Role of Courts in Winding Up of the Company

By- Ruhani Garg, Sakshi Sharma Bcom.LLB(H)

Institute of Law, Nirma Universiry

Introduction

According to Halsburry’s Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about & 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.

If incorporation is the process of bringing the company into existence, then winding up is the process of bringing an end to the existence of that so called artificial person Company. A company cannot die a natural death. It has an indefinite life term in any case, if such reasons have occurred which make it necessary to come into conclusion to its corporate life, at that point then necessary legal mechanisms has to be put into operation to get it done. This mechanism is the process of winding up. It is a process by which the properties of the company are managed for the benefit of its members and creditors. The person how is appointed for managing the assets and liabilities of a company is called ‘Liquidator’. In case of compulsory winding up, the liquidator is appointed by the Tribunal under section 275 of the Act; or, in case of voluntary winding up, the liquidator is appointed by the company itself under section 310 of the Act. Winding up is also referred as ‘Liquidation’. On liquidation, the company’s name is deleted from the list of companies by the Registrar of companies and the same is published in the official gazette.

According to Indian Law Companies Act, 2013, winding up of a company can be done by two methods which are voluntary and involuntary. The voluntary winding up contains petitions to the company tribunal by members or creditors whereas the involuntary contains winding up by the court[1]. Reasons for winding up are when:

  1. When company is not able to pay its debts
  2. the company has passed a special resolution to wind up the company by the tribunal,
  • if the company has acted against the integrity and sovereignty of India, the security of the state, friendly relations with foreign state, public order, decency, morality,

3. tribunal has ordered for winding up,

4. on application by registrar or any other person authorised by Central Government with the opinion that there has been fraudulent affairs, unlawful objectives of the company or the persons involved are guilty of fraud, misfeasance or misconduct,

  • the financial statements or annual returns of five consecutive financial years is not submitted to registrar,
  • it is just and equitable in the opinion of tribunal to wind up the company.[1]

Winding up by the court

Winding up by the court or obligatory winding up is initiated by application by method for request of to fitting Court for a winding up arrange. Section 10 of the Companies Act, 1956 manages the purview of for entertaining winding up request. The High court has locale in connection to the place at which the enrolled office of the company is arranged, or The District Court in which locale has been vested either by the Act or by warning of Central Government.

GTC Industries Ltd v. Parasrampuria Trading[1] it was held that exclusive High Court where the enrolled office is arranged has ward in winding up, regardless of whether there was assention between gatherings will be settled under the watchful eye of High Court where enlisted office isn’t arranged.

Voluntary Winding Up (Section 488 of Companies Act, 1956)

The company and its creditors may apply to court for bearings or requests yet generally they are left to settle their affairs within themselves. There are two kinds of voluntary winding up, Member’s Voluntary winding up and Creditor’s voluntary winding up.

Resolution for Voluntary Winding Up

Voluntary winding up can be passed with an Ordinary Resolution (When the time traverse settled in the AoA has lapsed) else with a Special Resolution (In every single other case). Within 14 days of passing the resolution, whether ordinary   or special, it must be advertised in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company. It was held in Neptune Assurance Co. Ltd. vs Union Of India[2], that in the Companies Act the expression “voluntary winding up”, means a winding up by a special resolution of a company to that effect. Similarly, the expression “winding up by the court” means winding up by an order of the Court in accordance with S. 433 of the Companies Act.

In Pankaj Mehra v. Province Of Maharashtra[3], it was set out that once a request of for winding up is exhibited it’s anything but a vital associative that the winding up would take after. This position is clarified in Section 440(2) of old act which says that “the court might not make a winding up arrange on an appeal to displayed to it under Sub-section (1), unless it is fulfilled that the voluntary winding up

or winding up subject to the supervision of the Court can’t be continued with due respect to the interests of the creditors or contributories or both.” So a legal exercise is called for to achieve the satisfaction of the court that winding up must be continued with due respect to the interest of the creditors or the contributors. Rishabh Agro Industries Ltd. V. PNB Capital[1], it was held that intention of the lawmaking body that in spite of the fact that the winding up of company does not in fact start at time of introduction itself, yet it might be attempted to begin from that stage.

