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1. INTRODUCTION 1.1

Winding up of a Company –  Company  –  A  A Contextual Outline Winding up is the process of selling all the assets of a business, paying off

creditors, distributing any remaining assets to the partners or shareholders and then dissolving the business. Winding up can refer to such a process either for a corporation or for a partnership. The term is used mostly in the United Kingdom. Elsewhere in the world it is known as liquidation. as  liquidation.1 Winding up of a company represents the last stage in its life. In the words of Professor Gower: “Winding up of company is the process whereby it’s life is ended and its  property administered for the benefit of its creditors cr editors and members. An administrator, called liquidator, is appointed and he takes control of the company collects its assets,  pays its debts and finally distributes any surplus among the members in accordance with their rights” rights”.2 The assets of the company are disposed of, the debts are paid off out of the realised assets (or from contributions from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The company is not dissolved immediately at the commencement of winding up. Its corporate status and power continue. Winding up precedes dissolution.

The winding up of a corporation is a legal process that is regulated by corporate laws as well as a company's articles of association (or a partnership agreement in the case of a partnership). Winding up can be compulsory or voluntary and can apply to both  public and private corporations and partnerships. Compulsory winding up occurs when a company is forced, by law and usually by a court order, to appoint a liquidator, sell off its assets and distribute the proceeds to its creditors. The process is often triggered by a company's creditors when they are unpaid and realize that the company is insolvent. The process is sometimes part of

Winding up, http://www.investopedia.com/terms/w/windingup.asp, up, http://www.investopedia.com/terms/w/windingup.asp, (3  (3rd April 2017, 11:22pm) 2 The Principles of Modern Company Law, 647 (3 rd Edn, 1969) 1

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a bankruptcy proceeding, but not always. If the company does not have sufficient assets to pay off all of its debts, then the creditors may face an economic loss. In the case of a voluntary winding up, it is the shareholders (or partners) who trigger the process, through a resolution. The company may or may not be insolvent. If it is solvent, the reason for winding up may simply be that the shareholders feel that their objectives have been reached and that it is time to shut the company down and distribute its assets. A subsidiary may occasionally be wound up by a company  because of its diminishing prospects or minimal contribution to the parent company's bottom line. The parent company may decide to wind up such a business if efforts to find a buyer for it are unsuccessful. If the company is insolvent, the shareholders may trigger a winding up to avoid bankruptcy or, in some cases, personal liability for the company's debts. Once the winding up process has begun, a company can no longer pursue its business, except in order to complete the liquidation and distribution of its assets. At the end of the process, the company will be dissolved and will effectively cease to exist. Some examples of large companies that were liquidated include Circuit City Stores, Inc., RadioShack Corporation, Blockbuster, LLC and Borders Group, Inc.

1.2 Objectives Set in the above perspective or background, the broad objective of the study is to:

1. To understand the concept of winding up.

2. To analyze the various grounds of winding up. 3. To study the effect of winding up.

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1.3 Scope of the study

The present project is an attempt to study the winding up according to Companies Act, 2013 and various grounds regarding the winding up of a company in India.

1.4 Methodology of the study

Given a study of this kind, this research p roject titled “the various grounds of winding up” has been written using the doctrinal or principled method of research, which involves the collection of data from secondary sources, like articles found in  journals and websites.

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2. WINDING UP Winding up of a company is defined as a process by which the life of a company is  brought to an end and its property administered for the benefit of its members and creditors. According to Halsburry’s Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about an in the course of which its assets are collected and realised; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with articles of the Company.”

Winding up is a legal process. Under the process, the life of the company is ended and its property is administered for the benefits of the members and creditors. A liquidator is appointed to realize the assets and properties of the company. After payment of the debts, is any surplus of assets is left out they will be distributed among the members according to their rights. Winding up does not necessarily mean that the company is insolvent. A perfectly solvent company may be wound up by the approval of members in a general meeting.

