NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

The Various Grounds of Winding Up of Company

Submitted To

Prof. Ishaq Qureshi

Submitted By

Nidhi Jain LL.M. IInd Semester.

Roll No. - 2010LL.M. 41

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Declaration

The text reported in the project is the outcome of my own efforts and no part of this project has

been copied in any unauthorized manner and no part in it has been incorporated without due

acknowledgement.

Nidhi Jain

Roll No. – 2010 LL.M. 41

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Introduction

Winding up of a company represents the last stage in its life. In the words of Professor

Gower:”Winding up of company is the process whereby it’s life is ended and its property

administered for the benefit of its creditors and members. An administrator, called liquidator, is

appointed and he takes control of the company collects its assets, pays its debts and finally

distributes any surplus among the members in accordance with their rights.1 The assets of the

company are disposed of, the debts are paid off out of the realised assets (or from contributions

from its members), and the surplus, if any, is then distributed among the members in proportion

to their holdings in the company.

The company is not dissolved immediately at the commencement of winding up. Its corporate

status and power continue. Winding up precedes dissolution.

Objective:

To understand the concept of winding up.

To analyse the various grounds of winding up.

To study the effect of winding up.

Research methodology

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

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

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MODES OF WINDING UP

There are two modes of winding up of a company, viz.,

1. Winding up under the order of the Tribunal2

2. Voluntary winding up, which itself of two kinds, namely:

(1) Members’ voluntary winding up, and

(2) Creditors’ voluntary winding up.

1. WINDING UP BY THE TRIBUNAL 

Winding up of a company under the order of a Court is also known as compulsory winding up.

GROUNDS FOR COMPULSORY WINDING UP (Section 433)

A company may be wound up by the Court in the following cases:

1. Special resolution of the company

If the company has, by special resolution, resolved that it be wound up by the court. The court is,

however, not bound to order winding up simply because the company has so resolved. The

power is discretionary and may not be exercised where winding up would be opposed to the

public or company’s interests.

In Bombay Metropolitan Transport Corpn Ltd v. Employees3 where the company itself was

the petitioner and the financial position of the company was eroded, the court ordered for its

winding up in public interest.

2. Default in delivering the statutory report to the Registrar or in holding statutory

meeting

2 Substituted for court by companies (second amanement )act,2002 (11 of 2003),3 (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 Hind

Overseas (Pvt.) Ltd. v. R.P. Jhunjhunwalla, must rest with the judicial discretion of the Court

depending upon the facts and circumstances of each case.4

4 (1976) 46 Comp. Cas. 91 (S.C.)

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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. 5a shipping company lost its only ship, the remaining asset being a

paltry sum of £363. A majority in number and value of shareholders petitioned for its

compulsory winding up but a minority shareholder opposed this and desired to carry on the

business as charterer. Held, it was ‘just and equitable’ that the company should be wound up.

(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 6, the objects clause of the German Date Coffee Co. stated that

it was formed for the working of a German patent which would be granted for making a partial

substitute for coffee from dates and for the acquisition of inventions incidental thereto and also

other inventions for similar purposes. The German patent was never granted but the company did

acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee

was made from dates, but not under the protection of a patent. Held, on a petition by 2

shareholders, that the main object could not be achieved and, therefore, it was ‘just and

equitable’ that the company should be wound up.

5 (1904) 6 F. 847.6 (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.

Oppression of minority shareholders will be a ‘just and equitable’ ground where those who

control the company abuse their power to such an extent as to seriously prejudice the interest of

minority shareholders.

d. Where there is a deadlock in the management of the company: 

When shareholding is more or less equal and there is a case of complete deadlock in the

company on account of lack of probity in the management of the company and there is no hope

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.

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VOLUNTARY WINDING UP 

Voluntary winding up means winding up by the members or creditors of a company without

interference by the Court. The object of a voluntary winding up is that the company, i.e. the

members as well as the creditors, are left free to settle their affairs without going to the

Court. They may however apply to the Court for any directions, if and when necessary.

Circumstances in which a company may be wound up voluntarily

A company may be wound up voluntarily —

(1) By passing an ordinary resolution: When the period, if any fixed for the duration of a

company by the Articles has expired, the company in general meeting may pass an ordinary

resolution for its voluntary winding up. The company may also do so when the event, if any,

on the occurrence of which the Articles provide that the company is to be dissolved, has

occurred.

