Winding up of Company under Company Law

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 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.

DIFFERENCE BETWEEN WINDING UP AND DISSOLUTION:

The terms “Winding up” and “Dissolution” are sometimes erroneously used to mean the same thing. But, the legal implications of these two terms are quite 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 realised, 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 Dissolution is the final stage whereby the existence of the company is withdrawn by the law.
2. The liquidator appointed by the company or the Court carries out the winding up proceedings but the order for dissolution can be passed by the Court only.
3. According to the Companies Act the liquidator can represent the company in the process of winding up. This can be done till the order of dissolution is passed by the Court. Once the Court passes dissolution orders the liquidator can no longer represent the company.
4. Creditors can prove their debts in the winding up but not on the dissolution of the company.
5. 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 vents the company will in all probability 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.

MODES OF WINDING UP: A company registered under the Companies Act, 1956 may be wound up by any of the following modes:

1. By the Tribunal i.e. compulsory winding up;
2. Voluntary winding up, which may be either:
   1. Members’ voluntary winding up; or
   1. Creditor’s voluntary winding up;

1. Winding up by Tribunal : As per section 271 of Company Act 2013 , A company may be wound up at an order of the Tribunal. This is also called compulsory winding up

Grounds of winding up by tribunals are as follows:-

1. Special resolution [S. 271(1)(b)] : If the company has, by special resolutions, resolved that it be wound up by the Tribunal. The Tribunal 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.
   1.  Acts against sovereignty : If the company has acted against the interests of sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.
   1. Fraudulent conduct of affairs : The Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent or unlawful purpose or persons concerned in its formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in those connections and that it is proper that the company be wound up. This clause can be activated by an application by the Registrar or by any other person authorised by the Central Government by notification.

• Default in filing financial statements If the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years.

• Just and equitable

The last ground on which the Tribunal can order the winding up of a company is when “it is of opinion that it is just and equitable that the company should be wound up”. This gives the Tribunal a very wide discretionary power to order winding up whenever it appears to be desirable. The Tribunal may give due weight to the interest of the company, its employees, creditors and shareholders and general public interest should also be considered. “Though the Tribunal is not bound to construe this clause (ejusdem generis) as only covering grounds of a like nature. The circumstances in which the courts have in the past dissolved companies on this ground can be resolved into general categories. And they are as follows :

• Deadlock: Firstly, when there is a deadlock in the management of, company, it is just and equitable to order winding up.

The well-known illustration is Yenidie Tobacco Co. Ltd, re 1916: W and R, who traded separately as cigarette manufacturers, agreed to amalgamate their business and formed a private limited company o which they were the shareholders and the only directors. They had equal voting rights and, therefore, the articles provided that any dispute would be resolved by arbitration, but one of them dissented from the award. Both then became so hostile that neither of them would speak to the other except through the secretary. Thus there was a complete deadlock and consequently the company was ordered to be wound up although its business was flourishing.

• Loss of substratum. -Secondly, it is just and equitable to wind up a company when its main object has failed to materialise or it has lost its sub-stratum.  A good illustration is German Date Coffee Co, re:1882 A company was formed for the purpose of manufacturing coffee from dates under a patent which was to be granted by the Government of Germany and also for working other patents of similar kind. The German patent was never granted and the company embarked upon other patents. But, on the petition of a shareholder, it was held that “the substratum of the company had failed, and it was impossible to carry out the objects for which it was formed; and, therefore, it was just and equitable that the company should be wound up”

• Losses. -Thirdly, it is considered just and equitable to wind up a 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 no hope of achieving the object of trading at a profit.3 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.40 Similarly, the Bombay High Court observed in Shah Steamship Navigation Co, ret that “the court will not be justified in making a winding up order merely on the ground that the company has made losses; and is likely to make further losses.”

• Oppression of minority. -Fourthly, it is just and equitable to wind up a company where the principal shareholders have adopted an aggressive or oppressive or squeezing policy towards the minority. The decision of the Madras High Court in R Sabapathi Rao v Sabapathi Press Ltd  is an illustration in point. The court observed:

Where the directors of a company were able to exercise a dominating influence on the management of the company and the managing director was able to outvote the minority of the shareholders and retain the profits of the business between members of the family and there were several complaints that the shareholders did not receive a copy of the balance-sheet, nor was the auditor’s report read at the general meeting, dividends were not regularly paid and the rate was diminishing, that constituted sufficient ground for winding up.

