Winding Up of Companies

5/27/2018 Winding Up of Companies

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WINDING UP OF COMPANIES

Winding up of a company is the stage, whereby the company takes its last breath.

It is a process by which business of the company is wound up, and the company

ceases to exist anymore. All the assets of the company are sold, and the

proceedings collected are used to discharge the liabilities on a priority basis. This

chapter deals with concept and various modes of winding up. The topics covered

are:

Introduction

Winding up and !issolution

"odes of winding up

Winding up by the #ourt

$oluntary winding up

Winding up sub%ect to supervision of #ourt

!istinction between voluntary winding up and winding up under the supervision

of #ourt

#ommencement of winding up

Winding up of unregistered companies

&'T(: Wherever the term )#ourt* is being used in the chapter, that will be

substituted by )Tribunal* in accordance with vide #ompanies +econd

Amendment- Act, // w.e.f. a date yet to be notified.


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INTRODUCTION

#orporate #ollapse implies business failure of the company, which may occur due

to inade0uate capital, fraudulent business practices, management inexperience and

incompetence, failure to respond to change, recession, obsolescence, excessive

gearing etc. The #ompanies Act, 1234, provides various remedies to deal with

such business failures such as arrangement, reconstruction, amalgamation,

winding5up. Winding5up of a company is a process of putting an end to the life of a

company. It is a proceeding by means of which a company is dissolved and in the

course of such dissolution its assets are collected, its debts are paid off out of the

assets of the company or from contributions by its members, if necessary. If any

surplus is left, it is distributed among the members in accordance with their rights.

In the words of 6rof. 7.#.8. ower, Winding5up of a company is the process

whereby its life is ended and its property administered for the benefit of its

creditors and members. An li0uidator is appointed and he takes control of the

company, collects its debts and finally distributes any surplus among the members

in accordance with their rights. Thus Winding5up is the process by which

management of a company*s affairs is taken out of its directors* hands, its assets

are reali9ed by a li0uidator and its debts are reali9ed and liabilities are discharged

out of proceeds of reali9ation and any surplus of assets remaining is returned to its

members or shareholders. At the end of the winding up the company will have no

assets or liabilities and it will, therefore, be simply a formal step for it to be

dissolved, that is, for its legal personality as a corporation to be brought to an end.

The main purpose of winding up of a company is to reali9e the assets and pay the

debts of the company expeditiously and fairly in accordance with the law.


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owever, the purpose must not be exploited for the benefit or advantage of any

class or person entitled to submit petition for winding up of a company. It may be

noted that on winding up, the company does not cease to exist as such except when

it is dissolved. The administrative machinery of the company gets changed as the

administration is transferred in the hands of the li0uidator. (ven after

commencement of the winding5up, the property and assets of the company belong

to the company until dissolution takes place. 'n dissolution the company ceases to

exist as a separate entity and becomes incapable of keeping property, suing or

being sued. Thus in between the winding up and dissolution, the legal status of the

company continues and it can be sued in the court of law

Company cannot be Adjudged Ino!"ent

The winding up of a company is not the same thing as the insolvency of a

company, for the general rule in regard to winding up is that if the members of a

company desire that the company should be dissolved or if it becomes insolvent or

is otherwise unable to pay its debts, or if for any reason it seems desirable that it

should cease to exist it is wound up. It is obvious that a company may be wound up

even when it is perfectly solvent, e.g. for purpose of reconstruction. ;urthermore, a

company can never be declared bankrupt although it is unable to pay its debts. It

can only be wound up, of course, some provisions of insolvency laws are made

applicable to companies in li0uidation +ee ections


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law but a company can also be wound up for reasons other than mere inability to

pay its debts.

;ollowing are some of the differences between the effects of insolvency of an

individual or a firm and winding up of a company

1. In the case of insolvency, the whole of the insolvent*s property is taken out of

his hands and rests in the #ourt +under the 6rovincial Insolvency Act, 12/- or the

'fficial Assignee +@nder the 6residency towns Insolvency Act, 12/2-. In winding

up, on the other hand, the property remains vested in the company, sub%ect to its

being administered for the purposes of winding up as the company retains its

complete existence. Its legal death comes only when it is formally dissolved.

. In insolvency, an insolvent individual can obtain his discharge and continue

living and working free from the burden of his debts. A company in li0uidation

cannot obtain its discharge and continue free from the burden of its debts. The

li0uidator winds up its affairs and then terminates it through dissolution.

?. Although in the administration of the assets of an insolvent company the

insolvency rules apply, they are, however, not identical with those of insolvency.

;or example, the reputed ownership clause of insolvency law has no application

in the case of a company in li0uidation.