(2) By passing a special resolution: A company may at any time pass a special resolution

that it be wound up voluntarily. No reasons need be given where the members pass a special

resolution for the voluntary winding up of the company. Even the Articles cannot prevent the

exercise of this statutory right.

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TYPES OF VOLUNTARY WINDING UP

A voluntary winding up may be a:

1. Members’ voluntary winding up, or

2. Creditors’ voluntary winding up.

1. MEMBERS’ VOLUNTARY WINDING UP

Declaration of solvency

In a voluntary winding up of a company if a declaration of its solvency is made in

accordance with the provisions of section 488, it is a members’ voluntary winding up. The

declaration shall be made by a majority of the directors at a meeting of the Board that the

company has no debts or that it will be able to pay its debts full within 3 years from the

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

The declaration shall have effect only when it is —

(a) Made within five weeks immediately before the date of the resolution, and delivered to

the Registrar for registration before that date; and

(b) accompanied by a copy of the report of the auditors of the company on

(i) the profit and loss account of the company from the date of the last profit and loss account

to the latest practicable date immediately before the declaration of solvency,

(ii) the balance sheet of the company, and

(iii) a statement of the 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 referred to as a creditors’ voluntary winding up.

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2. CREDITORS’ VOLUNTARY WINDING UP:

A voluntary winding up of a company in which declaration of its solvency is not made is

referred to as a creditors’ voluntary winding up.

Members’ and creditors’ voluntary winding up compared

1. Declaration of solvency: In case of a members’ voluntary winding up, there is

declaration of solvency. In case of a creditors’ voluntary winding up, there is no such

declaration.

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

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

voluntary winding up, he is appointed by the creditors and his remuneration is fixed by

the committee of inspection or, if there is no such committee, by the creditors.

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

winding up; in a creditors’ voluntary winding up the creditors may appoint a committee

of inspection.

4. Powers of liquidator: In a members’ voluntary winding up, the liquidator can exercise

certain powers with the sanction of a special resolution of the company; in a creditors’

voluntary winding up, he can do so with the sanction of the Court or the committee of

inspection or of a meeting of the creditors.

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Recent position:

The recent judgements regarding the winding up presents the current position of winding up.

In Rasik Lal S. Mardia v. OL of Mardia Chemicals LTD,Court applied the principle of

natural justice. Since during the course of winding up,th protection of interest of all concerened

and the protection of property of the company is the main concern of the court,court held that

although the powers and authority are vested in the official liquidator to represent the company

in liquidation,the Act does not dabar the promotors,shareholdera of guarantor from rendering

proper and effective assistance to the official liquidator. Preventing persons from the assisting

official liquidaotr would be violative of pinciples of natural justice.7

It has rightly been observed in Ratna Commercial enterprises P. Limited v. Vasu Tech.

Ltd,that winding up was not a mode of recovery of debt or amount payable by company. It was

the discretion of the court to order winding up which should be the last resort.

7 (2009)149 Comp cas278 (Guj)

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Conclusion

Winding up i. e. to bring to a conclusion or an end by putting in order is the process by which the

life of a company is ended and its property is administered for the benefit of its members and

creditors. It represnts the last stage in life of the company but it should be used as the last resort.

After analyzing and observing various legal propositions and situations it is found that the

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

orders passed by the court are not judgments in rem. But it should be marked that the winding up

proceeding are greatly affected by the facts and circumstances of a particular case. The

machinery of winding-up cannot be used as a pressure tactics, where a suit has already been

instituted for recovery of debt, under such circumstances, the proceeding are in the nature of

parallel proceedings in respect of the same cause of action. As a result, such course should not be

considered by the court more so to avoid conflict of jurisdiction of findings by two parallel

courts of competent jurisdiction. Thus at last it can be said that a genuine case has to be made out

rejecting the malafide contention, in the interest of good faith and justice.

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Bibliography

Books:

Gower’s Principles of Modern Company Law, Paul. Davies.

A Ramaiya,Guide to the Companies Act, Sixteenth Edition Rprint,2006.

Singh Avtar, Company Law, Fifteenth Edition,2007, Eastern book Company, Lucknow.

Statutes used:

Company Law,1956

Websites used:

www.mca.gov.in

www.jestore.com

http://www.legalserviceindia.com

www.companyliquidator.gov.in

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