Who can apply to court for winding up (Section 439)

Following persons can apply to the Court for winding up:

  • The company, in case of passing a special resolution for winding up.
  • A creditor, in case of a company’s inability to pay debts.
  • A contributory or contributories, in case of a failure to hold a statutory meeting or to file a statutory report or in case of reduction of members below the statutory minimum.

The Registrar, on any ground provided prior approval of the Central Government has been obtained.

  • A person authorised by the Central Government, in case of investigation into the business of the company where it appears from the report of the inspector that the affairs of the company have been conducted with intent to defraud its creditors, members or any other.
  • By Central or State Government, if the company has acted against the sovereignty, integrity of India, the Security of State, friendly relations with foreign state, public order, decency and morality.

The Orders the Court may pass (Sec.443)

The Court may pass any one of the following orders on hearing the winding up petition.

  1. Dismiss it, with or without costs
  2. Adjourn the hearing conditionally or unconditionally,
  3. Make any interim order, as it thinks fit, or
  4. Pass an order for winding up of the company with or without costs.

Consequences 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. Once the winding up order is passed, following consequences follows:

  1. Court will send notice within 14 days to registrar and to an official liquidator, to take change of the company. He shall carry out the process of winding up. (sec. 444)
  2. The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the winding up petition or not.
  3. The company shall relevant particulars, relating to assets, cash in hand, bank balance, liabilities, particulars of creditors etc to the official liquidator. (sec.454)
  4. The official liquidator shall within six months, from the date of winding up order, submit a preliminary report to the Court regarding:
  • Particulars of Capital
  • Cash and negotiable securities
  • Liabilities
  • Movable and immovable properties
  • Unpaid calls, and
  • An opinion, whether further inquiry is required or not (Sec.455) The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry.

Stay Order (sec. 463)

Where, the Court has passed a winding up order, it may stay the proceedings of winding up, on an application filed by official liquidator, or creditor or any contributory. (Sec.466)

Dissolution of Company (Sec.481)

Finally the Court will order for dissolution of the company, when:

  1. The affairs of the company are completely wound up, or
  2. The official liquidator is unable to carry on the winding up procedure for want of funds.

Appeal (Sec.483)

An appeal from the decision of Court will lie before that Court, before whom, appeals lie from any order or decision of the former Court in cases within its ordinary jurisdiction.

Role of NCLT

POWERS: After receiving the application for winding up under section 272 the tribunal has powers to dismiss, make any interim order, appoint provisional liquidator, or order for winding up or any other order as it deems fit[1]. The tribunal also must give a reasonable opportunity to the company to represent any objections. But if the tribunal is of the opinion that there lies any alternate remedy rather than winding up then it should not order for winding up.[2]

JURISDICTION: The jurisdiction of tribunal is limited to the company related matters. It can neither interfere in the matters of civil courts nor does any civil court has power to do so. The company related matters are suit proceedings, claims by or against the company or petition under section 233 or section 262.any matter relating to any question of law or fact of business actions, benefits, rights or privileges etc.[3]

POWER TO DIRECT LIQUIDATOR ON ITS REPORT: On careful perusal of the report the tribunal if satisfies may fix a time limit for the completion of WU process. After giving a reasonable opportunity to creditors and contributories order sale of company as a going concern or part thereof. If there is any fraud or any criminal act committed in the company the tribunal may direct the liquidator to file a criminal complaint against persons involved in that act. It may also order to protect, preserve and enhance the assets of the company[4]. An Advisory committee for the inspection of books of accounts and other documents can be set up and meetings shall be convened by the CL[5]. The tribunal has the power to arrest any person who is in the possession of any useful information and documents and is about to leave India or trying to conceal his properties and seize such documents relevant to the matter[6]. At last, if tribunal thinks that it is just and equitable to wind up the company it shall order for the dissolution of company and it will be carried out accordingly.[7] Any appeal from such orders can be challenged in NCLAT which is the competent authority.[8]  

Grounds

Section 271 of the Companies Act, 2013 gives different grounds based on which a request of can be filled in the Tribunal for the winding up of the company:

  1. Inability to pay debts: Sub-section (2) of section 271 gives that the inability to pay debts essentially emerge under three conditions:
  • Where the company neglects to clear the obligation of the creditor within three weeks instantly preceding the date of demand for payment being made;
  • Where execution or different process issued on an announcement or request of any court for the company is returned unsatisfied in entire or part; and
  • Where it is demonstrated to the satisfaction of the court that the company is unfit to pay its debts.

