WINDING UP OF A COMPANY

In words of Professor Gower, “Winding up of a company is the process whereby its life is ended and
its Property is administered for the benefit of its members & creditors. An Administrator, called a
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.”

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.

There are differences between winding up and dissolution. At the end of winding up, the company
will have no assets or liabilities. When the affairs of a company are completely wound up, the
dissolution of the company takes place. On dissolution, the company’s name is struck off the register
of the companies and its legal personality as a corporation comes to an end.

Section 2(94A) of the Companies Act 2013 provides the following definition of Winding up.

Winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy
Code, 2016, as applicable.”

under Chapter XX of the Companies Act, 2013

"270. The provisions of Part I shall apply to the winding up of a company by the Tribunal under this
Act.".]

271 Circumstances in Which Company May be Wound Up by Tribunal

[ " A company may, on a petition under section 272, be wound up by the Tribunal, -

(a) if the company has, by special resolution, resolved that the company be wound up by the
Tribunal;

(b) if the company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or morality;

(c) if on an application made by the Registrar or any other person authorised by the Central
Government by notification under this Act, the Tribunal is of the opinion that the affairs of the
company have been conducted in a fraudulent manner or the company was formed for fraudulent
and unlawful purpose or the persons concerned in the formation or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that
the company be wound up;

(d) 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; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound
up.".]

272. Petition for Winding Up.

["(1) Subject to the provisions of this section, a petition to the Tribunal for the winding up of a
company shall be presented by—

(a) the company;

(b) any contributory or contributories;

(c) all or any of the persons specified in clauses (a) and (b);

(d) the Registrar;

(e) any person authorised by the Central Government in that behalf; or

(f) in a case falling under clause (b) of section 271, by the Central Government or a State
Government.

(2) A contributory shall be entitled to present a petition for the winding up of a company,
notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no
assets at all or may have no surplus assets left for distribution among the shareholders after the
satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were
either originally allotted to him or have been held by him, and registered in his name, for at least six
months during the eighteen months immediately before the commencement of the winding up or
have devolved on him through the death of a former holder.

(3) The Registrar shall be entitled to present a petition for winding up under section 271, except on
the grounds specified in clause (a) 2[of that section]:

Provided that the Registrar shall obtain the previous sanction of the Central Government to the
presentation of a petition:

Provided further that the Central Government shall not accord its sanction unless the company has
been given a reasonable opportunity of making representations.

(4) A petition presented by the company for winding up before the Tribunal shall be admitted only if
accompanied by a statement of affairs in such form and in such manner as may be prescribed.

(5) A copy of the petition made under this section shall also be filed with the Registrar and the
Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal within
sixty days of receipt of such petition.".

273. Powers of Tribunal.

(1) The Tribunal may, on receipt of a petition for winding up under section 272 pass any of the
following orders, namely:—

(a) dismiss it, with or without costs;

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

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

(d) make an order for the winding up of the company with or without costs; or
(e) any other order as it thinks fit:

Provided that an order under this sub-section shall be made within ninety days from the date of
presentation of the petition:

Provided further that before appointing a provisional liquidator under clause (c), the Tribunal shall
give notice to the company and afford a reasonable opportunity to it to make its representations, if
any, unless for special reasons to be recorded in writing, the Tribunal thinks fit to dispense with such
notice:

Provided also that the Tribunal shall not refuse to make a winding up order on the ground only that
the assets of the company have been mortgaged for an amount equal to or in excess of those assets,
or that the company has no assets.

(2) Where a petition is presented on the ground that it is just and equitable that the company should
be wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion that
some other remedy is available to the petitioners and that they are acting unreasonably in seeking to
have the company wound up instead of pursuing the other remedy.

Company Liquidators

Section 275 (1) and (2) of the Companies Act, 2013 provides that for the purposes of winding up of a
company by the Tribunal, the Tribunal at the time of the passing of the order of winding up, shall
appoint a an Official Liquidator or Company Liquidator. Provisional Liquidator or the Company
Liquidator shall be from amongst the insolvency professionals registered under the Insolvency and
Bankruptcy Code, 2016.

302. Dissolution of Company by Tribunal.

(1) When the affairs of a company have been completely wound up, the Company Liquidator shall
make an application to the Tribunal for dissolution of such company.

