the
Central Government may, from time to time, specify by notification in
the Pfficial Gazette.

(2) Every company shall pay to the Central Government the cess
referred to in sub-section (1) within three months from the close of
every financial year.

(3) Every company shall furnish, in such form as may be

prescribed, to the Central Government and the Tribunal the details of
its turnover and gross receipts with payment of cess under sub-section
(1).

(4) The Central Government may, by rules made in this behalf,

specify the manner in which the cess shall be paid under sub-section
(2).

2. Crediting proceeds of cess of Consolidated Fund of India (Section

441B)

i The proceeds of the cess levied and collected under section 441
A shall first be credited to the Consolidated Fund of India and the

33
Central Government may, if Parliament by appropriation made by law
in this behalf so provides, pay to the Tribunal, from time to time, out of
such proceeds (after deducting the cost of collection), such sums of
money as it may think fit for being utilised for the purposes of the
Fund.

Rehabilitation and revival Fund (Section 441 C)

(1) There shall be formed for the purposes of rehabilitation or revival
or protection of assets of a sick industrial company, a Fund to be called
the Rehabilitation and Revival Fund.
(2) There shall be credited to the Fund-
(a) all amounts paid under section 441 B
(b) any amount given as grants by the Central Government for the
purposes of this Fund;
(c) any amount given to the Fund from any other source
(d) any income from investment of the amount in the Fund
(e) amount refunded by the company under section 441 G.

3. Application of Fund (Section 441 D)

The Fund shall be applied by the Tribunal for the purpose of

(a) making interim payment of workmen’s dues pending the revival or
rehabilitation of the sick industrial company ; or
(b) payment of workmen’s dues due to the workmen, referred to in sub-
section (3) of section 529, of the sick industrial company ; or 1 (c)
protection of assets of sick industrial company ; or (d) revival or
rehabilitation of sick industrial company; which in the opinion of the
Tribunal are necessary or expedient for the said purposes.

4. Pow er to call for information (Section 441 E) ‘

Ere Central Government or Tribunal may require any company to

34
furnish for the purposes of
rehabilitation or revival or protection of assets of sick industrial
companies, such statistical and other
information in such form and within such period as may be prescribed.

5. Penalty for non-payment of cess (Section 441 F)

(1) If any cess payable by a company under section 441 A is no paid in
accordance with the provisions of that section, it shall be deemed to be
in arrears and the same shall be recovered by the Tribunal in such
manner as may be prescribed.
(2) The Tribunal may, after such inquiry as it deems fit, impose on the
company, which is in arrears under sub-section (1), a penalty not
exceeding ten times the amount in arrears:
Provided that before imposing such penalty, such company shall be
given a reasonable opportunity of being heard, and if, after such
hearing, the Tribunal is satisfied that the default was for any good and
sufficient reason, no penalty shall be imposed (under this sub-section).

6. Refund of fund in certain cases (Section 441 G)

(1) Where the fund has been applied by the Tribunal for any of the
purposes specified in clauses (a) to (d) If section 441 D, such amount
of the fund shall be recovered from the company after its revival or
rehabilitation or out of sale proceeds of its, assets after discharging the
statutory liabilities and payment of dues to creditors.
(2) The amount referred to in sub-section (1) shall be recovered in the
manner as the Tribunal may direct.

CONSEQUENCES OF WINDING UP ORDER

The consequences of the making of a winding up order relate

back to an earlier date tlm: ‘that on which the order was actually made.

35
This date is called the commencement of the winding up. The winding
up commences from the time of the presentation of the petition or
where, before the presentation of the petition, the company was in
voluntary liquidation from the time of the passing of the resolution for
voluntary winding up. The various consequences of the winding up by
the Tribunal are as under:

1. intimation to official liquidator and registrar. Where the Tribunal

makes an order for the winding up of a company the Tribunal shall
forthwith cause intimation thereof to be sent to the official liquidator
and the registrar. (Sec. 444).

The object of intimation to official liquidator is that he may take up the

administration immediately.

2. Copy of the winding up order to be filed with the registrar. On the

making of a winding up order it is the duty of the petitioner in the
winding up proceedings and of the company to file with the registrar a
certified copy of order within thirty days from the date of the making
of the order. In computing the period of 30 days the time requisite for
obtaining the certified copy of the order shall be excluded. If default is
made in filing a certified copy, the petitioner, or as the case may
require, the company and every officer of the company who is in
default shall be punishable with fine which may extend to Rs. 100 for
each day during ~.vhich the default continues. On the filing of the
certified copy of the winding up order, the registrar shall make a
minute thereof in his books relating to the company and shall notify in
the official gazette that such an order has been made. [Sec 445]

3. Order for winding‘ up deemed to be notice of discharge . Once

such an order is made it shall be deemed to be notice of discharge to

36
the officers and employees of company except when the business of the
company is continued [Section 445 (3)] Where there is a contract of
service for particular term, an order for winding up will amount to
Wrongful discharge of the appointee and damages will be allowed as
for breach of contract of service.
But carrying on the business by the liquidator for the beneficial
winding-up of a company is not continuing the business of the company
so as to prevent the winding up order operating as notice of discharge
of the officers and employees.

4. Suits stayedon winding up order. When a winding up order has

been made, or the official liquidator has been appointed as provisional
liquidator, no suit or other legal proceeding shall be proceeded with
except by the leave of Tribunal. Further no suit or legel proceeding
pending on the date of winding up order shall be proceeded with [Sec
446 (1)]. Any suit or proceeding instituted without leave of the
Tribunal may be regarded as ineffective until leave is obtained.
The object of winding up of a company by the Tribunal is to facilitate
the protection of its assets with a view to ensure an equitable
distribution there of among those entitled and to prevent the
administration from being embarrased by a general scramble among
creditors and others. These provisions are intended to safeguard the
assets of a company in winding up against wasteful or expensive
litgiation in regard to matters capable of being determined
expeditiously and cheaply by the winding up Tribunal itself.

5. Power of the Tribunal. The Tribunal which is winding up the

company shall 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;

37
(c) any application made under section 391 by or in respect of the
company;
(d) any question of priorities or any other question whatsoever which
may arise in the course of the winding up of the company or which may
relate to the winding up of the company.
The claim referred to above must be a claim enforceable at law at the
date of the winding up order. A claim which had become time barred on
the date of the presentation of the winding up petition cannot be
described as a legally enforceable claim.
Any suit or proceeding by or against the company pending in any
Tribunal may be transferred to and disposed of by the Tribunal winding
up the company. [Section 446 (3)]. If a suit pending inanother Tribunal
is continued without leave of the winding-up Tribunal and a decree is
passed, the decree is not void but voidable at the instance of the
liquidator

6. Responsibility of directors and officers to submit to Tribunal

audited books of account (Section 446 A). The directors and other
officers of every company shall ensure that books of account of the
company are completed and audited up to date of winding up order
made by the Tribunal and submitted to it at the cost of the company,
failing which such directors and officers shall be liable for punishment
for a term not exceeding one year and a fine for an amount not
exceeding one lakh rupees.

7. Effect of winding up order. An order for winding up of a company

shall operate in favour of all the creditors and of all the contributories
of the company as if it had been made on the joint petition of a creditor
and of a contributory. (Sec. 447).

38
8. Official liquidator to be liquidator. On a winding up order being
made in respect of a company official liquidator shall by virtue of his
office become the liquidator of the company. (Sec.449 .
Every liquidator of a company which is being wound up, within 30 days
of its liquidation, give notice of his appointment to the Assessing
Officer who is entitled to assess the income of the company otherwise
he will be personally liable for the payment of tax which the company
will be liable to pay.

39
 OFFICIAL LIQUIDATORS

Appointment of Official Liquidator (Section 448),

As per new provisions of the Companies (Second Amendment) Act, 2002

‘the appointment of Liquidator shall be made in the following manner :
(1) For the purposes of this Act, so far as it relates to the winding up of
a company by the Tribunal, there shall be an Official Liquidator who :
(a) may be appointed from a panel of professional firms of chartered
accountants, advocates, company secretaries, costs and works
accountants or firms having a combination of these professions, which
the Central Government shall constitute for the Tribunal; or
(b) may be a body corporate consisting of such professionals as may be
approved by the Central Government from time to time ; or
(c) may be a whole-time or a part-time officer appointed by the Central
Government.
Provided that, before appointing the Official Liquidator, the Tribunal
may give due regard to the views or opinion of the secured creditors and
workmen.
(2) The terms and conditions for the appointment of the Official
Liquidator and the remuneration payable to him shall be :
(a) approved by the Tribunal for those appointed under clauses (a) and
(b) of sub-section (1), subject to a maximum remuneration of five per
cent. of the value of debt recovered and realisation of sale of assets ;
(b) approved by the Central Government for those appointed under
clause (c) of sub-section (1) in accordance with the rules made by it in
this behalf.
(3) Where the Official Liquidator is an officer appointed by the Central
Government under clause (c) of sub-section (1), the Central Government
may also appoint, if considered necessary, one or more Deputy Official

40
Liquidators or Assistant Official Liquidators to assist the Official
Liquidator in the discharge of his functions, and the terms and
conditions for the appointment of such Official Liquidators and the
remuneration payable to them shall also be in accordance with the rules
made by the Central Government.

Liquidator

On a winding up order being made the official liquidator, by

virtue of his office, become the liquidator of the company (Sec 449).

Where the official liquidator becomes or acts as liquidator, there

shall be paid to the central government out of the assets of the company
such fees as may be prescribed. A liquidator shall be described by the
style of “The Official Liquidator” of the particular company in respect
of which he acts and not by individual name [Sec 452].

Provisional liquidator .

The Tribunal may appoint the official liquidator to be the

liquidator provisionally at any time after the presentation of the
petition for winding up and before the making of the winding up order.
[Sec 450 (1)]. Before making such an appointment notice must be given
to the company and a reasonable opportunity must be given to it to
make representation. The Tribunal may dispense with such notice where
there are special reasons. Such reasons must be recorded in writing. A
provisional liquidator is as much a liquidator as a liquidator in the
winding up of a company. But where a provisional liquidator is
appointed by the Tribunal the Tribunal may limit and restrict his
powers. On a winding up order being made, the official liquidator shall
cease to be provisional liquidator and shall become liquidator of the
company.

41
General provisions for liquidators. The liquidator shall conduct the
proceedings in winding up the company and perform such duties as the
Tribunal may impose. The official liquidator gets his remuneration
from the central government and as such he is not entitled to any
further remuneration.

For the services rendered by the official liquidator to the

company, the central government shall be paid out of the assets of the
company such fees as may be prescribed.

The acts of a liquidator shall be valid, notwithstanding any

defect that may afterwards be discovered in his appointment or
qualification. But his acts shall not be valid if they are done after it has
been shown that his appointment was invalid. [Sec. 451].

Statement of affairs. After a winding up order is made or the official

(liquidator is appointed as provisional liquidator, a statement as to the
affairs of the company must be made out and submitted to the official
liquidator. It must be in the prescribed form and verified by an
affidavit. The statement must contain the following particulars :
(a) The assets of the company stating separately the cash balance in
hand and at the bank, if any, and the negotiable securities, if any, held
by the company.
(b) Debts and liabilities of the company.
(c) The names, residences and occupations of its creditors, stating
separately the amount of secured and unsecured debts; and in the case
of secured debts, particulars of the securities held by the creditors,
their value and dates on which they were given.
(d) The debts due to the company and the names, residences and
occupations of the persons from whom they are due and the amount
likely to be realised on account thereof.

42
(e) Such further or other information as may be prescribed, or as the
official liquidator may require.
The statement must be submitted within 21 days from the date of
appointment of the provisional liquidator and in the absence of such an
appointment within 21 days of the winding up order. The period may be
extended for special reasons by the official liquidator or the Tribunal to
not more than 3 months.

The statement of affairs has to be made and submitted of their

own accord by the director, manager, secretary or other chief officer of
the company, whether or not the official liquidators has called on them
to do so, But in the case of any other officers and persons mentioned in
clauses (a) to (d) of section 454 (2), the official liquidator has to call
on them to submit the statement.

Failure without reasonable cause to comply with the above

requirements is punishable with imprisonment for a term upto two
years or with fine upto Rs. 1,000 for every day during which the
default continues or with both. A person claiming to be a creditor or
contributory of the company is entitled to inspect the statement and to
a copy thereof on payment of prescribed fees. Falsely claiming to be a
creditor or contributory is an offence.

The object of section 454 is to facilitate the speedy

administration in winding up and enable the liquidator to get himself
appraised without delay of all the relevant facts relating to the affairs
of the company.

Duties of the liquidator. The primary duty of a liquidator is to conduct

equitably and impartially, and according to the provisions of the Act,
the proceedings in the winding up of the company whose liquidator he

43
is appointed. He shall perform all such duties as the Tribunal may
impose. The following are some important duties.

1. To submit preliminary report. As soon as practicable after the

receipt of the statement of affairs of the company, the official
liquidator must submit a preliminary report to the Tribunal not later
than six months of the order or such extended period as may be allowed
by the Tribunal. The report shall contain the following information :
(a) The amount of capital issued, subscribed and paid-up and the
estimated amount of assets and liabilities. The assets must be stated
under the following headings :
(i) cash and negotiable securities,
(ii) debts due from contributories,
(iii) debts due to the company and securities, if any, available in
respect thereof,
(iv) movable and immovable properties belonging to the company, and
(v) unpaid calls.
(b) Where the company has failed, the cause of such failure.
(c) Whether in his opinion further inquiry is desirable as to promotion,
formation‘ or failure of the company, or the conduct of the business
thereof.

The Tribunal may extend the period of six months for the
submission of the preliminary report by the official liquidator. It may
also order that no such statement need be submitted.

The official liquidator may, if he thinks fit, make further reports

stating the manner in which the company was promoted or formed.

44
 He may also submit report or reports bringing to the notice of the
Tribunal the frauds and other improper conduct on the part of the
directors and other officers. [Section 455]. '

It is on the basis of such further report or reports that the public

examination of the person or persons concerned is ordered. Such report
shall be open for inspection by any creditor or contributory or his agent
on payment of rupee onw.

2. To take over company’s assets. On a winding up order being made

the liquidator must take into custody all the property, effects and
actionable claims to which the company is or appears to be entitled. On
the passing of an order of winding up, the company’s assets are to be
treated as being in the custody of the Tribunal. [Section 456].

The liquidator can take the assistance of the chief presidency

magistrate or district magistrate as the case may be to obtain
possession of books, papers properties and assets of the company.