2.1 Difference between Winding up and Dissolution of a Company

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

Winding up in all cases does not culminate in dissolution. Even after paying all the creditors there may still be a surplus, company may earn profits during the course of  beneficial winding up, there may be a scheme of compromise with creditors while company is in winding up and in all such events the company will in all probability

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come out of winding up and hand over back to shareholders/old management, Dissolution is an act which puts an end to the life of the company.

As such winding up is only a process while the dissolution puts an end to the existence of the company. The important differences between dissolution and winding up are:

Dissolution: 1. The dissolution of a company is recorded and registered by the Registrar of Companies. 2. The process of dissolution is purely administrative function. 3. The liquidator does not have any important role in the dissolution. 4. The dissolution must take place after winding up.

Winding up: 1. The winding up of a company is heard and judged by the Tribunal. 2. The process of winding up is purely judicial function. 3. The liquidator had important role in winding up. 4. After winding up, dissolution takes place.

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3. MODES OF WINDING UP There are two modes of winding up of a company, viz., 1. Winding up under the order of the Tribunal 3 2. Voluntary winding up, which itself of two kinds, namely: (1) Members’ voluntary winding up, and (2) Creditors’ voluntary winding up.

3.1 Winding up by the Tribunal Winding up of a company under the order of a Court is also known as compulsory winding up. GROUNDS FOR COMPULSORY WINDING UP  (Section 433)

A company may be wound up by the Court in the following cases: 1. Special resolution of the company

If the company has, by special resolution, resolved that it be wound up by the court. The court is, however, not bound to order winding up simply because the company has so resolved. The power is discretionary and may not be exercised where winding up would be opposed to the public or company’s interests. In Bombay Metropolitan Transport Corpn L td v. E mployees 4 where the company itself was the petitioner and the financial position of the company was eroded, the court ordered for its winding up in public interest. 2. Default in delivering the statutory report to the Registrar or in holding statutory meeting

3

4

Substituted for Court by Companies (Second Amendment ) Act, 2002 ( 11 of 2003),  (1991) 71 Comp Cas 473 Bom.

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If a company has made a default in delivering the statutory report to the registrar or in holding the statutory meeting, it may be ordered to be wound up. A petition on this ground can be made either by the Registrar or by a contributory. In the latter case the  petition for winding up can filled only after the expiry of 14 days from the day on which the statutory meeting ought to have been held [Section 439 (7)]. If it is brought  by any other person e.g., a creditor ,it must be filed before the expiration of fourteen days after the last day on which the statutory meeting ought to have been held. The Court may, instead of making a winding up order, direct that the statutory report be delivered or that a statutory meeting be held. The Court may order the costs to be paid  by any persons who are responsible for the default [section 443 (3)]. 3. Failure to commence, or suspension of, business

The Court exercises power in this case only if the company has no intention of carrying on its business or if it is not possible for it to carry on its business. If a company has not begun to carry on business within a year from its incorporation or suspend its business for a whole year, the Court will not wind it up if  —  (a) There are reasonable prospects of the company starting business within a reasonable time, and (b) There are good reasons for the delay, i.e., the suspension of business are satisfactorily accounted for and appear to be due to temporary causes. 4. Reduction in membership

If, at any time, the number of members of a company is reduced in the case a public company, below seven or in the case of a private company, below two, the company may be ordered to be wound up by the Court.

5. Inability to pay its debts

A company may be wound up by the Court if it is unable to pay its debts. The test is whether the company has reached a stage where it is commercially insolvent that is to say, that its existing and probable assets would be insufficient to meet the existing liabilities.

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“Commercially insolvent” means that the company is unable to pay debts or liabilities as they arise in the ordinary course of business. When is a company unable to pay its debts?