(2) The Tribunal shall on an application filed by the Company Liquidator under sub-section (1) or
when the Tribunal is of the opinion that it is just and reasonable in the circumstances of the case that
an order for the dissolution of the company should be made, make an order that the company be
dissolved from the date of the order, and the company shall be dissolved accordingly.

1[(3) The Tribunal shall, within a period of thirty days from the date of the order,—

(a) forward a copy of the order to the Registrar who shall record in the register relating to the
company a minute of the dissolution of the company; and

(b) direct the Company Liquidator to forward a copy of the order to the Registrar who shall record in
the register relating to the company a minute of the dissolution of the company.]

TYPES OF WINDING UP:

Compulsory winding up — The court makes an order to wind up a company after a party applies to
the court. The High Court hears compulsory winding up applications.

Voluntary winding up — The company’s shareholders or creditors pass a resolution to wind up the
company. This does not involve the courts.

A company can be compulsory wound up by NCLT under section 271 in the following grounds:
1. Special Resolution

2. India’s Sovereignty

3. Fraudulent act

4. Annual filing

5. Just & equitable ground – it is divided into further parts:

(a) Deadlock:- whenever there is a deadlock in management of the company, i.e., it is not possible for
the company to carry out its objectives, itis just and equitable to wind up the company.

(b)Loss of Substratum: – when the substratum or the object with which company was incorporated
initially has failed.

(c)Losses :- it is just and equitable to wind up off when the company cannot carry on business except
at a loss. However, if there is an indication of improvement, company need not to be wound up.

(d)Oppression of Minority :- when majority adopts an oppressive policy towards the minority the
company may be wound up.

(e)Fraudulent purpose :- whenever a company is formed for nay fraudulent or illegal purpose, it is
just and equitable to wind up.

(f) Incorporated or Quasi partnership :- where a private company is in essence a partnership, it may
be ordered to be wound up under section 271(e) often, the mutual confidence in such companies
breaks down repair.

In re German Date Coffee Company (1882) 20 Ch. D. 169

Facts - The company was incorporated for manufacturing a coffee substitute out of dates, the first
object of the company to acquire a German patent. The German Empire did not grant the patent to
the company. It was held that the company had been set up with the aim of working a specific patent
and that once that failed, the shareholders were entitled to say that they were not interested in
carrying on any other business. The company was accordingly wound up.

Issue - Whether, on the facts and in the circumstances of the case, it was just and equitable to wind
up the company?

The first question we have to consider is, what is the fair construction of the memorandum of
association? It is required by the Act of 1862 to state what the objects of the company are. In
construing this memorandum of association, or any other memorandum of association in which
there are general words, care must be taken to construe those general words so as not to make them
a trap for unwary people. General words construed literally may mean anything; but they must be
taken in connection with what are shown by the context to be the dominant or main objects.

The object for which this company was formed was for working a patent in Germany, which was to
be obtained to manufacture coffee from dates. That was the main object or substratum for which the
shareholders subscribed their money, and the German patent cannot be procured. They never joined
the company for the purpose of manufacturing date coffee without a patent. In
 In re Suburaban Hotel Company [Law Rep. 2 Ch. 737, 750], Lord Cairns said, "If it were shown to the
Court that the whole substratum of the partnership, the whole of the business which the company
was incorporated to carry on has become impossible, I apprehend that the Court might, either under
the Act of Parliament or on general principles, order the company to be wound up."

In the case of Baring v. Dix [1 Cox, 213], the Court decided it would dissolve a partnership where it
appeared that the business could not be carried on according to the true intent of the partnership
articles, although one partner objected.

Court said that according to the MOA of the company, the acquisition of a German patent and
working under it was the main and principal object of the existence of the German Date Coffee
Company. Any other thing in the MOA was subsidiary and auxiliary only to that object of working a
German patent.

The basis of this case is that the members banded together for a very specific purpose, and once that
purpose failed they were entitled to pull out of the enterprise. In addition, a company may also
wound up if engages in acts which are entirely outside what can fairly be regarded as having been
within the general intention and common understanding of the members when they became
members.

Judgement - 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 to that the
company should be wound up.

Seth Mohan Lal v. Grain Chambers, Muzaffarnagar

Facts: The company was carrying on business principally in “futures” in gur, i.e., the purchase and
sale of gur on forward basis and providing for delivery at some future date and payment of margin
on such date on rates, as may be expressly or implied agreed upon by the parties. By a notification
the Govt. of India prohibited entry into transactions in “futures” in gur with effect from that date.
The appellant, a member of the company, filed a petition for winding up of the company on just and
equitable ground.