It may be noted that the official liquidator is only a custodian of

the company’s property and the property doe not vest in him. The
liquidator is a trustee of the company’s property for the creditors}

3. New Duties and Functions of Liquidator [Section 457]. As per new

companies (Second Amendment Act, 2002 following are the new
functions :

(1)Appointment of Security Guards and Valuers [Section 457 (2A)] :

(a) The liquidator shall appoint security guards to protect the property
of the company taken into his custody and to make out an inventory of
the assets in consultation with secured creditors after giving them
notice ;

45
(b) The liquidator shall appoint, as the case may be, valuer, chartered
surveyors or chartered accountant to assess the value of the company’s
assets within fifteen days after taking into custody of property, assets
referred to in sub-clause (a) and effects or actionable claims subject to
such terms and conditions as may be specified by the Tribunal ;
(c) The liquidator shall give an advertisement, inviting bids for sale of
the assets of the company, within fifteen days from the date of
receiving valuation report from the valuer, chartered s veyors or
chartered accountants referred to in clause (b), as the case may be.

2. Verification of statement of affairs [Section 457 (2B)] :

The liquidator shall, immediately after the order for winding up

or appointing the liquidator as provisional liquidator is made, issue a
notice requiring any of the persons mentioned in sub- section (2) of
section 454, to submit and verify a statement of the affairs of the
company and such notice shall be served by the liquidator.

3. Application to the Tribunal [Section 457 (2c)]:

The liquidator may apply to the Tribunal for an order directing

any person who, in his opinion, is competent to furnish a statement of
the affairs under sections 439A and 454 and such person shall for the
said purpose be served a notice by the liquidator in the manner as may
be prescribed.

4. Investigation [Section 457 (2D)] :

The liquidator may, from time to time, call any person for
recording any statement for the purpose of investigating the affairs of
the company which is being wound up and it shall be the duty of every
such person to attend to the liquidator at such time and place as the

46
liquidator may appoint and give the liquidator all information which he
may require and answer all such questions relating to winding up of
company as may be put to him by the liquidator.

5. Inspection of Property [Section 457 (2E)] :

Bay bidder shall, in response to the advertisement referred to in

clause (c) of sub-section (2A), deposit, his offer in the manner as may
be prescribed, with liquidator or provisional liquidator, as the case may
be, within forty-five days from the date of the advertisement and the
liquidator or provisional liquidator shall permit inspection of property
and assets in respect of which bids were invited :

Provided that such bid may be withdrawn within three days

before the last day of closing of the bid.

1. Re. General Rolling Stock O0. (1872) 2 Ch. App. 646.

Provided further that the inspection of property shall be open for not
more than five days before closing of the bid.

6. Details of Advertisement [Section 457 (2F)] :

The advertisement inviting bids shall contain the following details,
namely :
(a) name, address of registered office of the company and Its branch
offices, factories and plants and the place where assets of the company
are kept and available for sale;
(b) last date for submitting bids which shall not exceed ninety days from
the date of advertisement;
(c) time during which the premises of the company shall remain open for
inspection ;
(d) the last date for withdrawing the bid ;,

47
(e) financial guarantee which shall not be less than one-half of the value
of the bid ;
(f) validity period of the bids ;
(g) place and date of opening of the bids in public ;
(h) reserve price and earnest money to be deposited along with the bid ;
(i) any other terms and conditions of sale which may be prescribed.

(7) - Maintaining Bank Account and Books of Account [Section 457

(2G)] :
The liquidator appointed shall—
(a) maintain a separate bank account for each company under his charge
for depositing the sale proceeds of tie assets and recovery of debts of
each company;
(b) maintain pro oer books of account in respect of all receipts and
payments made by him in respect of each company and submit half
yearly return of receipts and payments to the Tribunal.

4. To comply with the directions. The liquidator is bound to follow the

directions given by the creditors, or contributories or by the committee
of inspection. Any directions given by creditors or contributories at
general meetings shall be deemed to override any directions given by the
committee of inspection in case of conflict. [Section 460 (1) and (2)].

5. To summon meetings of creditors and contributories. The liquidator

may summon general meetings of the creditors or contributories
whenever he thinks fit for the purpose of ascertaining the wishes. But he
must summon such meetings at such times as the creditors or
contributories may by resolution direct or whenever requested in writing
to do so by not less than one-tenth in value of the creditors or
contributories as the case may be [Section 460 (3)].

48
6. Directions from the Tribunal. The liquidator shall use his own
discretion in the administration of the assets of the company and in the
distribution of such assets among the creditors but he shall always be
working subject to the control of the Tribunal. The liquidator may apply
to the Tribunal for any directions in relation to any particular matter
arising in the winding up. [Section 460 (4) &

7. To keep proper books. The liquidator must keep proper books and
cause entries or minutes to be made of all proceedings at meetings and
of such other matters as may be prescribed. Any creditor or contributory
may, subject to the control of the Tribunal, inspect any such books,
personally or by his agent. [Section 461].

8. To submit accounts. The liquidator shall at least twice in any year

present to the Tribunal an account of his receipts and payments as
liquidator. The accounts must be in the prescribed form and shall be
made in duplicate and duly verified. The Tribunal must cause the
accounts to be audited. For the purpose of the audit the liquidator shall
furnish the Tribunal with suchvouchers, information and the books as the
Tribunal may require. When the accounts have been audited, one copy
thereof shall be filed and kept by the Tribunal and other copy shall be
delivered to the registrar. Each copy shall be open to inspection of any
creditor, contributory or person interested.

The liquidator shall cause the account when audited or a summary

thereof to be printed and shall send the printed copies by post to every
creditor and contributory. (Sec. 462)

9. Appointment of committee of inspection. Where a direction is

given by the Tribunal for the appointment of a committee of inspection
to act with the liquidator it is the duty of the liquidator to convene a

49
meeting of the creditors. within two months from the date of such
direction, for the purpose of determining who are to be the members of
the committee. He shall also, within fourteen days from the date of the
creditors’ meeting convene a meeting of the contributories to consider
the decision of the creditors meeting with respect to the membership of
the committee. It is open to the meeting of the contributories either to
accept with or without modifications or reject the decisions of the
creditors meeting. In the case of I'6]CC[10l1 it shall be the duty of the
liquidator to apply to the Tribunal for directions. (Section 464).

10. To submit information in pending liquidation. Where the winding

up of a company is not concluded within one year of its
commencement, the liquidator shall, unless exempted by the central
government within two months after the expiry of such year, and
thereafter until the winding up is concluded, at intervals of not more
than one year or at such intervals as may be prescribed, file a statement
duly audited with respect to the position of the liquidation. Such report
shall be filed in the Tribunal in case of winding up subject to the
supervision of the Tribunal and with the registrar in case of voluntary
windmg up. The statement is open to inspection by a creditor or
contributory. Failure to comply with the above provision makes the
liquidator liable for a fine of Rs. 5,000 for every day during which the
failure continues (Sec. 551).

11. Making payments into the Public Accounts of India. The official
liquidator shall pay all moneys received by him as liquidator of the
company into the public account of India in the Reserve Bank of India
in such manner and at such times as may be prescribed (Sec. 552).

Pow ers of official liquidator. The power of the liquidator are

determined by the provisions of the Companies Act. These statutory

50
powers can be divided into two classes; (a) those which can be
exercised with the sanction of the Tribunal ; and (b) those which do not
require such sanction.

(a) Powers to be exercised with the sanction of the Tribunal. [Sec.

457 (1)1.
(i) To institute or defend suits, prosecutions or other legal proceedings
in the name and on behalf of the company. However, for continuing or
defending a suit already instituted before the winding up, no sanction
of the Tribunal is necessary. The Supreme Tribunal has held that for a
criminal prosecution, no sanction is necessary.
(ii) To carry on business of the company so far as it may be necessary
for the beneficial winding up the company. The power to carry on
business extends only so far as necessary for the beneficial winding up
of the company and not for the purpose of earning profits. The
necessity has to be determined by the Tribunal having regard to all the
circumstances of the case, and it will include what may be called a
mercantile necessity.

A liquidator cannot carry on the company’s business indefinit he

may carry it on over an extended period with a view to the steady and
more profitable realisation of the company’s assets. In Liquidator of
Burntisland Oil Co. Ltd v. Dawson the Tribunal refused the liquidators
application to carry d f h d h h ld h b ‘on t usiness or an in e mite
period on the ground at the company’s property could not sold except
on ruinous terms but granted power to carry on for six weeks while the
property was advertised for sale. 2

When a liquidator carries on the business of the company he does

so as the company’s agent and if the power is exercised bonafide he
will be protected even if he has made a mistake.

51
(iii) To sell the immovable and movable property and actionable claims
of the company by public auction or private contract.
(iv) To raise money on the security of any asset of the company. i
(v) To do all other acts as may be necessary to wind up the company
and to distribute its assets.
(vi) To appoint an advocate, attorney or pleader entitled to appear
before the Tribunal to assist him in the performance of his duties. (Sec.
459). It is however, the duty of the liquidator to perform the business
of the liquidation himself and only to employ the law agent in such i
matters as to bring him into contact with the Tribunal or in such other
matters as justify him in obtaining legal advice for his guidance.

A general sanction for exercise of the various powers under

section 457 (1) is sufficient and complaint filed on the basis of such
sanction is not invalid. Though this section defines the powers which
the liquidator may exercise with the sanction of the Tribunal, there is
no indication that 31f the liquidator takes action without a direction of
the Tribunal, the action would be illegal or invalid.

Section 458 provides that the Tribunal may by order confer on

the liquidator the power to exercise his discretion in matters where
prior sanction of the Tribunal is necessary. The Tribunals will have,
however, the power to scrutinise the acts of the liquidator.

1. J.M. Akhaney v State of Bombay A.I.R. 1956 S.C. 575.

2. (1892) 20 R 180.
3. Dr. Sailendra path v. Jasoda A.I.R. 1959 S.C. 51.

(b) Pow ers to be exercised without the sanction of the Tribunal.

[Sec. 457 (2)1. The following powers do not require sanction of the
Tribunal for their exercise : A

52
(i) To do all acts and execute in the name of the company all deeds,
receipts, documents etc. and to use the company’s seal for that purpose,
where necessary.
(ii) To inspect the records and returns of the company or the files of the
registrar without payment to any cess.

(iii) To prove, rank and claim in the insolvency of any contributory and
to receive dividend out V of his estate.

(iv) To draw, accept, make and endorse bill of exchange, hundi or

pronote in the name and on behalf of the company. _ _
T (v) To take out in his official name, letters of administration to any
deceased contributory and in his official name to do all things
necessary for obtaining any money from a contributory or his estate.

(vi) To appoint agents where necessary.

The exercise by the liquidator of the above powers is subject to the
control of Tribunal. Any creditor or contributory can apply to the
Tribunal not only for any act done by the liquidator but also for his
proposed acts. [Sec. 457 (3)].

COMMITTEE OF INSPECTION

The Tribunal may at any time after the making of a winding up

order, direct that there shall be appointed a committee of inspection to
act with the liquidator. Where the,’l‘“rihunal so directs, the liquidator
shall, within two months of such direction convene a meeting of the
creditors to ascertain who are the members of the committee. The
liquidator shall within fourteen days from the date of the creditors
meeting or such further time as the Tribunal may grant, convene a
meeting of the contributories to consider the decision of the creditors

53
‘meeting with respect to the membership of the committee. It shall be
open to meeting of contributories either to accept or reject the decision
of the creditors meeting. In the ease of rejection the liquidator shall
appl to the Tribunal for directions as to whether there shall be a
committee of inspection and if so What shall be its composition and
who shall be the members thereof. (Section 464).

A committee of inspeetitiii appointed in pursuance of section 464

shall consist of not more than twelve members. The proportion of
creditors and contributories will be agreed upon by the meetings of
creditors and contributories and if they fail to agree the Tribunal will
determine the proportion.

The committee can inspett the accounts of the liquidator at all

reasonable times.

GENERAL POWERS OF THE TRIBUNAL

The Tribunal can exercise all the powers vested in it by law,

subject to its jurisdiction. It cannot exercise its powers in respect of
that mattei which does not fall within its jurisdiction. The various
powers of the Tribunal relating ti‘) winding up proceedings are as
under.

1. Pow er of Tribunal to stay winding up (Section 466). As per new

companies (Second Amendment) Act, 2002 following pfitiééfs hiive
been conferred on the Tribunal to stay winding up :
(1) The Tribunal may at any time after making a Winding up order, on
the application either of the Official Liquidator or of any creditor or
contributory and on proof to the satisfaction of the Tribunal that all
proceedings in relation to the winding lip ought to be stayed, make an

54
Order staying the proceedings, either altogether or for a limited time,
on such terms and conditions as the Tribunal thinks fit.
(2) On any application under this section, the Tribunal may, before
making an order, require the Official Liquidator to furnish to the
Tribunal a report with respect to any facts or matters which are in his
opinion relevant to the application.
(3) A copy of every order made under this section shall forthwith be
forwarded by the company, or otherwise as may be prescribed, to the
Registrar, who shall make 8 minute of the order in his books relating to
the company.

2. Settlement of the list of contributories and application of assets.

(Section 467). The Tribunal shall settle as soon as possible after
making the winding up order a list of contributories. Settlement of the
list of contributories is based on the names of shareholders as found in-
the register. The Tribunal, however, is not bound by the register of
shareholders and has authority to rectify the register in all cases where
rectification is required. The effect of the settlement of the list of
contributories and the placing of the name of a person on the said list
is, unless the order is set aside on appeal, to render the question of
liability final and conclusive Where it appears to the Tribunal that it
will not be necessary to make calls or adjust the rights of
contributories, the Tribunal may dispense with the settlement of list of
contributories.
The Tribunal shall cause the assets of the company to be collected and
applied in discharge of the company’s liabilities.

3. Delivery of property to the liquidator. (Section 468). The company

has the power to require, at any time after the winding up order, any
contributory, for the time being on the list of contributories, and any

55
trustee, receiver, banker, agent or officer or other employee of the
company to pay, deliver, surrender or transfer forthwith or within such
time as the Tribunal directs to the official liquidator any money,
property or document in his possession or control to which the
company is prima facie entitled.

4. Power to order payment of debts and to allow set off. (Section

469). The Tribunal has the power to make, at any time after the
winding up order, an order on any contributory to pay, as directed by
the Tribunal any money due from him or from the estate of the person
whom he represents, to the Eplmpany exclusive of any money payable
by him or by the estate by virtue of any call in pursuance of off is
allowed only in the cases mentioned in sub sections (2) and (3) of
section 469. The Tribunal may allow any contributory of an unlimited
company, by way of set off, any money due to him, or to the estate
represented by him from the company on any independent dealing or
contract with the company, but not any money due to him as a member
of the company, in respect of any dividend or profit. The Tribunal may,
likewise, allow the same facility of set-off to any director, managing
agent, secretaries and treasurers or manager whose liability is
unlimited, or to his estate represented by his representative as a
contributory. In the case of a company, whether limited or unlimited,
when all the creditors have been paid in full, any money due on any
account whatever to a contributory from the company may be allowed
to him by way of set-off against any subsequent call.