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WINDING UP AND DISSO#UTION

The terms CWinding up and C!issolution are sometimes erroneously used to

mean the same thing. 8ut according to the #ompanies Act, 1234, the legal

implications of these two terms are 0uite different and there are fundamental

differences between them as regards the legal procedure involved. The main points

of distinction are given below:

1. The entire procedure for bringing about a lawful end to the life of a company is

divided into two stages )winding up* and )dissolution*. Winding up is the first

stage in the process whereby assets are reali9ed, liabilities are paid off and the

surplus, if any, distributed among its members. !issolution is the final stage

whereby the existence of the company is withdrawn by the law.

. The li0uidator appointed by the company or the #ourt carries out the winding up

proceedings but the order for dissolution can be passed by the #ourt only,

?. According to the #ompanies Act the li0uidator can represent the company in the

process of winding up. This can be done till the order of dissolution is passed by

the #ourt. 'nce the #ourt passes dissolution orders the li0uidator can no longer

represent the company.


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MODES OF WINDING UP

A company registered under the #ompanies Act, 1234 may be wound up in any

of the following modes:

1. 8y the #ourt i.e. compulsory winding upD

. $oluntary winding up, which may be either

+a- "embers* voluntary winding upD or

+b- #reditor*s voluntary winding upD

?. Winding up sub%ect to the supervision of the #ourt.

ection


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WINDING UP $% T&E COURT TRI$UNA#

Winding up by the #ourt or compulsory winding up is initiated by an application

by way of petition to the appropriate #ourt for a winding up order. A winding up

petition has to be resorted to only when other means of healing an ailing company

are of absolutely no avail. Bemedies are provided by the statute on matters

concerning the management and running of company. The extreme and

irretrievable step of winding up must be resorted to only in very compelling

circumstances.[Daulat Makanmal Luthrki v. Solatire Hotels (1993) 76 Comp.

Cas. 1! ("om. HCD)#.It is primarily the igh #ourt which has the %urisdiction to

wind up companies under ection 1/ of the #ompanies Act, 1234 in relation to the

place at which registered office of the company concerned is situated except to the

extent to which %urisdiction has been conferred on any !istrict or !istrict #ourts

subordinate to the igh #ourt. The #entral Fovernment may empower any !istrict

#ourt to exercise that %urisdiction, presumably to reduce the burden of the igh

#ourt, only in respect of small companies with the paid5up capital of not more than

one lakh of rupees and having their registered office within the !istrict, with a

view to achieving expeditious and efficient disposal of winding up proceedings.

The Act, therefore, under ections , confers wide powers upon the igh

#ourt to regulate the conduct of such proceedings. Accordingly the igh #ourt

which is the winding up #ourt may direct a !istrict #ourt to retain and continue

winding up proceedings which should not really have been commenced in that

#ourt +ection


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#ourt subordinate to that igh #ourt, whereupon the #ourt in respect of which

such direction is given shall be deemed to be the #ourt with all powers and

%urisdiction of the igh #ourt under the Act +ection -. There must be strong reasons to order winding up as it

is a last resort to be adopted. Temporary difficulty cannot be ground for li0uidating

company when company is on path of revival. D. $shokan v. S. %. &e''iar

Sons ()* SCL (+er. HC D").

G'ound on ()*c) a Company may be (ound up by t)e Cou't

A company under ection


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order for winding up of a company under clause +h- on application made by the

#entral Fovernment or a tate Fovernment.

The winding up petition is not a legitimate means of seeking to enforce payment

of debt, which is bonafide disputed by the company.

,n Shakti $-enies /. Manshuk "hai ,n'ustries Lt'. [(7)0 7* SCL 33

(&$)0 'ei'e' on 1*.2.60 6etitioner firm filed a winding up petition against

the respondent company for the recovery of a debt which was disputed by the

respondent company. The 6etition was dismissed.

T)e *ntant cae (a o+ bona +*de d*puted debt, E"en +'om t)e pet*t*on +o'

(*nd*ng up- *t (a e"*dent t)at +o' t)e payment o+ R, ./-0/-///- t)e pet*t*one'

+*'m ag'eed to pu'c)ae )a'e o+ t)e 'epondent company,

T)e p'*nc*p!e- on ()*c) t)e Cou't )ou!d act * d*po*ng o+ (*nd*ng up

pet*t*on- may be deduced t)u1 2*3 *+ t)e debt * not d*puted on ome

ubtant*a! g'ound- t)e Cou't may ma4e t)e o'de'- 2**3 *+ t)e debt * bona +*de

d*patc)ed- t)e'e cannot be 5neg!ect to pay6 (*t)*n t)e mean*ng o+ ect*on

7882*32a3 and pet*t*on +o' (*nd*ng up * not ma*nta*nab!e- 2***3 d*pute (*t)

'ega'd to payment o+ *nte'et * not a bona fide d*pute- 2*"3 t)e de+ence o+

'epondent company )ou!d be *n good +a*t)- one o+ ubtance and !*4e!y to

ucceed *n po*nt o+ !a(,


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In t)e add*t*ona! a++*da"*t +*!ed t)e 'epondent company- *t (a tated t)at