A request of for winding up on the ground of inability to pay debts must contain all the significant information about the obligation. The request of must unveil the resources of the company and whether they are adequate to meet the liabilities including contingent and forthcoming liabilities. Further, the request of must additionally uncover the situation of settled resources and additionally valuation of plant and machinery of the company. Where an obligation is true blue debated by the company and the court is fulfilled with the company’s resistance a winding up request won’t be made. In K. Appa rao v. Sarkar Chemicals (P) Ltd[1], the Andhra Pradesh High Court held that where a company has an at first sight sustainable safeguard or a true blue question of its commitments to release the asserted debts or liabilities, the court may not entertain proceedings for the winding up, considerably less request winding up.

  1. Special Resolution: The Company may by special resolution settle that it be ended up by the Tribunal. The resolution might be passed for any reason at all. Be that as it may, the Tribunal must see that the winding up isn’t contradicted to open interest or the interest of the company all in all. In New Kerala Chits and Traders (P.) Ltd. versus Official Liquidator [1981][2], it has been seen in this issue the Tribunal has attentiveness in the issue and is under no commitment to arrange winding-up simply on the grounds that the company has so settled.
  2. Against National interest: If the company has acted against the interest of power and integrity of India, the security of the State, neighborly relations with outside States, open request, goodness or profound quality.
  3. Failure of Scheme: If the scheme of recovery and restoration isn’t endorsed by the creditors, at that point the company administrator might present an answer to the Tribunal within 15 days and the Tribunal should arrange for the winding up of the debilitated company. The Tribunal, on passing the request of winding up, might lead the proceedings for winding up in understanding with the arrangements.
  4. Fraudulent and unlawful affairs: If on an application made by the Registrar or on the other hand some other individual approved by the Central Government by warning under this Act, the Tribunal is of the opinion that the affairs of the company have been directed in a fraudulent way or the company was framed for fraudulent and unlawful purposes or the people worried in the arrangement or then again administration of its affairs have been blameworthy of misrepresentation, misfeasance or unfortunate behavior in association therewith and that it is appropriate that the company be ended up; at that point in such a circumstance, the Tribunal may, on an appeal to recorded by any approved individual, pass a request for the winding up of the company.[1]
  5. Default in filling financial statements: If the company has made a default in filling with the Registrar its financial statements or yearly return for quickly preceding five back to back financial years.[2]

Winding up of companies other than Registered Companies

Apart from a normal company, registered under the companies Act, 1956 there are other companies as well winding up procedure for these companies are bit different from a company registered under companies Act.

  1. Unregistered Companies: (Sec.583) In simple words, an unregistered company is a company which is not registered or covered under provisions of companies Act, 1956 (Sec.582)

2. Foreign Company– A foreign company is a company which is incorporated outside India, and having a place of business in India. Winding up of such companies is only limited to the extent of its assets in India. In respect of assets and business carried outside India, Indian courts have no jurisdiction.

  1. Government Company– A Govt. company means a company, in which 51% or more of, shares are held by a govt. company winding up procedure for a government company registered under the companies Act, 1956, is nearly similar to normal winding up procedure. However, courts, take interest of public into consideration, and priority is given to them, as a govt. company’s main function is to provide services to public.