5. Pow er of Tribunal to make calls (Section 470). As per new

companies (Second Amendment-) Act, 2002 following powers have
been conferred on the Tribunal to make calls up : 1
(1) The Tribunal may, at any time after making winding up order, and

56
either before or after it has ascertained the sufficiency of the assets of
the company.
(a) calls on all or any of the contributories for the time being on the
list of the contributories, make to the extent of their liability, for
payment of any money which the Tribunal considers necessary to
satisfy the debts and liabilities of the company, and the costs, charges
and expenses of winding up, and for the adjustment of the rights of the
contributories among themselves ; and (b) make an order for payment
of any calls so made. (2) In making a call, the Tribunal may take into
consideration the probability that some of the contributories may,
partly or wholly, fail to pay the call.

6. Payment into bank of money due to the company. (Section 471).

The Tribunal may by order direct any contributory, purchaser or other
person from whom any money is due to the company to pay the same
into the public account of India in the Reserve Bank of India instead of
paying it to the liquidator.

7. Pow er to exclude creditors not proving in time. (Section 474). The

Tribunal may fix a time within which the creditors shall prove their
debts or claims so that if they do not prove their debts or claims within
the time so fixed, they shall be excluded from the benefit of any
distribution made before these debts and claims are proved.
A creditor who is late may, as long as there are assets and funds, prove
his debts, provided these are not time barred at the date of the making
of the order for winding upz.

8. Adjustment of rights of contributories. (Section 475). The

Tribunal is empowered to adjust the rights of contributories among
themselves, and distribute any surplus among the persons entitled
thereto.

57
9. Power to costs. (Section 476). Where the assets of the company are
insufficient to satisfy the liabilities, the Tribunal has the power to
make an order for payment out of the assets, the costs,

1. Re Free Press Journal (Madras) Ltd. (1960) I.M.L.J. 146.

2. Re. General Rolling Stock Co. (1872) 7 Ch. 646.

charges and expenses incurred in the winding up. The priority as

regards costs and expenses inter se may be determined by the Tribunal.
10. Pow er to summon persons suspected of having the property of
the company. (Section 477).
The Tribunal may, after making the order for winding up or after
appointing a provisional liquidator, summon before it for examination

(i) persons who are known or suspected to have in their custody any
property of the company.
(ii) persons who are known or supposed to be indebted to the company,
and
(iii) any person deemed by the Tribunal to be capable of giving
information concerning the promotion, formation, trade, dealings,
property or affairs of the company.

The Tribunal may examine any such person on oath, by word of

mouth or on written interrogatories.

The Tribunal has the power to compel any such person to produce
before it any books and papers which may be in his custody or power
relating to the company. If he claims any lien on them, the production
shall be without prejudice to that lien and the Tribunal shall have the
power to decide the question.

58
 If the person summoned admits his indebtedness the Tribunal
may order him to pay to the provisional liquidator or the liquidator as
the case may be. The Tribunal will fix the time, the amount or‘manner
or payment. Further, if the person summoned admits that he has any
property or documents, the Tribunal may direct him to deliver the same
on such terms as the Tribunal may seem just. By making payment or
delivering property or documents as directed by the Tribunal, the
person summoned will stand discharged from his liabilities in respect
thereof. Where any person summoned, after being paid or tendered a
reasonable sum for his expenses fails to appear before the Tribunal, the
Tribunal may cause him to be apprehended and brought before the
Tribunal for examination.

11. Pow er to order public examination of promoters, directors etc.

(Sec. 478). The Tribunal is empowered under this section to investigate
the conduct of the persons who have taken part in the promotion,
formation or managment of the company. Where an official liquidator
has made a report to the Tribunal alleging commission of fraud by any
person in the promotion, formation or management of the company, the
Tribunal may direct the person concerned to appear before it for being
examined.

An order under this section can be made against any person,

promoter, director, manager or officer of the company provided he took
part either in promotion or formation of the company or was connected
with management of the affairs of the company.

The offical liquidators shall take part in the examination, and if

permitted by the Tribunal, he may have the assistance of a law yer. Any
creditor or contributory may also take part in the examination. The
Tribunal may put any questions as it may think fit. The person

59
examined shall be examined on oath. Notes of the examination must be
taken down in writing and must be read over to or by and signed by, the
person examined. They may be used in evidence against him and must
be open to inspection at all reasonable times by a creditor or
contributory.

12. Power to arrest absconding contributory. (Sec. 479). At any time

either before or after making a winding up order, the Tribunal may, on
proof of probable cause for believing that a contributory is about to
quit India otherwise to abscond, or is about to remove or conceal any
of his property, for the purpose of ending payment of calls or of
avoiding examination respecting the affairs of the company, cause
(a) the‘ contributory to be arrested and safely kept until such time as
the Tribunal may order; an
(b) his books and papers and movable property to be seized and safely
kept until such time as the Tribunal may order 2% solution of the
company

60
 CHAPTER-IV

DISSOLUTION OF THE COMPANY

The dissolution of a company is similar to the death of a living

person. On its dissolution the company ceases to exist‘. A company
which has been dissolved, no longer exists as a corporate entity capable
of holding property or of being sued in any Tribunal.
Grounds for dissolution . The Tribunal shall order for the dissolution
of a company-
(i) when the affairs of the company have been completely wound up, or

1. Coxon v. Gorst (1891) 2 Ch. 73.

(ii) when the Tribunal is of the opinion that the liquidator cannot
proceed with the winding up for want of funds and assets, or S

(iii) for any other reason whatsoever. in the to the which 431).

The Tribunal makes an order for the dissolution of the company

only wh en it is just and reasonable circumstances of the case, that such
an order should be made.

A copy of the order shall, within thirty days from the date
thereof, be fc~rwarded by the liquidator registrar who shall make in
this books a minute of the dissolution of the company.

If the liquidator makes default in forwarding a copy as aforesaid,

he shali be punishable with fine may extend to Five Hundred rupees for
every day during which the default continues. (Section) When a
company is dissolved all property and all assets remaining with the
liquidator, at the time of dissolution, or acquired after the dissolution,
vest to the State as bona vacantia.

61
 Dissolution is normally final but it can be revived by the
Tribunal by declaring the dissolution Section 559 confers on the
Tribunal the power of revival of the nearly dead companies. At any
time within two years of the date of dissolution, the Tribunal has power
on application by the liquidator OI‘ an interested person to make an
order on such terms as it thinks fit declaring the dissolution void.

On such an order being made by the Tribunal, such proceedings

may be taken as might have been taken if the company might not have
been dissolved.

Order When an order is made declaring the dissolution to be

void, the applicant must file a copy of the with the registrar of
companies within thirty days of the making of the order who shall
register the same. If such person fails to do so, he shall be punishable
with fine upto rupees Five Hundred for every day during which the
default continues.

The power given to the Tribunal under section 559 is wholly

discretionary and the grounds on the Tribunal will exercise its
jurisdiction will be the general principles of justice and good
conscience.

The grounds for declaring a dissolution void may be that there

are unsatisfied claims by creditors or the discovery of undistributed
assets or to enable the liquidator to grant a title to property of the
company sold since dissolution. Application under this section can also
be made on the ground of fraud but it must be strictly proved by the
applicant.

The effect of an order under section 559 is that it makes

dissolution void ab initio. Consequently any property which on the

62
dissolution was deemed to vest in the State as bona vacantia would
automatically revert
on the to the company.

63
 CONTRIBUTORY

In a going company, that is, before liquidation a member is liable

and bound to pay full amount shares held by him. This liability
continues even after the company passes into liquidation. The
shareholder then becomes a contributory and certain changes occur in
his status, rights and liabilities.

Section 428 defines the term ‘contributory’. It means every

person who is liable to contribute to the assets of the company in the
event of its being wound up and includes the holder of fully paid up
shares. The word ‘liable to contribute’ to the assets of a company are
very wide and might have been held to include persons other than
members, such as debtors, and holders of share wlarrants, but it is now
settled that it refers only to members, past and present and their
representatives.

A holder of fully paid shares is a contributory but, since he is no

longer liable to make any contribution to the assets, he will not
normally be put on the list of contributories unless he so wishes, or
unless there is a prospect of the return of surplus assets.‘
Exceptionally, where fully paid shares were issued without
consideration, the holders may be liable for the full amount.

For the purposes of determining who are or are to be deemed as

contributories, the term ‘contributory’ will include any person alleged
to be a contributory, whether in fact he is or is not a contributory‘. A
minor cannot be a contributory so as to be liable to contribute to the
assets of the company.

64
 The legal representatives of a contributory who dies either before
or after he has been placed on

Re Lakshmi Flour Mills Co. A.I.R (1926) ALL 101.

. Re Aidal Ltd. (1933) 1 Ch. 233.
. Rup Ram. v. Fazal Din (1938) 1. Lah, 237.
. Re Eddystone Marine Insurance C0. (1893) 3 Ch. 9.

the list of contributories shall be liable to contribute to the assets of

the company and shall be contributories accordingly (Section 430). But
he is only liable to contribute to the extent of the assets if any, which
have come into his hands from the deceased member. He is not
personally liable, he is liable in his representative character.
The official assignee or receiver of a contributory who is adjudged
insolvent either before or after it has been placed on the list of
contributories represents the insolvent for all the purposes of the
winding up and is to be considered contributory. (Sec. 431).
If a body corporate which is a contributory is ordered to be wound up,
either before or after he has been placed on the list of contributories,
the liquidator of the body corporate shall represent it for all purposes
of winding up of the company and shall be contributory accordingly.
(Sec. 432).

Nature of contributory’s liability. Once the winding up commences,

the shareholders become contributories and their liability for the debts
of the company as contributories is different from their liability as
shareholders. On a winding up order being made, the liability of a
contributory to contribute to the assets of the company to the extent set
out in section 426, becomes an absolute liability which arises by reason
of statute and not by reason of contract.

65
Extent of liability. In the event of a company being wound up, every
present and past member shall be liable to contribute to the assets of
the company to an amount sufficient for payment of its debts and
liabilities and the costs, charges and expenses of the winding up, and
for the adjustment of the rights of the contributories among themselves.
[Sec. 426

As soon as may be after making the winding up order, the

Tribunal shall settle a list of the contributories. Two lists of
contributories are prepared—the A list and the B list. A list includes the
names of present members i.e. the names of persons who are members
at the commencement of the winding up. B list includes the names of
persons who ceased to be members within a period of twelve months of
the commencement of winding up.

Liability of present members. The liability of contributories on the A

list is primary liability.

The liability of present members is limited to the amount

remaining unpaid on the shares held by him.

If he has guaranteed any amount in a company limited by

guarantee, then his liability to contribute is limited to the amount so
guaranteed. In the case of a company limited by guarantee and having a
share capital, a member ’s liability may be to the extent that he has
guaranteed plus the amount remaining unpaid on the shares held by
him.

Liability of past members. A contributory on ‘B’ list will normally

have no liability. The liability of the ‘B’ list contributories is
secondary i.e. they are liable to contribute to the assets if the moneys
payable by the present members are not paid by them and the debts

66
have remained unsatisfied. A past member will not be liable to
contribute in the conditions stated below :
(i) a past member will not be liable to contribute if he had ceased to be
a member for one year upwards before the commencement of the
winding up.
(ii) a past member will not be liable to contribute in respect of any debt
or liability of the company contracted after he ceased to be a member;
(iii) a past member will not be liable to contribute if there remains
nothing unpaid while he was holding the shares.
(iv) a past member will not be liable to contribute unless it appears to
the Tribunal that the present members are unable to satisfy the
contributions required to be made by them.

In Paras Ram Brij Kishore v Jagraon Trading Syndicate?‘

The liquidator of a company called upon the defendant to pay the

uncalled amount on his shares. His shares had been forfeited before the
winding up and, therefore, he was on B List. But the existing members
had not been called upon to contribute to the full extent of the unpaid
amount of their share money. It was held “that in the circumstances a
past member cannot be liable to contribute till List A is exhausted”.

A person whose shares have been forfeited is also liable as a past

member, provided the liquidation commences w' 'n one year of the date
of forfeiture and the above conditions are fulfilled.” 43

Obligations of directors and managers whose liability is unlimited.

A director of a limited company is, in its winding up, liable to
contribute as an ordinary member in respect of shares held by him. In
addition to this liability, he may be liable to an ulimited extent under
section 427. In the case of directors and managers whose liability is

67
unlimited, under the provisions of Act shall, in addition to his liability
to contribute as ordinary member of the company, be liable to make a
further contribution as a member of an unlimited company. This
additional liability ends if he ceased to hold office for a year or more
before the commencement of the winding up, and does not apply to
debts or liabilities of the company contracted after he ceased to hold
office; and he is not liable for such further contributions unless the
Tribunal deems it necessary in order to satisfy the debts and liabilities
of the company and the costs, charges and expenses of winding up.
Contributory’s right of set off. (Sec. 469). A contributory in a limited
company who is also a creditor of the company cannot, on a winding
up, set off his debt against a call made on him by the liquidator. A
contributory cannot set off his debts against his liability for calls even
if there is an express agreement to do so. For if set off were allowed
the effect would be that a shareholder creditorwould be paid his debt in
full, while other creditors would get only a dividend on their debts.
This ruleis however, subject to the following exceptions where a
limited right of set off is given by the Act.

(1) In the case of an unlimited company, a contributory may set off his
debt against any moneydue to him from the company on any
independent dealing or contract with the company;
(2) Where such contributory is a director, managing director or
manager of a limited company with unlimited liability, he shall have
the same right of set off as is described above.
(3) In the case of any company, whether limited or unlimited, when all
the creditors have been paid in full, any money due to a contributory
may be set off against any subsequent call.

Liability of applicants and allottees of shares

68
 No allotment shall be made of any share capital of a company
offered to the public for subscription, unless the amount stated in the
prospectus as the minimum amount has been subscribed. (Sec. 69).

An allotment made by a company to an applicant in contravention

of this provision is voidable at the instance of the applicant. The
applicant can rescind the contract within two months of the holding of
the statutory meeting or within two months of the allotment, where no
statutory meeting is to be held.

Such an allotment is voidable even if the company is in the

course of winding up provided the option is exercised within the
specified time. If he fails to do so, and the company goes into
liquidation, he will be liable as a contributory.