Issue: Whether it is just just and equitable to wind up the company?

Judgement: Court said that there is no evidence that the company was unable to pay its debts under
section 271 Companies Act, the court may make an order for winding up a company if the court is of
the opinion that it is just and equitable that the company be wound up. In making an order for
winding up, the court will consider the interests of the shareholder as well as of the creditors. The
substratum of the company is 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. In the present case the object for which the company was incorporated has not
substantially failed, and it cannot be said that the company could not carry on its business except at a
loss, nor that its assets were sufficient to meet its liabilities. The SC held that substratum of the
company was not destroyed.

Aluminium Corp. of India Ltd. v. Lakshmi Ratan Cotton Mills Co. Ltd

Facts: The Gupta and Singhania groups from Kanpur jointly controlled a corporation and a company.
Disputes arose, leading to their separation. They used to run the corporation and company together
and also controlled another firm called Behari Lal Ram Chand.This firm had claims against the
Corporation, which did not settle its accounts. Two lawsuits were filed in Kanpur. One was filed by
the company against the corporation, and the other was filed by the firm, claiming their dues. The
court ruled in favor of the company, stating that the corporation owed them Rs. 2,82,734/11/3, plus
costs and interest. The corporation argued that the claim was time-barred, but the court disagreed,
considering a letter from the Corporation’s Secretary as an acknowledgment of the debt. However,
the Allahabad High Court adjudged in favor of the corporation, directing the company to pay Rs.
4,11,554/- through restitution. The corporation served a notice for payment within three weeks, but
the company denied any neglect and filed a winding-up petition on 9th August 1967, citing its
inability to pay debts among other reasons.

Issue: Whether the Company is liable to be wound up on the ground that it is commercially insolvent
for the reasons mentioned in the petition as amended?

Whether the Company has suspended its business for a whole year and is liable to be wound up for
this reason?

Whether it is otherwise just and equitable to wind up the Company?

Whether the petition is mala fide and liable to be dismissed on that ground?

Judgement: The Allahabad High Court noted that the authority to wind up a company is discretionary
and must be fair.This means that a winding-up order is only granted when a petitioner proves that
the circumstances strongly support it. It is not automatically given just because certain facts are
proven. In simple terms, fairness plays a big role even when using Section 433 of the Indian
Companies Act, 1956 to request a winding-up order, not just under the general just and equitable
provision. Although Section 434(1) of the Indian Companies Act, 1956 specifies when the conditions
of Section 433(e) of the Indian Companies Act, 1956 are considered met, it does not mention when a
winding-up order must be issued. Even if a creditor does not have to wait beyond the prescribed
time after a notice, the court can, based on fairness, delay or even deny a winding-up order, despite
the company being proven unable to pay its debts. This discretionary power must always be guided
by principles of justice and fairness.

Coming to the third issue relating to the question whether it is just and equitable, apart from
commercial insolvency and suspension of business for more than a year, that the company should be
wound up, provisions of Section 443(2) have to be borne in mind. It is laid down here: “Where a
petition is presented on the ground that it is just and equitable that the company should be wound
up the Court may refuse to make an order of winding up if it is of opinion that some other remedy is
available to the petitioners and that they are acting unreasonably in seeking to have the company
wound up instead of pursuing that other remedy.” It is true that the powers under the just and
equitable clause are wide and are not to be construed ejusdem generis with matters mentioned in
previous clauses of Sec. 433 as has been repeatedly held. Nevertheless, there are well recognised
types of cases illustrating what justice and equity in this clause means. Instances of these are given in
Buckley, “On Companies Acts” under the following heads:

(1) substrarum gone;

(2) deadlock;

(3) fraud or illegality;

(4) mismanagement or misapplication of the company funds; (5) bubble

company;

(6) insolvency;

(7) business carried on for the benefit of the debenture holders; and

(8) rights given by provisions of the Articles.

Cases considered under each head show that proved facts of the case must establish that a
sufficiently grave situation exists to warrant a winding up order which is an extreme measure. Thus,
we find that a fraud not connected with the formation or promotion of a company but against third
parties would not ordinarily provide a ground for a winding up order.

The Court held that the company is unable to pay its debts, does not necessarily entitle the Court to
order winding up of the company as the discretion to pass such an order, even in the case of the
inability of a company to pay its debts, is by section 271 vested in the court. But the discretion has to
be exercised judicially.