According to section 434, a company shall be deemed to be unable to pay its debts in the following cases: 1. Statutory Notice: If a creditor to whom the company is indebted for a sum exceeding one lakh rupees has served on the company at its registered office, a demand for payment and the company has for three weeks thereafter neglected to pay or otherwise satisfy him, the company is unable to pay its debts. But here the debt must  be presently payable and the title of demand be complete, bonafide and substantial and not a disputed title. 2. Decreed debt unsatisfied : If execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part the company is deemed to be unable to pay its debt. 3. Commercial insolvency: A company is deemed to be unable to pay its debts, if it is  proved to the satisfaction of the Court that the company is unable to pay its debts. In determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company also. 6. Just and equitable

The words ‘just and equitable’ are of the widest significance and do not limit the  jurisdiction of the Court to any particular case. The principle of just and equitable clause baffles a precise definition. It was held in the

H ind Overseas (Pvt.) Ltd. v. R.P. Jhunjhunwalla, must rest with the judicial discretion of the Court depending upon the facts and circumstances of each case. 5

5

(1976) 46 Comp. Cas. 91 (SC)

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What is ‘just and equitable’ clause:-

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

The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. The substratum of a company disappears: (i) When the very basis for the survival of the company is gone.

In Pirie v. Stewart 6 a shipping company lost its only ship, the remaining asset being a  paltry sum of £363. A majority in number and value of shareholders petitioned for its compulsory winding up but a minority shareholder opposed this and desired to carry on the business as charterer. Held , it was ‘just and equitable’ that the company should be wound up. (ii) When the main object of the company has substantially failed or become

Impracticable: Where a company’s main object fails, its substratum is gone and it may  be wound up even though it is carrying on its business in pursuit of a subsidiary object. In German Date Coffee Co., Re 7, the objects clause of the German Date Coffee Co. stated that it was formed for the working of a German patent which would be granted for making a partial substitute for coffee from dates and for the acquisition of inventions incidental thereto and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work a Swedish  patent and carried on business at Hamburg where a substitute coffee was made from dates, but not under the protection of a patent. Held, on a petition by 2 shareholders, that the main object could not be achieved and, therefore, it was ‘just and equitable’ that the company should be wound up.

6 7

(1904) 6 F. 847. (1882) 20 Ch. D. 169 .

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b. Losses:

Secondly,it is considered to wind up the company when it cannot carry on business except at losses. It will be needless indeed,for a company to carry on business when there is nohope of achieving the object of trading at a profit. But a mere apprehension on the part of some shareholders that the assets of the company will be frittered away and that loss instead of gain will result has been held to be no ground. c. Oppression of Minority

When the management is carried on in such a way that the minority is disregarded or oppressed, o ppression of minority shareholders will be a ‘just and equitable’ ground where those who control the company abuse their power to such an extent as to seriously prejudice the interest of minority shareholders. d. Where there is a deadlock in the management of the company:

When shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. e. Where public interest is likely to be prejudiced.

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

3.2 Voluntary winding up Voluntary winding up means winding up by the members or creditors of a company without interference by the Court. The object of a voluntary winding up is that the company, i.e. the members as well as the creditors, are left free to settle their affairs

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without going to the Court. They may however apply to the Court for any directions, if and when necessary.

Circumstances in which a company may be wound up voluntarily

A company may be wound up voluntarily  — 

(1) By passing an ordinary resolution: When the period, if any fixed for the duration of a company by the Articles has expired, the company in general meetin g may pass an ordinary resolution for its voluntary winding up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company is to be dissolved, has occurred.

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

3.2.1 Types of Voluntary winding up

A voluntary winding up may be a: 1. Members’ voluntary winding up, or  2. Creditors’ voluntary winding up.

This category seeks no relevance in the new 2013 Act. However, there is a difference in the 1956 Act.

1. MEMBERS’ VOLUNTARY WINDING UP Declaration of solvency

In a voluntary winding up of a company if a declaration of its solvenc y is made in accordance with the provisions of section 488, it is a members’ voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts full within 3 years

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from the commencement of the winding up. The declaration shall be verified by an affidavit.

The declaration shall have effect only when it is — 

(a) Made within five weeks immediately before the date of the resolution, and delivered to the Registrar for registration before that date; and (b) accompanied by a copy of the report of the auditors of the company on

(i) the profit and loss account of the company from the date of the last profit and loss account to the latest practicable date immediately before the declaration of solvency, (ii) the balance sheet of the company, and (iii) a statement of the company’s assets and liabilities as on the last mentioned date.