Allottee of shares on the faith of a false and misleading prospectus

A shareholder who has purchased shares from a company on the

basis of a false or misleading prospectus can- avoid his liability before
the company has gone into liquidation. Accordingly; if a shareholder
having right to rescind the contract for shares is on the register at the
commencement of winding up, he cannot escape liability as a
contributory unless he has commenced legal proceedings to enforce
rescission before the date of the winding up.

Applicant for shares when condition precedent or subsequent

If an application for shares is made subject to a condition

precedent, and the condition has not been performed, the applicant will
not be a member and will not be liable as a contributory on winding up.
Where, however, the condition is subsequent the applicant becomes a
member on allotment to him of the shares, even if the condition is not

69
fulfilled.
Example : R applied for shares to be allotted to him to the condition
that he was first appointed as a branch manager of the company.
Shares were allotted to R but he was not appointed the branch
manager. It was held that he was not liable as contributory on the
winding up. [Roman Bhai case (I981) I.L.R Bombay 595].

70
 CHAPTER-V

VOLUNTARY WINDING UP

A voluntary winding up of a company is entirely different from a

compulsory winding up. Voluntary winding up is winding up by the
members or creditors of a company without interference by the
Tribunal.

The object of a voluntary winding up is that the company and its

creditors are left to settle their affairs without going to the Tribunal,
but they may apply to the Tribunal for any directions or orders if and
when necessary. From the point of view of the company itself a
voluntary winding up has more advantages over a compulsory winding
up, the chief being that there are not so many formalities to be
complied with. This form of winding up is by far the most common and
the most popular.

A company may be wound up voluntarily when—

(a) the period fixed by the articles for the duration of the company has
expired or an event upon which the company is to be wound up has
happened and the company in general meeting has passed ordinary
resolution.
(b) the company has for any cause whatever passed a special resolution
to wind up voluntarily [Section 484]. The company may be wound up
by special resolution even if it is prosperous.
No articles of the company can prevent the exercise of this statutory
right.

A resolution for voluntary winding up must be advertised in the

official gazette and also in some newspaper, circulating in the district

71
where the registered office of the company is situated, within 14 days
of the passing of the resolution. If default is made in complying with
this provision, the company and every defaulting officer shall be
punishable with fine which may extend to Rs. 500 per day for every
day during which default continues. [Section 485]. Officer herein
includes the liquidator also.

1. Oakas v. Turquand (1867) L.R. 2HL 325.

A voluntary winding up commences from the date of the passing of the

resolution. [Section 486].

The date of commencement of winding up is important for

various matters, such as liability of past members who will not be
affected if, on the date of commencement of winding up, a year had
elapsed after they ceased to be members.

Consequences of voluntary winding up

(1) Effect on status of a company. In the case of a voluntary winding
up, the company ceases to carry on the business from the
commencement of the winding up except so far as may be required for
the beneficial winding up of the business. However, the corporate
status and the corporate powers of the company will continue until it is
dissolved. (Section 487).

A voluntary winding up does not necessarily operate as notice of

dismissal to the company’s employees, but there is no change in the
personality of the employer. But where the circumstances of the
winding up are such that the company can no longer carry on business,
its contracts and its servants will necessarily cease, leaving the
employees free to claim damages if they are so entitled.
Example : By a written agreement F was appointed managing director

72
of a company for five years. Before the expiration of the five years,
the company passed a resolution for voluntry winding up, as it could
not by reason of its liabilities continue its business. F voted in favour
of this resolution. It was held that-
(a) the voluntary winding up operated as a wrongful dismissal of F,
and
(b) the fact that F voted in for 1; of the resolution did not prevent
him from claiming damages.
[Fow ler v. Commercial Timbe‘ ,..;. Ltd. (1930) 2 K.B. 1 (C.A.)].
(2) Board’s pow er to cease on appointment of a liquidator. On the
appointment of a liquidator the powers of the board oi directors,
managing or whole time directors and the manager shall cease, except
for the purpose of giving notice to the registrar of the appointment of
the liquidator. (Sec. 491).

On the appointment of a liquidator the powers of the board of

directors cease except so far as the company in general meeting or the
liquidator (in a members voluntary winding up) or the committee of
inspection or if there is no such committee, the creditors (in a creditors
voluntary winding up), sanction the continuance. (Sec. 505).

A difference between section 505 and section 491 may be noted

while under section 491 the powers of the entire managerial personnel
cease, under section 505 the powers of the board of directors alone
cease.

(3) Avoidance of transfer etc. after commencement of winding up. In

the case of a voluntary winding up, any transfer of shares in the
company, not being a transfer made to or with the sanction of the
liquidator, and any alteration in the status of the members of the

73
company, made after the commencement of the winding up, shall be
void. (Sec. 536).

Types of voluntary winding up . A voluntary winding up may be :

(A) A members’ voluntary winding up.
(B) A creditors voluntary winding up.

MEMBERS’ VOLUNTARY WINDING UP

A member ’s voluntary winding up takes place only when the

compay is solvent. It is initiated by the members and is entirely
managed by them. The liquidator is appointed by the members. No
meeting of creditors is held and no committee of inspection is
appointed. To obtain the benefit of this form of winding up, a
declaration of solvency must be filed.

Declaration of solvency. Section 488 provides that where it is

proposed to wind up a company voluntarily the directors or a majority
of them, may, at a meeting of the board, make a declaration verified by
an affidavit that the company has no debts or that it will be able to pay
its debts in full within a period not exceeding 3 years from the
commencement of winding up as may be specified in the declaration.
Such declaration shall be made within five weeks immediately
preceding the date of the passing of the resolution for winding up and
shall be delivered to the registrar before that date. It shall also be
accompanied by a copy of the auditors on the profit and loss account
and the balance sheet of the company prepared upto the date of the
declaration and must embody a statement of the company’s assets and
liabilities as on that date.

74
 Directors making such a declaration without reasonable grounds
are liable to heavy penalities. If the debts are not paid or provided for
within the period stated, they are presumed not to have reasonable
grounds. They shall be liable to imprisonment for a term which may
extend to six months or with fine which may extend to fifty thousand
rupees or with both.

Where such a declaration is duly made and delivered, the

winding up following shall be called member's voluntary winding up.
Where the same is not duly made, it shall be called creditor ’s voluntary
winding up.

Sections 490-98 of the Act deal with provisions applicable to

member ’s voluntary winding up. They are as follows :

1. Appointment of liquidator. [Section 490]. The company in general

meeting shall appoint one or more liquidators for winding up the affairs
of a company and for distributing the assets. The company shall also fix
his remuneration and unless his remuneration is not fixed, he will not
take charge of his office. Such remuneration cannot be increased in any
circumstance whatsoever. The liquidator may be appointed at the
meeting at which the resolution for voluntary winding up is passed.

2. Board’s pow er to cease. [Section 491]. On the appointment of a

liquidator all the powers of the board and other managerial personnel
shall come to an end, except in so far as the company in general
meeting or the liquidator sanctions the continuance thereof. However, a
resolution for voluntary winding up does not automatically dismiss all
servants but if it takes place because the company is insolvent it does
operate as a discharge

75
3, Power to fill vacancy in the office of liquidator. [Section 492].
Where a vacancy for whatever cause occurs in the office of the
liquidator the company in general meeting, subject to any agreement
with the creditors fill the vacancy. The general meeting may be called
by any contributory or by any continuing liquidator.

4. Notice of appointment of liquidator to registrar. [Section 493].

The company shall give notice to the registrar of the appointment of a
liquidator. The company shall also give notice of every vacancy
occurring in the office of liquidator and of the names of the liquidators
appointed to fill every such vacancy. The notice shall be given by the
company within 10 days of the event to which it relates.

If default is made in complying with these provisions, the company and

its officers who are in default shall be punishable with fine upto Rs.
1,000 for every day during which the default continues.

5. Duty to call creditors meeting. [Section 495]. Where the liquidator

is, at any time, of the opinion that the company will not be able to pay
its debts in full within the specified period, he shall immediately call a
meeting of the creditors and shall place before it a statement of
company’s assets and liabilities. On default the penalty is a fine which
may extend to Rs. 5,000.

Where a liquidator has called a creditors meeting under section

495, the winding up, then, would proceed as if it was creditor ’s
voluntary winding up. [Section 498].

6. General meeting at the end of year. [Section 496]. Where the

winding up continues for more than one year, the liquidator must call a
general meeting of the company at the end of the first year and at the
end of each subsequent year. He should lay before the meeting an

76
account of acts and dealings and the progress of the winding up during
the year. The purpose of this section is to enable the shareholders to
know the state of affairs in the winding up.

If the liquidator fails to comply with the above mentioned

provisions, he shall be punishable in respect of each failure with fine
which may extend to Rs. 1,000.

7. Final meeting and dissolution. [Section 497]. When the affairs of

the company are fully wound up, the liquidator shall perform the
following duties :

(a) He shall make up an account of the winding up, showing how the
same has been conducted and how the property has been disposed of.
(b) He shall call a general meeting of the company for laying before it
the said accounts. This meeting is the final meeting of the company.
The meeting shall be called by advertisement specifying the time, place
and object thereof. The advertisement shall be made not less than one
month before the meeting in the official gazette and also in some local
newspaper where the registered office of the company is situated.
Failure to call meeting is punishable with fine upto Rs. 5,000.
(c) Within one week after the meeting, the liquidator shall send a copy
of the account to the registrar and the official liquidator and also a
return of the holding of the meeting and the date thereof.
If the copy is not so sent or the return is not so made, the liquidator
shall be punishable with fine which may extend to Rs. 500 for every
day during which the default continues.

1. Reigate v. Union Manufacturing Company (Ramsbmtom) Ltd. (1918)

1KB 592.

77
 If a quorum is not present at the final meeting, the liquidator
shall make a return that the meeting was duly called and that no
quorum was present thereat.

The registrar on receiving the account and either of the returns

shall forthwith register the same.

The official liquidator on receipt of the account and the return is

required to make a scrutiny of the books and papers of the company.
The liquidator of the company, its past and present officers, shall
afford an opportunity to the official liquidator for this purpose. The
official liquidator shall send a report of the scrutiny to the Tribunal. If
the report shows that the affairs of the company have been conducted
bonafide i.e. not in a manner prejudicial to the interests of its members
or public interest, then from the date of the submission of the report to
the Tribunal, the company shall be deemed to be dissolved. If the
report shows that the affairs of the company have been conducted in a
manner prejudicial to the interests of members or public interest, the
Tribunal shall by order direct the official liquidator to make a further
investigation of the affairs of the company. For this purpose the
Tribunal shall invest him with all such powers as it may deem fit. On
receipt of the report of the official liquidator on such further
investigation the Tribunal may either make an order that the company
shall stand dissolved or make such other order as the circumstances of
the case brought out in the report permit.

CREDlTOR’S VOLUNTARY. WINDING UP

Where a company proposes to wind up voluntarily and the

directors are not in a position to make the statutory declaration of
solvency, the winding up is a creditor ’s voluntary winding up. The

78
provisions for creditors voluntary winding up are similar to those
applicable to the member ’s voluntary winding up except that in the
former, it is the creditors who appoint the liquidator, fix his
remuneration and generally conduct the winding up. Section 500 to 509
deal with creditor ’s voluntary winding up. They are discussed as under :
1. Meeting of creditors. (Section 500). When the declaration of
solvency is not made by the directors, the company shall cause a meeting
of the creditors of the company to be called on the day or next following
day on which the resolution for voluntary winding up is to be proposed.
Notice of the meeting of creditors shall be posted to creditors
simultaneously with notice of the meeting of the company. The notice
calling the meeting of the creditors shall be advertised in the official
gazette and once at least in two newspapers circulating in the district
where the registered office of the company is situated. The board of
directors shall lay before the meeting of the creditors a full statement of
the position of the company’s affairs together with the list of its
creditors and the estimated amount of their claims. One of the directors
must preside at the meeting.

If the meeting of the company at which the resolution for

voluntary winding up is to be proposed is adjourned, and the resolution
is passed at an adjourned meeting, any resolution passed at the meeting
of the creditors shall have effect as if it had been passed immediately
after the passing of the resolution for winding up of the company.
2. Notice to registrar. [Section 501]. The company shall give notice of
resolution passed at the creditors meeting to the registrar within 10 days
of its passing. If the company fails to send the notice, within the
prescribed period, the registrar of companies, the company, every officer
of the company and the liquidator shall be punishable with fine which
may extend to Rs. 500 for every day during which the default continues.

79
3. Appointment of liquidator. [Section 502]. The creditors and the
company shall appoint a person to be the liquidator. If different persons
were nominated, the person nominated by the creditors shall be the
liquidator. Any director, member or creditor of the company may, within
7 days of the nomination made by the creditors, apply to the Tribunal for
an order that the person appointed by the company shall be the
liquidator. Where no person is nominated by the creditors, the person
nominated by the company shall be the liquidator. On the other hand, if
no person is nominated by the company, the person nominated by the
creditors shall be the liquidator.
4. Committee of inspection. [Section 503]. The creditors at their
meeting may appoint a committee of inspection consisting of not more
than five persons. Where such a committee is appointed, the company
may also appoint at a meeting such number of persons not exceeding five
to act as the members of the committee. The creditors may resolve that
any of the person appointed by the company ought not to be the members
of the committee of inspection. In such cases, unless the Tribunal
otherwise directs, they cannot act on the committee. The Tribunal may
appoint other persons in place of persons objected to.
5. Liquidator’s remuneration. [Section 504]. Remuneration of the
liquidator may be fixed by the committee of inspection or the creditors if
there is no committee of inspection. Otherwise the Tribunal may fix his
remuneration. Remuneration -fixed as above cannot be increased in any
circumstances.
6. Power of board to cease. [Section 505]. The board usually ceases to
function on appointment of the liquidator. The board may act in so far as
the committee of inspection (if any) or the creditors in general meeting
may sanction the continuance thereof.
7. Vacancy in office of liquidator. [Section 506]. The creditors in

80
general meeting may fill up any vacancy caused in the office of the
liquidator other than a liquidator appointed by or by the direction of the
Tribunal.
8. Meeting at the end of each year. [Section 508]. Where the winding
up continues for more than a year, the liquidator shall call a general
meeting of the company and a meeting of the creditors at the end of the
first year from the commencement of the winding up and at the end of
each succeeding year within three months from the end of the year or
such longer period as the central government may allow. The liquidator
shall lay before the meeting an account of his acts and dealings and of
the conduct of the winding up during the preceding year. The object of
these provisions is to give regular information to the creditors and
shareholders. If the liquidator fails to comply with these provisions he is
liable to be fined upto Rs. 1,000 in respect of each failure. 7
9. Final meeting and dissolution. [Section 509]. As soon as the affairs
of the company are wound up, the liquidator shall make up the account
of the winding up showing how the winding up has been conducted and
property of the company has been disposed of. He shall call a general
meeting of the company and a meeting of the creditors for the purpose of
laying the accounts before the meetings. Each such meeting shall be
advertised in the official gazette and also in some newspaper circulating
in the district where the registered office of the company is situated.
Within a week after the meeting, the liquidator shall send to the registrar
a copy of the account and a return which will be registered. Thereafter
the procedure is the same as in member ’s voluntary winding up.