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

ett!e t)e outtand*ng account pu'uant to ()*c) t)e 'epondent p'oceeded to

a!!ot 9/-/// )a'e to t)e pet*t*one' and t)e ce't*+*cate (e'e d*patc)ed-

()*c) (e'e 'ece*"ed by t)e 'ep'eentat*"e o+ pet*t*one', T)e 'epondent

d*puted t)e debt and *t cou!d not be )e!d t)at *t neg!ected to pay t)e debt

(*t)*n t)e mean*ng o+ ect*on 7882.32a3, T)e (*nd*ng up pet*t*on * not a

!eg*t*mate mean o+ ee4*ng to en+o'ce payment o+ debt- ()*c) * bona +*de

d*puted by t)e company,

W)o may Pet*t*on +o' t)e W*nd*ng up

An application for the winding up of a company has to be made by way of petition

to the #ourt. A petition may be presented under ection


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+f- Any person authori9ed by the #entral Fovernment in the case falling under

ection


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there was agreement between parties that dispute between parties will be resolved

before igh #ourt where registered office is not situated. Begardless of where

agreement is executed, #ompany #ourt having %urisdiction over the place where

the registered office is situated, will have the %urisdiction to entertain a petition for

winding up.L+ Merhant 5inanin-v. $i8in Liui' ases (1) 13 Comp.

Cas. 11 (u:.).

;or the purposes of %urisdiction to wind up companies, the expression )Begistered

'ffice* means the place which has longest been the registered office of

the company during the six months immediately preceeding the presentation of the

$ide #ompanies +econd Amendment- Act, // wet, a date yet to be notified.

petition for winding up.,n +alpana %ra'in- v. ;. CL. ,n'ustries Lt'. [(1996) 1

Comp. 4 1!#0the 'rissa igh #ourt refused to entertain the petition for winding

up as the #ompany had its place of Begistered 'ffice at yderabad.

W)at O'de'- T)e Cou't May Pa >2SEC 7783

The court may pass any one of the following orders on hearing the winding uppetition.

1. !ismiss it, with or without costs

. "ake any interim order, as it thinks fit, or

?. 6ass an order for winding up of the company with or without costs.

#onse0uences of court passing an order for winding up :

If the court is satisfied, that sufficient reasons exist in the petition for winding up,

then it will pass a winding up order. 'nce the winding up order is passed,

following conse0uences follow :

1. #ourt will send notice to an official li0uidator, to take change of the

company. e shall carry out the process of winding up, + sec.


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. The winding up order, shall be applicable on all the creditors and

contributories, whether they have filed the winding up petition or not.

?. The official li0uidator is appointed by central Fovernment + sec.

ection


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The act nowhere prohibits that the proceedings under the act shall or could not lie,

where civil suits are pending or they subse0uently be filed. There is no provision in

the Act to oust the %urisdiction of the court and decide the winding up proceedings.

There would have been a provision to that effect in the Act if the legislature had

intended to that effect. ince the winding up proceeding is not merely for thebenefit of the petitioner but of all its shareholders, creditors or contributories. The

pendency of a civil suit is not a bar to the admission of winding up petition based

on same debt. The proceeding for winding up will not be invalidated if a suit is

filed by the petitioner by way of abundant caution to save the claim getting barred

by limitation.

The winding up proceedings can be continued in a company court once it has come

to the conclusion that it has not been a case of bona fide and tenable defence ismade out. While dismissing the petition for winding up the following principals

have to be relied upon by the #ourt:

1- The defence of the company is in good faith and one of substance.

- The defence is likely to succeed in point of law.

?- The company adduces prima facie proof of the facts on which the defence

depends.


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T)e +o!!o(*ng po*nt )a"e to be con*de'ed ()*!e dea!*ng (*t) (*nd*ng?up1

1- A petition presented ostensibly for a winding5up orderD but really to exercise

pressure will be dismissed, and under the circumstances, may be stigmati9ed as a

scandalous abuse of the process of the #ourt The modern practice has been to

dismiss such petitions. If the debt is not disputed on some substantial ground, the

#ourt may decide it on the petition and make the order.

- The company may be wound up even if it has large assets. The crux is to see if it

is unable to meet its current demands i.e., if the current liabilities are more than the

current assets. If the company is financially sound and in a position to pay itsliability, it cannot be ordered to be wound up under ection


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Conc!u*on

After analy9ing and observing various legal propositions and situations, it is found

that the right to apply for winding up is the creature of statute and not of contract,

and the winding up orders passed by the court are not %udgments in rem. In the

absence of any prohibited provisions in the Act winding up proceedings uEs


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$SS,;MS ,,

%opi?@ C=M4LS=&A >,;D,; 4 =5

C=M$;A

Sumitte' to?@

Mr. Bai Moh'. 4sman

Sumitte' "?@

Shari +han

&oll ;o.?@ *2

"$LL"(hons.) /,,th sem.

Documents

Winding Up of Companies