• Fraudulent purpose. – It is just and equitable to wind up a company if it has been conceived and brought forth in fraud or for illegal purposes. Thus in Universal Mutual Aid & Poor Houses Ass v AD Thappa Naidut the Madras High Court observed:

Where the main object of a company is the conduct of a lottery, the mere fact that some of its objects were philanthropic will not prevent the company from being ordered to be wound up as being one formed for an illegal purpose.

• Public interest.-Winding up can also be ordered under this section when public interest demands it. A type of conduct which comes in conflict with public interest.

Who Can Apply :

An application to the Tribunal for the winding up of a company is made by a petition. A petition may be presented by any one of the following:

1. Petition by company [S. 272(1) (a)] – The company may itself present a petition for winding up. Petition by the company will be particularly necessary when the only ground for winding up is that the company has passed a special resolution to that effect.
2. Creditor’s petition [S. 272(1)(6)].- A creditor may apply for winding up.” A creditor who is proceeding against the company on the ground of the company’s inability to pay its debts has to proceed under the Insolvency and Bankruptcy Code, 2016. His petition under the Companies Act is not going to be entertained. A creditor’s petition can be entertained under this section only if it is based upon any of the grounds now available under the section. The word “creditor” includes a secured creditor, debenture-holder

and a trustee for debenture-holders.

• Contributory’s petition. On the commencement of the winding up of a company, its shareholders are called contributories.” Any contributory or contributories may present a petition for winding up. 115 It is requisite that the shares in respect of which the petitioner is contributory were originally allotted to him or he has been the registered holder for at least 6 months during the 18 months immediately before the commencement of the winding up, or the shares have devolved on him through the death of a former holder. In a case on the point.

• Registrar’s petition [S. 272(1)(e) and (4)].- The Registrar of Companies is also entitled to present a petition for winding up on any of the grounds of winding up by the Tribunal, except the second, namely, that the company has passed a special resolution. But he shall not present a petition on the ground of the company’s inability to pay its debts “unless it appears to him either from the financial condition of the company as disclosed in its balance-sheet122 or from the report of an inspector under Section 210.
• Central Government’s petition. – The Central Government is also authorised by the Act, in certain cases, to present a petition for winding up. Section 224 enables the Government to petition for winding up where it appears from the report of inspectors appointed to investigate the affairs of a company under Section 206 that the business of the company has been conducted for fraudulent or unlawful purposes as explained in sub-clauses (1) and (i) of clause (b) of Section 213. The Government may authorise any person to act on its behalf for the purpose. [S. 272(1]

• Central Government or State Government’s petition S. 272(1) (g)].-If a case falls under Section 272(c) (anti-national acts), the Central Government or the State Government may apply to the Tribunal for winding up of a company.

Powers of Tribunal [S. 273]

After hearing a winding up petition, 27 the Tribunal may

 (a) dismiss it with or without costs,128 or

 (b) make any interim order 2 as it thinks fit; or

 (c) appoint a provisional liquidator of the company till a winding up order; or

(d) make an order for winding up with or without costs;130 or

(e) any other order it thinks fit. 131 The Tribunal can also issue a conditional order of winding up.

Commencement of winding up [S. 357]

Winding up commences not from the date of the order, it shall be deemed to commence from the time of the presentation of the petition. But where, before the presentation of the petition, a resolution has been passed by the company for winding up, the winding up shall be deemed to have commenced at the time of the passing of the resolution. In any other case winding up by the Tribunal is deemed to commence from the date of filing of the petition. Where there were more than one petitions, winding up was deemed to have commenced from the date of the earliest of the creditor’s petition.

Procedure

The following is the procedure for compulsory winding up of company by tribunal:

• Appointment of a Liquidator to the Company under Section 275 to examine the Company’s debts and credits in order to verify the Company’s eligibility for forced winding up by the Tribunal.
• Following the appointment, Liquidators as per section 281 of the Act to make a report to the Tribunal.
• The Tribunal issues orders to the liquidators in dissolving the Company under Section 282 of the Act. And according to which, the company’s property undergo shift into custody in order to satisfy the creditors and contributors first.
• Finally, the Court issues the order for dissolution under Section 302 of the Act, after carefully reviewing the audits and reports provided by the liquidator to the Court in the interest of resolving the obligations owed to creditors and other contributors.

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