Difference betw een member’s voluntary winding up and creditor’s

voluntary winding up
1. Declaration of solvency is a must in a member ’s voluntary winding
up, whereas it is not necessary in a creditor ’s voluntary winding up.

81
2. It is not necessary to have a creditor ’s voluntary meeting in the case
of member ’s voluntary winding up, whereas in the case of creditor ’s
voluntary winding up, it is a statutory duty of the company to call a
meeting of the creditors.

3. The liquidator is approved by the members in case of member ’s

voluntary winding up whereas both members and creditors appoint
liquidator in case of creditor ’s voluntary winding up.

4. There is no committee of inspection in case of member ’s voluntary

winding up, but in case of the latter there is one.

5. In the case of member ’s voluntary winding up it is the members who

control the winding up, and the creditors do not play an active role as
the company is solvent. In the case of creditor ’s voluntary winding up, it
is the creditors who control the winding up as the company is considered
to be insolvent.

6. In a member ’s voluntary winding up, the liquidator can exercise some

of the powers with the sanction of _a special resolution of the company.
In a creditor ’s voluntary winding up, he can do so with the sanction of
the Tribunal or the committee of inspection or of meeting of creditors.

LIQUIDATORS IN VOLUNTARY WINDING UP

Appointment of liquidator. In a member ’s voluntary winding

up, the company in general meeting shall appoint one or more
liquidators for the purpose of collecting the company’s assets and
distributing the proceeds among creditors and contributories. If a
vacancy occurs by death or resignation or otherwise in the office of the
liquidator the company in general meeting may fill the vacancy.
(Section 490 and 492).

82
 In the case of a creditors voluntary winding up, the creditors and
the members at their respective meetings, may nominate a person to be
the liquidator of the company. However, the creditors are given a
preferential right in the matter of the appointment of the liquidator
with a power to the Tribunal to vary the appointment on application
made within seven days by a director, member or creditor. (Section
502).

Pow er of the Tribunal to appoint liquidator. In a member ’s or

creditor ’s voluntary winding up, if for any cause whatever there is no
liquidator acting, the Tribunal may appoint the official liquidator or
any other person as a liquidator of the company. The Tribunal may also
appoint a liquidator on the application of the registrar. (Section 515).
Body corporate not to be appointed as liquidator. A body corporate
shall not be qualified for appointment as a liquidator of a company in a
voluntary winding up. Any appointment of a body corporate as
liquidator shall be void. (Section 513). A partnership firm of accounts
is not a body corporate and as such may be appointed liquidator of a
company.

Corrupt inducement affecting appointment as liquidator. Any person

who gives or agrees or offers to give, to any members or creditor of the
company any gratification with a view to securing his
own appointment or nomination or to securing or preventing the
appointment of someone else, as the liquidator is liable to a fine which
may extend upto Rs. 10,000. (Section 514).

Notice by liquidator of his appointment. When a person is appointed

the liquidator and accepts the appointment, he shall publish in the
official gazette notice of his appointment, in the prescribed form. He
shall also deliver a copy of such notice to the registrar. The liquidator

83
shall do this within 30 days of his appointment. Where the liquidator
fails to comply with the above provision, he is liable to a fine which
may extend to Rs. 500 for each day of default. (Section 516).

Effect of the appointment of liquidator. On the appointment of a

liquidator, in a member ’s voluntary winding up all the powers of the
directors, including managing director, whole time directors as also the
manager shall cease except so far as the company in general meeting or
the liquidator may sanction their continuance. (Section 491).

On the appointment of a liquidator in creditor ’s voluntary

winding up, all the powers of the board of directors shall cease. The
committee of inspection or if there is no such committee, the creditor ’s
meeting by resolution may sanction continuance of the powers of the
board. (Section 505).

Remuneration of liquidator. In a member ’s voluntary winding up, the

general meeting shall fix the remuneration to be paid to the liquidators.
Unless the question of remuneration is resolved the liquidators shall
not take charge of his office. Once remuneration is fixed it cannot be
increased. (Section 490).

In a creditors voluntary winding up, the remuneration of the

liquidator is fixed by the committee of inspection and if there is no
committee of inspection then by the creditors. In the absence of any
such fixation, the Tribunal shall determine his remuneration. Any
remuneration so fixed shall not be increased (Section 504).

All costs, charges and expenses properly incurred in the winding

up, including the remuneration of the liquidator, shall subject to the
rights of secured creditors, be payable out of the assets of the company
in priority to all other claims. (Section 520).

84
Removal of liquidator. In either kind of voluntary winding up, the
Tribunal may, on cause shown, remove a liquidator and appoint the
official liquidator or any other person as a liquidator in place of
removed liquidator. The Tribunal may also remove a liquidator on the
application of the registrar.

The term ‘on cause shown’ does not necessarily mean personal
misconduct or unfitness. It means any conduct which would make the
liquidator no longer fit to act as such. Where the liquidator disregards
the wishes of creditors in an insolvent company and the wishes of
contributories in a solvent company, it may be sufficient cause on
which Tribunal may remove a liquidator.2

However, in the exercise of his powers, the liquidator shall be

subject to the control of the court. 4 7 Any creditor or contributory may
apply to the court with respect to any exercise or proposed exercise of
the liquidator ’s powers. If the court finds that, from any cause
whatever, no liquidator is functioning the court may appoint the
official liquidator or any other person as the liquidator of the company.
The court also has the power, on cause shown, to remove a liquidator
and appoint some other person in his place.“ In Dr Hardit Singh v
Registrar of Companies,“ the Delhi High Court ordered the removal of
a voluntary liquidator on the grounds that he had not deposited certain
amounts as required by Section 553 of the Act, that he had been
uncooperative and defiant regarding the recovery of the company’s
claims and that the process of liquidation was a collusive affair
between the ex-managing director and the liquidator. The Madras High
Court5° rejected an application for removal as the move was not bona
fide, but was motivated by malice on account of certain actions which
were taken against the applicant by the liquidator and because the

85
applicant was apprehensive that the liquidator would pursue the action
to the finish. “The courts are loathe to interfere with the scheme of self
determination by the members of a company. Vague allegations are not
sufficient to secure the removal of a liquidator.“ Where the liquidator
made no response to a creditor ’s claim and proofs, nor even replied to
his letters enquiring about the matter, this was held to be dereliction of
duty sufficient to merit removal.“

A liquidator is not removable only on the ground that he was a

shareholder or director or because the creditors or members in majority
demand it. 5 3

The following statement occurs in a judgment of ASTBURY J54

as to the meaning of the expression “on cause shown”. The words “on
cause shown” have not quite the effect of “if the court shall think fit.”
JESSEL MR said in Sir John Moore Gold Mining C0, Re,55 “they point
to some unfitness of the person-—it may be from personal character, or
from his connection with other parties, or from circumstances in which
he is mixed up—some unfitness in a wide sense of the term.” But, as
pointed out by the Court of Appeal in Adam Eyton Ltd, Re, 5‘ this
definition was not intended to be exhaustive, and if the court is
satisfied on the evidence that it is desirable in the interest of all those
interested in the assets that a particular person shall not manage the
assets, the court has power to

47 Registrar of Companies v Rowe & Pal, (1972) 42 Comp

Cas 188 Ori.

48 S. 515.
49 (1972) 42 Comp Cas 256 Delhi.
50 Rangaswami v Mandhi Viswa Brahmana Sarvajana

86
 Sahaya Nidhi Ltd, (1967) 37 Comp Cas 730 Mad.
51 Registrar of Companies v Hardit Singh Giani, (1978) 48
Comp Cas 152 Del.
52 Amar Nath Krishan Lal v Hindustan Forest Co Ltd,
(1993) 77 Comp Cas 128 P&H.
53 See Charlesworth & Cain, COMPANY LAW, 606 (11th
Edn, 1977), citing M. Knight & C0 Ltd v Montgomerie,
(1892) 19 R 501 and Ker, Petitioner, (1897) 5 SLT 126 O1-
I.
54 Rubber and Produce Investment Trust, [1915] l Ch 382
at 387.
55 (1879) 12 Ch D 325, 331.
56 (1887) 36 Ch D 299 CA.

remove him, without there being shown any personal misconduct or

unfitness.

The liquidator or any contributory or creditor may apply to the

court to
determine any question arising in the winding up of the company or to
exercise all or any of the powers which the court may exercise if the
company were being wound by the court.” In the exercise of this power
the court stayed a voluntary winding up because the company was
producing a socially needed commodity, cement; it had resources. both
raw material and finance and the shareholders wanted to revive their
company.”

The liquidator may make a report to the court stating that in his
opinion a fraud has been committed by any person in the promotion or
formation of the company or by any officer after the formation of the

87
com. The court may then direct the person to appear for public
examination.

Example : The secretary of a company was appointed liquidator. He

was intimate with the directors and to some extent jointly interested
with them. There was suflicient evidence that he took their side
strongly.

A contributory moved against the liquidator and two directors for

an order compelling them to pay money for which they were liable in a
fiduciary relation. It was held that there was suflicient cause for the
removal of the liquidator. [Re Sir John Moore Gold Mining Co. (I879)
12 Ch. 325].
A liquidator should not be removed arbitrarily. In Hardit Singh Giani v.
Registrar of Companiess, Delhi High Tribunal ordered the removal of a
liquidator on the grounds that :
(i) he had not deposited certain amounts as required by section 553 of
the Companies Act ;

1. Registrar of Companies v Rowe & Pali (1972) 42 Comp. Cas 188.

2. Re Rubber & Produce Investment Trust (1915) 1 Ch. 382.
3. (1972) 42 Comp. Cas 256.

(ii) he had been unco-operative and defiant regarding the recovery of

the company’s claim ;
(iii) the process of liquidation was a collusive affair between the ex-
managing director and the liquidatar.

Provisions applicable to every voluntary winding up

The provisions contained in sections 511 to 521 shall apply to both
member ’s and creditor ’s voluntary winding up. (Sec. 510).

88
Distribution of property of company. The assets of a company which
is being wound up, shall be utilised in making preferential payments
and the balance will be applied in satisfaction of the company’s
liabilities pari passu. The residuary amount, unless the articles
otherwise provide shall be distributed among the members according to
their rights and interests in the company. (Sec. 511).

Statement of affairs to be made to liquidator. The provisions of

section 454 (dealing with requirement as to making of statement of
affairs by the officers of the company in case of winding up by the
Tribunal) apply, so far as may be, to every voluntary winding up as
they apply to the winding up by the Tribunal except that references to:
(a) the Tribunal shall be omitted ;
(b) the official liquidator or the provisional liquidator shall be
eonstruted as references to the liquidator; and
(c) the ‘relevant date’ shall be construed as references to the date of
commencement of the winding up. (Sec. 511-A).

Pow ers and duties of liquidator in voluntary winding up. Section

512 deals with the powers and duties of liquidator in voluntary winding
up. The powers of the liquidator in voluntary winding up are the same
as those of the official liquidator in a winding up by the Tribunal
except with one difference, regarding the manner in which these powers
are exercised. In the case of winding up by the Tribunal the official
liquidator has to obtain the sanction of the Tribunal to exercise some of
the powers. But in the case of member ’s voluntary winding up, the
liquidator can exercise those powers ‘vith the sanction of a special
resolution of the company. However, in the case of creditor ’s voluntary
winding up, the liquidator has to obtain the sanction of the Tribunal or

89
the committee of inspection or in its absence, of a meeting of the
creditors.

Pow ers with sanction. The liquidator may exercise the following
powers, in the case of a members voluntary winding up with the
sanction of a special resolution of the company, and in the case of a
creditors voluntary winding up, with the sanction of the Tribunal or the
committee of inspection or the meeting of the creditors if there is no
committee of inspection
(a) to institute or defend any suit in the name and on behalf of the
company;
(b) to carry on the business of the company so far as may be necessary
for the beneficial winding up of the company;
(c) to sell the immovable and movable property of the company;
(d) to raise any money required on the security of the assets of the
company.
The exercise of these powers by the liquidator is subject to the control
of the Tribunal. Any creditor or contributory may apply to the Tribunal
with respect to any exercise or proposed exercise of any of these
powers.

Pow ers without sanction. The liquidator in a voluntary winding up

may exercise certain powers Without any sanction referred to above.
The liquidator in exercise of his powers may :
(a) do all acts and execute all documents and use company’s seal,
(b) inspect the records and returns of the company in the registrar ’s
office without payment of fees,
(c) prove, rank and claim insolvency of any contributory,
(d) draw, accept, make and endorse any bills of exchange, hundi or
promissory note,

90
(e) take out letter of administration to any deceased contributory
without effecting the right of the administrator- general, and
(I) appoint an agent.
In addition to the above powers the liquidator can without obtaining the
sanction, exercise the following powers-
(i) he may exercise the power of the Tribunal as regards settling the list
of contributories,
(ii) he may exercise the power of the Tribunal of making calls,

(iii) he may convene general meetings of the company for obtaining

sanction of the company by ordinary or special resolution or for any
other purpose.

When several liquidators are appointed, any power given by the

Act may be exercised by such one or more of them as may be
determined at the time of their appointment or in default of such
determination by any number of them not being less than two.

It is the duty of the liquidator to pay the debts of the company and to
adjust the rights of the contributories among themselves.

Application to Tribunal to have questions determined

When a company is being voluntarily Wound up, the liquidator, any
contributory or any creditor may apply to the Tribunal-
(a) for determination of any question arising in the winding up of a
company.
(b) for exercise of any of the powers of Tribunal exercisable in a
compulsory winding up. and
(c) for setting aside any attachment, distress or execution but into force
against the estate‘ or effects of the company after the commencement
of winding up.

91
 The Tribunal may accede wholly or partially to the application on
such terms and conditions as it thinks fit. It may make such other
orders as it thinks just.

A copy of the order staying the proceedings in the winding up

shall forthwith be forwarded by the company to the registrar who would
make an entry in the book relating to the company (Sec. 518).

Application for public examination of promoters, directors etc.