A winding up in the case of which a declaration has been made and delivered is referred to as a member voluntary winding up and a winding up in the case of which a declaration has not been so made and delivered is r eferred to as a creditors’ voluntary winding up.

2. CREDITORS’ VOLUNTARY WINDING UP:

A voluntary winding up of a company in which declaration of its solvency is not made is referred to as a creditors’ voluntary winding up.

Comparison of members’ and creditors’ voluntary winding up:

1. Declaration of solvency : In case of a members’ voluntary winding up, there is declaration of solvency. In case of a creditors’ voluntary winding up, there is no such declaration. 2.

Appointment of liquidator: In a members’ voluntary winding up, the liquidator is

appointed by the company and his remuneration is fixed by the company. In a creditors’ voluntary winding up, he is appointed by the credi tors and his remuneration is fixed by the committee of inspection or, if there is no such committee, by the creditors.

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3.

Committee of inspection : There is no committee of inspection in a members’

voluntary winding up; in a creditors’ voluntary winding up the creditors may appoint a committee of inspection. 4. Powers of liquidator : In a members’ voluntary winding up, the liquidator can exercise certain powers with the sanction of a special resolution of the company; in a creditors’ voluntary winding up, he can do so with the sanction of the Court or the committee of inspection or of a meeting of the creditors.

3.3 Recent Position The recent judgements regarding the winding up presents the current position of winding up. In Rasik Lal S. Mardia v. OL of Mardia Chemicals Ltd. ,Court applied the principle of natural justice. Since during the course of winding up, the protection of interest of all concerned and the protection of property of the company is the main concern of the court, court held that although the powers and authority are vested in the official liquidator to represent the company in liquidation, the Act does not debar the promoters, shareholders of guarantor from rendering proper and effective assistance to the official liquidator. Preventing persons from the assisting official liquidator would be violative of  principles of natural justice.8 It has rightly been observed in Ratna Commercial enterprises P. Limited v. Vasu Tech.

Ltd., that winding up was not a mode of recovery of debt or amount payable by company. It was the discretion of the court to order winding up which should be the last resort.

8

(2009)149 Comp Cas 278 (Guj)

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4. CONCLUSION

Winding up i.e., to bring to a conclusion or an end by putting in order is the process  by which the life of a company is ended and its property is administered for the  benefit of its members and creditors. It represents the last stage in life of the company  but it should be used as the last resort. After analyzing and observing various legal propositions and situations it is found that the right to apply for winding up is the creature of statute and not of contract, and the winding up orders passed by the court are not judgments in rem. But it should be marked that the winding up proceeding are greatly affected by the facts and circumstances of a particular case. The machinery of winding-up cannot be used as a  pressure tactics, where a suit has already been instituted for recovery of debt, under such circumstances, the proceeding are in the nature of parallel proceedings in respect of the same cause of action. As a result, such course should not be considered by the court more so to avoid conflict of jurisdiction of findings by two parallel courts of competent jurisdiction. Thus at last it can be said that a genuine case has to be made out rejecting the mala fide contention, in the interest of good faith and justice.

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5. REFERENCES

Websites –  Winding up, http://www.investopedia.com/terms/w/windingup.asp, (3rd April’ 17, 11:23  pm)

Tripti, Winding up of a Company, http://www.legalservicesindia.com/article/article/winding-up-of-a-company-1319-1.html , (3rd April’17, 12:50 pm)

Voluntary Winding up, http://companyliquidator.gov.in/winding_up_3.html , (4th April’ 17, 14:20 pm)

Lawsenate, Winding up of a Company, http://www.legallyindia.com/views/entry/windingup-of-a-company, (4th April’17, 14:53 pm)

Barsha Dixit, Winding up of a Company: An Overview, http://taxguru.in/companylaw/winding-company-overview.html , (4th April 15:07 pm)

Books –  Dr. G.K. Kapoor, Sanjay Dhamija, Company Law and Practi ce, (20 th ed.) Mr. A.K. Majumdar, Dr. G.K. Kapoor, Company Law, (16 th ed.)

Statutes used –  Companies Act, 2013 Companies Act, 1956