VYSYA BANK V. OFFICIAL LIQUIDATOR, SHREENIWS COTTON MILLS LTD.[1]

The company Shreeniwas Cotton Mills Ltd. was ordered to be wound up and a liquidator was appointed. The company was in debt to Vysya Bank which has discounted some bills in the favour of the company. The Bank had filed a suit to recover the money. The bank had to take the leave of the court to file the suit as the company was ordered to be wound up. The single judge referred to the decision of supreme court in Bansidhar Shankarlal v. Mohd. Ibrahim[2] where the question was whether to take leave from the court for institution of fresh proceedings is a condition precedent. According to S. 446[3] the suit can be only after taking leave of the court when the winding up order by the court has been passed. Therefore all the pending suits and proceedings will be stayed and no fresh suits can be instituted by or against the company except by leave of the court. The legislative intent of this section is to safeguard the company and protect its rights and claims. False and frivolous suits against the company can be taken out by the court before its institution. Therefore, in Bansidhar[4] case the Supreme Court held that it is not a condition precedent and leave can be granted ex- post facto. Thus, the court held in this case that leave can be granted under section 446.

NATIONAL TEXTILE WORKERS V. RAMAKRISHNA[5]

This case related to matter of employees, that whether they have locus standi in the winding up of company. In this case there were three workers union which had applied that they should be impleaded as respondents or interveners as their interest was being adversely effected because the winding up order of the company was passed and the court had restrained the company from borrowing any money from banks, financial institutions or from any other. The resources of the company were blocked and it was the employees who had to suffer at last for their wages. This application was rejected by the court and this decision was upheld by the division bench on appeal. The unions filed for special leave which was then granted to them. The five judge bench by majority held that the employees had a locus standi in the petition. As the principle of natural justice, audi alteram partem suggests that the other party should be heard and no decision should be given without hearing the other party. Although the employees may not have a say when the winding up order has been finalized but they must be given a opportunity of being heard before that. The workmen are the people whose livelihood will be put at risk as their services will end and they will have to search for work again in this situation. There is no provision in the law which bars the workers from having any say in these proceedings. Therefore, both the lower courts were in error for not allowing the stand of workmen in the winding up petition where their interests were seriously and adversely affected.

Conclusion

As the death of the company is drawn from the analogy of that the death of the man, we can clearly see that how a company liquidator compared to the power of attorney of man, takes custody of the assets and properties of the company and man respectively and disposes of them with proper procedure of the court. A company can’t come into existence by simple means before getting incorporated the company has to faces many thing after that only the company gets commenced but after been the artificial person for a long term or period due to some wrongful act the company might falls into winding up procedure either through the voluntary winding up or by the compulsory winding up when the company faces the process of dissolution.

Anything done in contrary to the directions of courts will be void and invalid. Once the winding up process begins the company can no longer carry on its business and it is considered to a termination notice for the employees. The company after the completion of liquidation stands dissolved and cannot keep its property. If the property still remains it goes to the government.

 

[1] (1992) 94 Bom LR 303.

[2] (1971) SCR 2 746.See also, State of Bihar v. Saiyed Anisur Rehman (1977) 47 Comp Cas 372.

[3] Companies Act, 1956.

[4] (1970) 9 TMI 62.

[5] 1983 SCR (1) 9 See also, Fertilizer Corporation Kamgar Union and Oters v. Union of India and others (1981) 2 SCR 52, Balchandra Dharmajee Makaji and others v. Alcock Ashdown and Co. Ltd and Others 42, Comp Cases 190.

[6] [Sec. 271(1) (e)].

[7] [Sec. 271(1) (f)].

Cas 670 AP.

[8] [1981] 51 Comp Cas 601 (Ker).

[9] S. 273 of Companies Act, 2013.

[10] IBID.

[11] S. 280 of Companies Act, 2013.

[12] S. 282 of CA, 2013.

[13] S. 277 of CA, 2013.

[14] S. 301 of CA, 2013.

[15] S. 302 of CA, 2013.

[16] S. 303 of CA, 2013.

[17] 2000 101 CompCas 245 P H.

[18] 2001 104 CompCas 368 All.

[19] 1973 SCR (2) 940.

[20] 2000 100 CompCas 417 SC.

 

 

 

 

 

 

 

 

 

 

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