The liquidator may make a report stating that in his opinion a

fraud has been committed by any person in the promotion or formation
of the company or by any officer of the company in relation to the
company since its formation. The Tribunal may after considering the
report direct such person to appear for public examination. Public
examination, means examination in Tribunal where members of the
public may be present (Section 519).

CONSEQUENCES OF WINDING UP

Winding up affects a number of parties. The consequences of winding

up are as under 2

1. Consequences as to shareholders. A member of a company is liable

and bound to pay the full amount on the shares held by him. This
liability continues even after the company goes into liquidation; for the
purposes of winding up, he is described by the Act as a contributory.
The term ‘contributory’ means a person liable to contribute to the
assets of a company in the event of its being wound up, and inlcudes
the holder of any shares which are fully paid up. Contributory may be
present or past. The liability of a present contributory is limited to the
amount remaining unpaid on the shares held by him. A past

92
contributory can only be called upon to pay if the present contributory
is unable to pay.

2. Consequences as to creditors. The object of winding up is to realise

the assets and discharge the liabilities and then if there be any surplus,
to pay it off to the shareholders. It is the duty of the liquidator to pay
off the liabilities of the company. In order to ascertain the liabilities,
section 528 requires that all persons having claims of whatever nature
against the company should submit proofs of what is due to them.
Every kind of a liability, whether present or future, certain or
contingent and however difficult of valuation is provable and has got to
be proved. Section 528 applies to proofs of debts where a company is
solvent i.e. where its assets are sufficient to pay all its debts and
liabilities as well as the costs of the winding up. Where an insolvent
company is being wound up, the insolvency rules will apply and only
such claims shall be provable against the company as are provable
against an insolvent person. (Sec. 529).

Right of secured creditors. The position of a secured creditor in

relation to the winding up of a company is quite different from that of
an unsecured creditor. He can stand wholly outside the Winding up
proceedings unless he abandons his security and joins the ranks of
unsecured creditors. A secured creditor, has three alternatives before
him.
(i) He may rely on his security for the payment of all that may be due
to him and ignore the liquidation altogether; or .
(ii) he may value or realise the security and prove for the deficiency in
the winding up, or
(iii) he may give up the security and prove for the whole amount.

93
 Where the secured creditor proceeds to ‘realise the security, he is
liable to pay all the expenses incurred by liquidator for the
preservation of the security before its realisation.

Right of unsecured creditors. All debts due to unsecured creditors are

to be treated equally and paid pari passu.

When the list of claims is settled the liquidator has to commence

making payments. The assets available to the liquidator are applied in
the following orders :
1. Secured creditors. 2. Cost of the liquidation.
3. Preferential payments. 4. Debenture holders secured by a floating
charge.
5. Unsecured creditors. 6. Balance returned to the contributories.

Preferential payment. Section 530 enumerates certain debts which are

to be paid in priority to all other debts. Such payments are called
preferential payments. It may however be noted that such payments are
made after paying the secured creditors, and costs, charges and
expenses of the winding up.

These preferential payments are: (a) All revenues, taxes, cesses and
rates due from the company to the central or state government or to a
local authority. The amount should have become due and payable
within 12 months before the winding up. (b) All wages or salary of any
employee in respect of services rendered to the company and due for a
period not exceeding 4 months within 12 months, before the winding up
and any compensation payable to any workman under any of the
provisions of Chapter V-A of the Industrial Disputes Act. 1947. The
amount must not exceed Rs. 20,000 in the case of any one claimant. (c)
All accrued holiday remuneration becoming payable to any employee or

94
in the case of his death to any other person in his right, on the
termination of his employment before or by the effect of the winding
up. (d) All amounts due in respect of contributions payable by the
company as employer but this is not payable if the company is being
would up voluntarily for the purpose of reconstruction and
amalgamation. (e) All amounts due in respect of any compensation or
liability for compensation in respect of death or disablement of any
employee under the Workmens’ Compensation Act, 1923 but this is not
payable if the company is being wound up voluntarily for
reconstruction or amalgamation. (f) All sums due to any employee from
a provident fund, a pension fund, a gratuity fund or any other fund for
the welfare of the employees maintained by the company. (g) The
expenses of any investigation held in pursuance of section 235 and 237,
in so far as they are payable by the company.

3. Consequences as to servants and officers. A winding up order by a

Tribunal operates as a notice of discharge to the employees and officers
of the company except when the business of the company is continued.
The same principle will apply as regards discharge of employees in a
voluntary winding up. Where there is a contract of service for a
particular period, an order for winding up will amount to wrongful
discharge and damages will be allowed as for breach of contract of
service.
Example : A agreed to act as a director of a company for seven years
and not to engage in any competing business for seven years after he
should cease to hold office. Company was ordered to be wound up. It
was held that the winding up order operated as a wrongful dismissal
of A and that he was free from his agreement not to compete with the
company. [Measures Bros. Ltd. v. Measures". (1910). I Ch. 336].

95
4. Consequences of proceedings against the company. When a
winding up order is made, or an official liquidator has been appointed
as provisional liquidator no suit or legal proceeding can be commenced
and no pending suit or legal proceeding continued against the company
except with the leave of the Tribunal and on such terms as it may
impose. In the case of a voluntary winding up, the Tribunal may
restrain proceedings against the company if it thinks fit. It may be
noted that law does not prohibit proceedings being taken by the
company against others including directors, or officers or other
servants of the company.

5. Consequences as to costs. Where the assets of the company are

insufficient to satisfy the liabilities, the Tribunal may make an order
for payment out of the assets of the costs, charges and expenses
incurred in the winding up. The Tribunal may determine the order of
priority in which such payments are to be made. (Section 476).

6. Consequences as to documents. When a company is being wound up

whether by or under the supervision of the Tribunal or voluntarily, the
fact must be made known to all those having any dealing with the
company; every document in the nature of an invoice, order for goods
or business letter issued in the name of the company, after the
commencement of winding up must contain a statement that the
company is being wound up. (Sec. 547).

Where a company is being wound up, all documents of the

company and of the liquidators shall, as between the contributories of
the company, be prima facie evidence of the truth of all matters
recorded therein. (Sec. 548).

96
 Where an order for winding up of the company by or subject to
the supervision of the Tribunal is made, any creditor or contributory of
the company may inspect of the books and the papers of the company,
subject to the provisions made in the rules by the central government in
this behalf. When the affairs of_ a company have been completely
wound up, and it is about to be dissolved, its books and papers and
those of the liquidator may be disposed of in such manner as the
Tribunal directs. This applies to a winding up by or subject to the
supervision of the Tribunal.

In the case of a member ’s voluntary winding up, they may be

disposed of in the manner directed by a special resolution of the
company and in the case of a creditor ’s voluntary winding up, in the
manner directed by committee of inspection or if there is no such
committee by the creditors. (Sec 550).

97
 CHAPTER-VI

WINDING UP OF INSOLVENT COMPANIES

Section 529 of the Companies Act applies to winding up of the

company which cannot pay all its debts i.e. to an insolvent company
only in respect of the following matters :
(a) debts provable,
(b) the valuation of annuities and future and contingent liabilities; and
(c) the respective rights of secured and unsecured creditors.

All persons who would be entitled to prove for and receive

dividends out of the assets of the company may come in under the
winding up and make such claims against the company as they
respectively are entitled to. But it is not necessary for a secured
creditor to prove his debt in the winding up and he can stand wholly
outside the winding up proceedings. However, if a secured creditor
instead of giving up his security and proving for his debt proceeds to
realise his security, he shall be liable to pay the expenses inurred by
the liquidator for the preservation of the security before its realisation
by the secured creditor.

The rules of insolvency in India are to be found in the Presidency

Towns Insovlency Act, 1909 and the Provincial Insolvency Act, 1920.
Only such of the rules contained in these Acts as relate to the
respective rights of the secured and unsecured creditors, and to debts
provable and to the valuation of certain liabilities shall apply under
section 529. Apart from these provisions, in respect of other matters
such as those relating to priority of debts, all questions have to be
determined with reference to the Companies Act only.

98
 Section 529 ceases to be applicable as soon as it is found that the
company in the course of winding up is not insolvent. The provisions
of the laws of insolvency applicable to insolvent companies will not
apply to such company and it will be treated as having been solvent
throughout the winding up proceedings.

WINDING UP OF UNREGISTERED COMPANIES

Part X of the Companies Act containing sections 582 to 590 deal

with the winding up of unregistered companies.

Meaning. Section 582 defines an ‘unregistered company’. It includes

any partnership, association or company having eight or more members
at the time when the petition for winding up is presented. However, it
shall not include-

(a) a railway company incorporated by any Act of Parliament or other

Indian law or any Act of Parliament of the United Kingdom;
(b) a company registered under the Companies Act 1956 and
(c) a company registered under any previous companies law.

The term ‘unregistered companies’ does not cover associations

formed contrary to the provisions of Section 11 which are known as
illegal associations. Section 584 provides that where a foreign company
incorporated outside India has been carrying on business in India and
ceases to do so, it may be wound up as an unregistered company
despite the fact that its existence had ceased according to the law of the
country of incorporation. An unregistered company may be wound up
under this Act and all the provisions of this Act with respect to winding
up shall apply to an unregistered company with the exception that the
principal place of business of the unregistered company will be treated

99
as registered office and the appropriate Tribunal of that place will have
jurisdiction to wind up the company. [Section 583 (1) & (2)].

Grounds for winding up. An unregistered company may be wound up

by the Tribunal if :
(a) it is dissolved or has ceased business or is carrying on business
only for the purpose of winding up its affairs; or

(b) it is unable to pay its debts; or

(c) the Tribunal is of opinion that it is just and equitable that the
company should be wound up. [Section 583 (4)]. An unregistered
company is to be deemed to be unable to pay its debts,

(a) if a creditor, for more than rupees five hundred has demanded
payment in writing but the company has neglected to pay or secure or
compound the same within a period of three weeks, or

(b) if any action has been instituted against a member for any debt due
from the company or from him in his character of member and a notice
of such action has been served on the company and the company has
not within 10 days paid, secured or compounded for the debt or
procured the action to be stayed or indemnified the defendant against
the action.

(c) if any execution issued on a judgement in favour of a creditor

against the company or any member thereof, is returned unsatisfied in
whole or in part, or

(d) if it is otherwise proved to the satisfaction of the Tribunal that the

company is unable to pay its debts. [Section 583 (5)1.

100
Cumulative effect of the provisions. All the provisions with respect to
winding up of unregistered companies shall be in addition to, and not
in derogation, any provisions of the Act with respect to the winding up
of companies by the Tribunal. In other Words sections 425 to 560 will
apply to winding up of unregistered companies in so far as they are
applicable in addition to sections 582 to 590.

The Tribunal or official liquidator may exercise any powers or do

any act in the case of unregistered companies which might be exercised
or done by the Tribunal or official liquidator in winding up of
unregistered companies.

An unregistered company shall not be treated as a company except for

the purpose of sections 582 to 590. [Section 589].

Winding up of unregistered company

Meaning of Unregistered Company [S. 582]

The expression includes any partnership, association or company

consisting of more than seven members” at the time of the petition, but
does not include—

(1) a railway company incorporated by an Act of Parliament or other

Indian law or any Act of the British Parliament;

(2) a company registered under the Companies Act;

(3) a company registered under any previous company law, excepting

those having registered office in Burma, Aden or Pakistan before their
separation from India.

101
 It has been held that “the word ‘association’ has to be understood
in its general sense and not with reference to the provisions in Section
11 of the Act”.

Thus construed, there would be no bar to the winding up of the

Ex-servicemen’s Rehabilitation Association, registered under the
Societies Registration Act, as an unregistered company, though its
membership was more than that of 20 persons. Winding Up [S. 583]

Such a company can be wound up under the Act and with some
exceptions all the provisions of the Act relating to winding up are
applicable.

For the purposes of jurisdiction the company shall be deemed to

be registered in the State where it has its principal place of business. If
it has a principal place of business in more than one State, proceedings
may be commenced in any such State.“

Such a company can be wound up only by the court, not voluntarily

nor under supervision.“ The company may be wound up in the
following circumstances:

57 A certificate from the Registrar of Firms that the firm had seven
members on his record was held to be a sufficient proof of this
requirement despite allegations that the firm had only five
members. Makhan Singh Devinder Pal Singh v Roja Oil Mills,
(1999) 98 Comp Cas 190 (P&H), here it could not be shown that the
partnership had seven or more members, a petition for order of
winding up not sustained. R. Saraswathi v Shakthi Beneficial
Corpn, (1980) 50 Comp Cas 193 Kant. The right to apply for
winding up accrues from the date of dissolution of the partnership.
Under Article 137 of the Limitation Act, 1963, only three years

102
 would be available from that date. In this case the petition was late
by a year, Malini Rao v Hotel Dwarka, (1997) 90 Comp Cas 179
AP.

58 B. T. Industries v Madras Sapper Ex Servicemen’s Rehabilitation

Assn, (1988) 63 Comp Cas 733 Kant. Under S. 665 of the English
Act of 1985 it has been held that an international society consisting
of States as members was not liable to be wound up as an
unregistered company. International Tin Council, Re, [1987] l All
ER 890 Ch D; followed in Maclaine Watson v Deptt o_/‘Trade,
[1988] 3 All ER 257 CA.

59 The jurisdiction of the company court to order the winding up of an

unregistered company cannot be ousted either by the dissolution of
the firm by the partners or under an arbitration clause. M
VParsvarthavardhana v M V Ganesh Pd, (1999) 35 CLA 318 Ker.

60 S. 583(2).

61 S. 583(3). Proceedings under the section are not in the nature of a

civil suit and, therefore, not

(1) if the company has been dissolved, or has ceased to can' y on

business, or is carrying on business only for the purpose of winding
up;62

(2) if the company is unable to pay its debts; A

(3) if the court is of the opinion that it is just and equitable ‘to wind up
the company. The company is said to be unable to pay its debts in the
following cases“

103
(1) where a creditor to whom the company is indebted for more than Rs
500 has served a notice, but the company has not settled with him for
three weeks;

(2) if any case has been filed against a member for a debt due from the
company or from the member in his character as member, and the
company has not within ten days settled the demand or procured the
case to be stayed or indemnified the member against the sum due and
the expenses etc;

(3) If any execution or other process has been returned unsatisfied in

whole or in part.

(4) If it is otherwise proved to the satisfaction of the court that the

company is unable to pay its debts.

Winding Up of Foreign Companies [S. 584]

Where a foreign company, having had a place of business in India, has

ceased to carry on its business, it may be ordered to be wound up as an
unregistered company even if it has already been dissolved in its
mother country.“

Contributories [S. 585]

A contributory for this purpose means a person who is liable to

contribute to the payment of any debt of the company or for adjustment
of their mutual rights or the costs etc., of winding up.

These provisions are additional to the rest of the provisions of

the Act relating to winding up, all of which are also applicable affected
by S. 34 of the Arbitration Act. See M. Vinoda Rao v M. Janardhana
Rao, (1988) 64 Comp Cas 167 Kant. Where the dispute was about

104
profits and capital of the firm, a petition for winding up was not
allowed. The partners were already locked up in a civil suit for
accounts and partition of family assets. K N Eswara Rao v K H Shama
Rao, (2000) CLC 408 Kant.
62 This clause will cover cases where the partnership firm has already
been dissolved; clauses (b) and (c) apply to cases where the firm is
subsisting, Malini Rao v Hotel Dwarka, Hyderabad (1994) 1 Andh LT
36. .
63 S. 582(4). V
64 S. 582(5).
65 See Rajan Nagindas Doshi v British Burma Petroleum C0, (1972) 42
Comp Cas 197 Bom; Inland Revenue v Highland Engg Co, Scotland,
(1975) SLT 203: 1976 JBL 51; RBI v BCCI (Overseas) Ltd, (N0. I),
(1993) 78 Comp Cas 207 Bom; RBI v BCCI (Overseas) Ltd, (N0. 2),
(1993) 78 Comp Cas 230 Bom.
66 S. 589.

These provisions do not exclude the operation of the Partnership

Act relating to dissolution even if the finn in question is likely to fall
in the definition of an “unregistered company”.

Period of limitation [S. 458-A]

In computing the period of limitation for the purposes of the

claims of a company in winding up, the period from the date of the
petition to the date of the order of winding up (both inclusive) and the
period of one year immediately following the winding up order is to be
excluded. Thus the company in winding up has the benefit of an
additional period covering the time from the commencement of the
proceeding to the date of the order and one more year from the date of
the order.“ Where a company has been put by an order of the court on

105
voluntary winding up under supervision of the court, the period of
limitation begins from the date on which e court passes supervision
order and not from the date of special I6SO1U[ Where leave of the
court had to be obtained for filing the company’s aim, the time lost in
obtaining the leave, the period between the date of petition and
winding up order was excluded and one more year was added.7° The
claim of the company should be alive at the time of the winding up
order." If the company’s claim is alive on the date of the petition for
winding up, the right to sue accrues to the official liquidator on order
of winding up. Three years time plus one more year would be
available.72 Article 137 of the Limitation Act, 1963 applies to
proceedings under Section 446. The period of limitation commences for
the purposes of that section from the date of the winding up order or
appointment of a provisional liquidator

67 Vasantrao v Shyamrao, (1977) 4 SCC 9: (1977) 47 Comp Cas 666;

G.P. Ganapaiah v M. T. R. Associates, (1986) 59 Comp Cas 359
Kant; Navjeevan Enterprises (P) Ltd v T. N. Ramalingaiah, (1985)
58 Comp Cas 217 Kant; Deutsche Dampschiflshrts v Bharat
Aluminium C0, (1984) 55 Comp Cas 727 Cal. The provisions of the
Act relating to stay or restraint of proceedings are also applicable
and on the passing of a winding-up order suits or legal proceedings
become stayed unless permitted by the court [Ss. 586-587]. Stay of
proceedings against the company does not extinguish the liability
of individuals, neither does it operate as a stay of proceedings
against them, Venkoba Rao v B.K. Shreenivasa Iyengar, (1997) 88
Comp Cas 383 Kant.

106
68 See Punjab Finance (P) Ltd, Re, (1978) 48 Comp Cas 271 Punj;
Official Liquidator, Security & Finance (P) Ltd v Pushpa Wati Puri,
(1978) 48 Comp Cas 385 Del.

69 Jagdish Parshad Gupta v Youngmen Benefit Chit (P) Ltd, (1981) 51

Comp Cas 201 Del; Pushpa Wati Puri v OL, (1984) 56 Comp Cas 88
Del. The period of limitation depends upon the nature of the
proceedings. Official Liquidator v Southern Screws (P) Ltd, (1988)
63 Comp Cas 749 Mad.

70 Sudarsan Chits (India) Ltd v Uma Sharma, (1992) 73 Comp Cas 381
Ker; Sudarsan Chits (India) Ltd v Madlam Narasimhulu Chetty,
(1993) 3 Comp LJ 96 Ker.

71 Karnataka Steel and Wire Products Ltd v Kohinoor Rolling Shutters,

(I993) 78 Comp Cas 96 Kant (FB). The starting point depends upon
the right of the company and the nature of its claim to which is
added the benefit of this section, Best and Crompton Engg Ltd v
0L, AIR 1995 Mad 20: (1995) 82 Comp Cas 77.

72 Unico Trading and Chit Funds (India) (P) Ltd v Zahaor Hasan,
( 1991) 71 Comp Cas 270 Kant. Followed in Unico Trading and
Chit Funds (India) P Ltd v S.H. Lohati, (1982) 52 Comp Cas 340
Kant; United Hire-Purchase & Land Finance (P) Ltd, (1996) 87
Comp Cas 246 P&H.

73 See K.P. Ulahaman v Wandoor Jupiter Chits P Ltd, AIR 1989 Ker
41: (1989) 65 Comp Cas 178, winding up order passed on Dec 20,
1973 and a claim was filed on Feb, 28, 1978 and the

107
Information as to pending liquidations [S. 551]

the winding up of a company is not completed within one year of

commencement, the liquidator has to prepare a statement in the
prescribed form containing the prescribed particulars and duly audited
by a person who is qualified to be a company auditor. The statement
must be filed within two months of the expiry of the first year and their
after each year. If the winding up is by the cou1t§or under its
supervision, it should be filed in the court, (a copy with the Registrar)
and in the case of voluntary winding up, with the Registrar. Auditing of
the statement is not necessary where the liquidator has to get his
accounts audited under Section 462. In the case of the liquidation of a
Government company, a copy has to be sent to the Central Government
or States which are its members. Creditors and co tributaries are
entitled to copies and inspection prescribed fee. Any default by the
liquidator in complying with the requirements and any person falsely
criming himself to be a creditor or contributory, are punishable.

Any person staining himself to be a creditor or contributory in

writing, shall have the right of inspecting the documents and a person
falsely claiming to be so is liable to punishment under Section 182 of
the Indian Penal Code, 1860.

Liquidator’s miscellaneous powers [S. 546]

The powers specified below may be exercised by the liquidator with the
sanction of the court where the winding up is subject to the supervision
of the court or with the sanction of a special fire solution where the
winding up is voluntary:

1. The payment of a class or classes of creditors in full;

108
2. Compromise or arrangement with creditors, the word “creditors” for
this purpose including persons claiming to be creditors or having or
alleging themselves to have any ‘claim, present or future, certain or
contingent‘, ascertained or sounding only in damages, against the
company or whereby the company may be rendered liable.

3. Compromising any call, or liability to call, debt and any claim,

present or future, “certain or contingent, ascertained or sounding only
in damages, subsisting or alleged to assist between the company and a
contributory?‘ or alleged contributor or other debtor or person
apprehending liability to the company settling all questions relating to
or affecting the assets of the company or its winding up; he may do so
on such terms may be mutually agreeable and take any security for the
discharge of the call, debt, liability or claim and give a complete
discharge for the same. The Supreme Court is empowered to make rules
in respect of the exercise by the liquidator of any of the above powers
and then the power shall be same was held to be within time. The
period between the filing of the petition and the winding up order was
excluded and one more year was added. For other decisions to the same
effect, see Maruti Lzd v Parry & Co Ltd, (1989) 66 Comp Cas 309,
316: [1989] 3 Comp LJ 384 P&H and New Kerala Roadways (P) Ltd v
K. K. Nandal, (1989) 66 Comp Cas 715: [1988] 3 Comp LJ 35 Ker.
Exercisable subject to such conditions, restrictions and limitations as
may be specified in those ru1es. 7 4

In the case of voluntary winding up the exercise of the above

powers shall be subject to the control of the court and for this purpose
any contributory or creditor may apply to the court. 7 5

This section will not authorise any compromise to be imposed

upon any unwilling creditors which is quite possible under S. 391.76

109
The sanction of a special resolution or that of the court is necessary for
the sanctity of the transaction.” The power of the liquidator is very
wide. The court will act wit great caution before putting upon a
transaction the stamp of its prova1. 7 3

Notification of liquidation [S. 547]

When a company is in winding up voluntarily or under court

supervision, all its invoices, orders for goods or business letters shall
contain a statement that the company is being wound up, failing which
the defaulting officer, liquidator, receiver or manager is liable to a fine
up to Rs 5000.

Books and papers to be evidence [s. 548]

Where a company is being wound up, all the books and papers of the
company shall, as between the contributories of the company, be prima
facie evidence of the truth of all matters purporting to be stated in
them. A prima facie evidence creates only a presumption of truth and
thereby shifts the burden to the contributory to disprove the inference
of truth.

Inspection of books and papers [S. 549]

Subject to the restrictions contained in the Supreme Court Rules, after
an order of winding up by or under the supervision of the court,
creditors and contributories have the right to inspect the books and
papers of the company. The court may allow inspection if the right is
not going to be abused“ and even to a person who is facing misfeasance
proceedings.“ A provision for secrecy in the Articles may not prevent
inspection“ except where the winding up is for purposes of
reconstruction. 3 3

110
74 S. 546 (1-A).

75 S. 546(2) and (3).

76 Albert Life Assurance Co Ltd, Re. (1871) 6 Ch App 381.

77 Union Bank v Gobind Singh, ILR 4 Lah 283, but compare with
Cyclemakers Coop Supply Co VSims, [1903] 1 KB 477.

78 Bank of Hindustan, China & Japan v Eastern Financial Assn Ltd,

(1869) 3 Moore’s IA 15, PC.

79 Great Northern Salt & Chemical Works, Re, (1887) 36 CHD 702;
Kesar Singh v Joint OL of Radheysham Beopar Co, AIR 1937 Lah
61.

80 People Bank of Northern India, Re, AIR 1937 Lah 821.

81 Subramaiah Setty v OL, (1985) 57 Comp Cas 626: [1985] 2 Comp LJ

205 Kzmt.

82 London & Yorshire Bank v Cooper, (1885) 15 QBD 83.

83 Glamorganshire Bkg Co, Re; Morgan ‘s case, (1884) 28 Ch D 620.

Enforcement of duty of liquidator to make returns, etc. [S. 556]

The liquidator has to deliver or file some documents in the performance

of his functions and also to give notices, etc. This section provides the
procedure consequent upon a default. It says that if the liquidator does
not make good the default within 14 days after the service on him of a
notice, the court may make an order directing the liquidator to make
good the default within such time as may be specified in the order. An
application for this purpose may be made by any creditor or
contributory or the Registrar. The order of the court may provide that

111
all costs of and incidental to the application shall be borne by the
liquidator.

Meetings to ascertain wishes of creditors or contributories [S. 557]

fi his section empowers the court in all matters relating to winding up

to have regard to the wishes of creditors or contributories and for this
purpose to eall their meetings and appoint a person as the chairman of a
meeting. The court may give due weight to the value of a creditor ’s
debt, and the number of votes that may be cast by each contributory.

Courts of persons before whom affidavits may be sw orn [S. 558]

Affidavits required by the Act may be sworn in India before any court,
judge or person lawfully authorized to take and receive affidavits and,
in any other country, either before any court, judge or person lawfully
authorized to take or receive affidavits in that country or before any
Indian Consul or Vice-Consul. All courts, judges, justices,
commissioners and person acting judicially in India are required to take
judicial notice of the seal, stamp or signature, of the functionaries
described above in reference to affidavits or other documents to be
used for the purposes of the Companies Act. 8 4

Cognizance of offence under the Act [S. 621]

Any violations of the Act which constitute an offence are cognizable

only on a complaint by the Registrar, Government or a shareholder of
the company. The only exception specified in the section is a
prosecution of delinquent officers and members of a company under
Section 545. In such cases a complaint can be filed by any person who
is interested in the winding up of the company. The word “shareholder”
would include a person who has purchased the shares of a company and
has applied to the company for registering him as a shareholder. A

112
proviso to the section added by the Amendment Act of 2000 says that
the court may take cognizance of offence relating to issue and transfer
of securities and non-payment of dividend on a complaint in writing by
a person authorised by SEBI. V The bar of the section does not apply to
a prosecution by the company of any of its officers and also to any
action taken by the liquidator of a company in respect of any offence
alleged to have been committed in respect of any of the matters
included in Part VH (Ss. 425-560) or in any other provision of this Act
relating to the winding up of companies. For the purposes of this
provision, a liquidator of a company shall not be deemed to be an
officer of the company. Where a complaint is made by the Registrar or
by a representative of the Central Government, then, notwithstanding
anything contained in the Criminal Procedure Code, the personal
attendance of the complainant in the court shall not be necessary,
unless the court for reasons to be recorded in writing requires personal
attendance.

A complaint was allowed to be filed at the place of the

transaction. The court was of the view that trade in securities was a
country-wide phenomenon. The policy behind the penalty provisions
would be defeated if a complaint against a company could lie only at
the place of its registered office. 5

Composition of certain offences [S. 621-A]

This new section has been inserted by the amendment of 1988. This
provision became necessary because the concept of an “officer who is
in 17 of the Companies Regulations 1956 to bring the defect to the
notice of the company giving it 15 days’ time to rectify the defect. If
the company still fails to do so, the Registrar will take the defective

113
document on record without prejudice to his powers to take action.
Press Note No. 12/92 of Dec 12, 1992.

4 Federal Bank Ltd v Sarala Devi Rathi, (1997) 88 Comp Cas 323 Raj.
A complainant, who did not aver in his complaint that he was a
shareholder and also concealed that an order of CLB in his favour was
stayed by the High Court, had to face dismissal, V.M. Modi v State of
Gujarat, (1997) 88 Comp Cas 871: (1997) 3 Comp LJ 244 Guj; S. C.
Bhatia v P. C. Wadhawa, (1998)
30 Corpt LA 135 P&H.
5 Ranbaxy Laboratories Ltd v Indra Kala, (1997) 88 Comp Cas 348 Raj.
default” has been so defined in Section 5 (also by the amendment of
1988) that a director who is there only ceremonially and who may have
no control or grip over the affairs of or even contact with, the company,
is also likely to be covered. Such a person may have to pay the price
for being merely a director though he may not be responsible for the
default in ques Now the facility of compounding an offence has been
given so that anyone et rid of the default by paying composition money
and save himself from the torture of a punishment by way of fine.6 The
provision does not apply to offences which are punishable with
imprisonment only or with imprisonment and fine. Where the amount of
fine does not exceed Rs 50,000 it can be compounded by the Regional
Director and, in other cases, by the Company Law Board. Quite
obviously, the compromised amount of fine cannot exceed the amount
which would have been otherwise leviable. Where the default has been
made good by paying additional fee under Section 611, the amount of
such fee can go towards reduction of the fine money which the
compromise may bring about. Where an offence has been repeated
within a period of three years from the date of the last similar offence,
it cannot be compromised.

114
 Where an offence was compounded and three years thereafter has
been repeated, the repeated offence should be taken to be the first
offence.

Regional directors have to work under the supervision and

control of the Company Law Board. An application for composition has
to be presented to the Registrar who will forward it to the Regional
Director or the Company Law Board, as the case may be. The fact that
an offence has been compounded must be brought to the notice of the
Registrar within seven days whether the compounding was before or
after the institution of any prosecution. After the compounding of an
offence, prosecution proceedings for the same cannot be launched.
Where the compounding was done after a prosecution had already been
taken up, the composition should be brought to the notice of the
Registrar who will inform the court in which the prosecution is pending
and thereafter the court shall discharge the company or the officer in
question.

While dealing with an application for compounding an offence

which arises out of default in filing documents etc., with the Registrar,
the defaulting company or officer may be ordered to file the documents
on payment of additional fee leviable under Section 611 within a
specified time. 7 An employee of the company or officer so ordered will
have to suffer a penalty for his default in complying with the order
which may extend to an imprisonment for six months or fine up to fifty
thousand rupees.

An offence which is punishable with fine or imprisonment or

both can be compounded only with the permission of the court in
accordance with the

115
6 Failure to deliver debenture certificates within the time delimited by
S. 113 or even within the extended time has been held to be a
compoundable offence, Vikrant Tyres Ltd, Re, (1995) 17 Corpt LA
100 CLB Mad : (1995) 83 Comp Cas 210, it was compounded on
payment of Rs 5000.

7 An application for compounding was rejected where the company had

not made good the default yet, General Produce C0 Ltd, Re, (1994)
81 Comp Cas 570 CLB.

provisions of the Companies Act. An offence which is punishable with

imprisonment only or with imprisonment and fine cannot be
compounded?

Jurisdiction to try offences [S. 622]

Where is a categorical declaration in the section that no court inferior

to that of a Presidency Magistrate or a Magistrate of the first class
shall try an offence under this Act.

An offence punishable with fine only which is committed by a

person within a Presidency Town may be tried summarily and punished
by the Presidency Magistrate. 9

Offences under the Act are non-cognizable. 1 0 Prosecutors are

appointed by the Central Government. 11

In the case of an acquittal by any court other than a High Court,

the Central Government may authorise the filing of an appeal against
such acquittal and it will be a valid appeal notwithstanding anything
contained in the Criminal Procedure Code.

116
 Section 625 provides about payment of compensation in cases of
frivolous vexatious prosecution.

Application of lines [S. 626]

A court imposing any fine under this Act may direct that the whole or
any part thereof shall be applied in or towards payments of the costs of
the proceedings or rewarding of the person on whose information or at
whose ytance the fine is recovered.

Production and Inspection of books where offence committed [S.

627]

Where an application is made to a High Court Judge in chambers by the

Public Prosecutor of the State or by the Central Government or by a
company prosecutor appointed under Section 624-A, there is a
reasonable cause to believe that any person while an officer of the
company committed an offence in connection with the management of
the company’s affairs and that evidence of the company, an order may
be passed authorizing any person to inspect the books and papers for
the purpose of investigating and obtaining evidence of the commissions
of the offence and requiring the manager of the company or officer of
the company named in the order to produce the books and papers to a
person,

8 See Circular No 5/93 of April 28, 1993 issued by DCA as to matters

connected with this power. A default of technical nature
(misdescription of a head of account: deposits being described as
secured loans) was allowed to be compounded at a nominal fine of
Rs. 100 for the company and Rs. 10 for secretary and each director.
The compounding power of the CLB was not affected by the pending
appeal in the High Court for quashing of proceedings, Usha India

117
 Ltd, Re, (1996) 85 Comp Cas 581 CLB. For procedural guidance see
Reliance Industries Ltd, Re, (1997) 89 Comp Cas 67 and 465 CLB.
Permission of the court under the Criminal Procedure Code is not
required for compounding under the section, Hoflland Finance Ltd,
Re, (1997) 90 Comp Cas 38: (1997) 3 Comp LJ 341 CLB.

9 S. 623.

10 S. 624.

11 S. 624-A.

12 S. 624-B.

place and time mentioned in the order. The power extends to banking
companies also subject to due modifications that its exercise will be
confined only to the affairs of the company and the secorfitype of order
requiring any officer to produce books etc, will not be passed. The
orders under the section are not appealable.

Penalty for false statements [S. 628]

May statements have to be prepared under the Act relating to the affairs
of the company. The section requires that statements which are required
by the Companies Act to be prepared should not carry any particular
which is false in a material respect. Hence, if any person makes a
statement which he knows to be false in any material particular or
which omits any particular knowing it to be material and, if no
punishment is otherwise provided in the Act in that respect, he is
punishable with imprisonment extending up to two years and is also
liable to a fine.

Penalty for false evidence [s. 629]

118
Intentionally giving false evidence in any examination upon oath or
solemn affirmation authorised under the Act or in any affidavit,
deposition or solemn affirmation, in or about the winding up of any
company under the Act or otherwise in or about any matter arising
under the Act, is punishable with imprisonment extending up to seven
years and shall also be punishable with a fine.

Where no specific penalty provided [S. 629-A]

Any default in complying with the regulatory requirements of the Act is

generally punishable under a penalty provision in the section itself. But
even so there are many sections which prescribe one thing or the other
but which do not carry any penalty provision. This section is intended
to deal with such contradic-tions. This section also applies to defaults
in complying with the conditions, restrictions etc., subject to which an
approval was granted. The penalty provided is fine extending up to Rs
5000 and, in the case of a continuing default, Rs 500 for every day of
default. The Kamataka High Court held that on directors’ failure to call
a meeting on a requisition received by them, Section 169(b) gives an
alternative remedy to requisitionists to call a meeting by themselves
and therefore directors’ failure would not attract Section 629-A.

Form and procedure of certain applications [S. 640-B]

The section deals with applications to the Central Government under

Sections 259, 268, 310, 311 and empowers it prescribe forms.

119
Pow er to alter Schedules [S. 641]

The section authorises the Govemment to alter schedules. The

Govemment cannot widen or constrict the scope of the Act or its
policy. 1 5

Pow er of Central Govermnent to make Rules [S. 642]

The Central Govemment has the power to make rules in respect

of all the matters which have to be prescribed by it and generally to
carry out the purposes of the Act. The rules so promulgated may
provide that contraventions will be punishable with a fine extending up
to Rs 5000 and in case of a continuing default, with a fine extending up
to Rs 500 for every day of default. Rules framed in the exercise of this
power have to be lai efore each House of Parliament while it is in
session for a total period of 30 At the end of the session during which
the 30-day period is completed, the rul ecome effective either as
originally framed or subject to any modifications or annulment, made
by the Parliament. Anything already done on the basis of the original
rules will not be prejudiced by any such modification or annulment.“
The Companies (Amendment) Act, 1999 (w.e.f. 31-10-1998) has added
sub-section (4) of the section prescribing the same requirement of
Parliamentary approval for Regulations made by SEBI.

Pow er of Supreme Court to make Rules [S. 643]

The Supreme Court is required to make mles, after consulting the High
Courts, providing for all matters relating to the winding up of
companies which are to be prescribed under the Act and may also make
rules on matters as may be prescribed, but not on those matters which
are reserved to the Central Govemment by Section 503(5) [Composition
of Committee of Inspection], Section 550(3) [Disposal of Books and

120
Papers], Section 552 [Payment by Official Liquidator into Public
Account of India] and Section 555(3) [Deposit of Unpaid Dividend]
The Supreme it is also empowered to make rules, consistent with the
Code of Civil Procedure, 1908 on the following matters: (1) as to mode
of proceedings to be had for winding up a company in High Courts and
in Courts subordinate to High Courts; (2) for the voluntary winding up
of companies, whether by members or by creditors; (3) for the holding
of meetings of creditors and members in connection with proceedings
under Section 391 (compromise and arrangements); (4) for giving
effect to the provisions of the Act for reduction of capital; (5)
generally for all applications to be made to the court under the
provisions of this Act.

Such rules can require that the Official Liquidator or any other
liquidator as an officer of the court shall exercise the following powers
subject to the control of the court: (a) holding and conducting of
meetings to ascertain the wishes of creditors and contributors; (b) the
settling of the list of contributors and rectification of the register of
members where required and collecting and I5 J Klndustries Ltd v
ROC, (1997) 27 Corpt LA 195.

16 See The Companies (Central Government) General Rules and Forms,

1956. See further the Central Government’s power to alter Schedules as
conferred by S. 641 and to lay down Forms and Rules as conferred by
S. 640-B. applying the assets; (c) the payment, delivery, conveyance,
surrender, or transfer of money, property, books or papers to the
liquidator; (d) the making of calls; and (e) the fixing of time within
which debts and claims shall be proved.

121
 A provison to the section says that the liquidator shall not,
without the special leave of the court, rectify the register of members
or make any call.

Annual report on working of Act [S. 638]

The Central Government is under a duty to cause a general annual

report on the working and administration of the Companies Act to be
prepared and laid before both Houses of Parliament within one year of
the close of the year to which t eport relates.

Condoning of delays in certain cases [S. 637-B]

A number of provisions of the Act prescribe a time-limit for filing of

applications. This section gives power to the Central Govemment to
condone the delay in filing an application. Reasons for condoning
delays must be recorded in writing. A similar power of condonation
exists in reference to delays in filing documents with the Registrar.
Here again reasons for condonation have to be recorded in writing.

Delegation by Central Government of its powers [S. 637]

The Central Government is empowered by this section to delegate any

of its functions or powers to such authority or officer as may be
specified in the notification. The delegation can be subject to such
conditions, restrictions and limitations as may be specified in the
notification : The section clearly says that the prior to appoint a person
as a public trust e under Section 153-A and the power to make rules
cannot be delegated.

The powers and functions which cannot e delegated under this

section are those conferred by or mentioned in the following sections:
[Section 10 [Jurisdiction of Courts]; Section 81 [Further Issue of

122
Capital]; Section 89(4) [Termination of disproportionally excessive
voting rights]; Section 213 [Financial year of lding company and
subsidiary]; Sections 235 and 237 [Investigation of affairglg Sections
241-245 [Powers after investigation of affairs]; Section 247
[Investigation of ownership of company]; Section 372 [inter-corporate
investments]; Section 396 [Amalgamation in national interest]; Section
399(4) and (5) [Right to apply under Section 397 or 398]; Section 401
[Right of Central Government to apply under Section 397 or 398];
Section 408 [Power of Central Government to prevent oppression or
mismanagement]; Section 410 [Appointment of Advisory Committee];
Section 448 [Appointment of official Liquidator]; Section 609
[Registration offices]; Section 620 [Power to modify Act in relation to
Govemment companies]; Section 638 [Annual report by Central
Government]; Section 641 [Power to alter Schedules]; and Section 642
[Power of Central Govemment to make rules].

Enforcement of orders of one court by other courts [S. 635]

An order of one court can be enforced by another court. A copy of the

order should be produced to the proper officer of the court required to
enforce the order. A certified copy of the order shall be a sufficient
evidence of the order. It then becomes the duty of the court to enforce
the order. A similar procedure has to be followed when the orders of
the Company Law Board have to be enforced through a court. The
procedure to be followed in the matter of execution of an order made
by the company court is different from that laid down in the Code of
Civil Procedure. It is sufficient to produce to the executing court a
certified copy 19 er sought to be executed.

123
Protection of acts done in good faith [S. 635-A]

Acts done by the Government or any officer of the Government or any

other person in pursuance of the Act and in goodfaith cannot be the
subject-matter of any prosecution or other legal proceeding. The same
protection is available in respect of the publication by or under the
authority of the Government or such officer of any report, paper or
proceedings.

Protection of employees [S. 635-B]

The section provides for protection of employees during investigation

by an inspector and pendency of proceedings before courts against any
person concemed in the conduct and management of the affairs of a
company.

Non-dislosure of information in certain cases [S. 635-AA]

The Registrar, any officer of the Government or any other person is not
compellable to disclose to any court, tribunal or other authority as to
whence he got any information which led the Central Government to
direct a special audit ynvestigation and which is material in that
connection.

Enforcement of orders of court [S. 634]

Orders of court under the Companies Act are enforceable in the same
manner as a decree made by a court in a suit pending before it. 2 0

Enforcement of orders of Company Law Board [S. 634-A]

The Company Law Board can enforce its orders in the same manner as
if it were a decree made by a court in a suit pending before it. If the

124
CLB is unable to do so, it may send the order for execution to the court
which has jurisdiction

l8 A certified copy of the order is sent to the court which has to enforce
the order and it is not necessary that the matter should be
transferred to the executing court in the manner of a decree under
CPC. Sindhu Chits and Trading (P) Ltd v Khayirunnissa, (1993) 76
Comp Cas 878 Kant.

l9 Anand Finance (P) Ltd v Amrit Dasarat Kakad, (1997) 90 Comp Cas
350 Del: (1996) 61 Delhi LT 305.

20 An order against the director of a company in winding up calling

upon him to pay the debt of the company which he guaranteed was
enforced under this section. Deutsche Bank v S. P. Kala, (1992) 74
Comp Cas 577 Bom. An order under S. 397 was held to be
enforceable under this section as a decree, Hungerford Investment
Trust Ltd v Turner, Morrison C0 Ltd, (1994) 1 Cal LJ 500.

over the party against whom the order is to be enforced. A consent

order would be enforceable in the same manner.“ An amicable
settlement order has been held to be enforceable.

Pow er require security for costs [S. 632]

In a suit or proceeding instituted by a limited liability company, if the

court has a reason to believe that the company will not be able to pay
the costs of the defendant, should he win, the court may require
sufficient security to be given for those costs and may stay all
proceedings until the security is given.

A person who is seeking an order for costs can simultaneously

ask t e court for striking out the proceedings.“ The security for costs

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can be ordered only by the court and not by any other Authority like
Controller of Patents.

The court may hesitate in ordering a security for costs where the
litigation started by the company involves a point of general public
importance.

Penalty for improper use of “Limited” or “Private Limited” [S. 631]

A fine extending up to Rs 500 for every day of default is leviable when

the words “limited” or “Private Limited” are used without proper
authorisation for anybody’s trade or business.

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