“Court having company jurisdiction has power to wind up a company by its own motion”- explain and evaluate.

Introduction

 Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called a liquidator 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. All the provisions for winding up of the Company are enshrined from section 425 to section 590 and divided in eight parts.[1]

Object of Winding up of Company

 The object of winding up of a company is to realize the assets and pay the debts of the company expeditiously and fairly in accordance with law. At the end of the winding up the company will have no assets and liabilities. But that does not mean that the company ceases to exist on winding up. It continues to exist even after winding up and ceases to exist only after dissolution order is passed by the court. Thus, in between the winding p and dissolution, the legal status of the company continues.

 Kind of Companies can be wound up

 Only a limited company can be wound-up. The term “winding-up” (or “wound-up”) bears a similar meaning of “liquidation”. It generally means that all the assets of the company would be realized (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up would bring a company to an end.

A limited company is a company that is registered under the Companies Ordinance[2]. It is a separate legal entity (i.e. it can sue or be sued in legal proceedings). The liabilities of shareholders are limited to the value of the company’s shares held by them (limited by shares). Another situation, which is not common in commercial organizations, is that the liabilities of shareholders are limited to the amount in which the shareholders have agreed to contribute to the company’s assets if the company is being wound-up (limited by guarantee).

An “unlimited company” or a sole trader is not a “company” in a strict sense. It is a business operated in the form of a sole proprietorship. In other words, the business is owned by an individual. A sole proprietor is solely and personally responsible for the liability of the business.
A partnership is a form of business owned by two or more persons (partners). The partners are personally jointly and severally liable (i.e. every partner should be liable) for the liability of the business.

An overview of winding-up procedures:

We can get a general picture on the winding-up procedures (except “voluntary Winding up)[3] from the following steps:

Firstly, issuing a written demand for debt repayment to the target company

Secondly, presenting a winding-up petition to the Court and the company.

Thirdly, Court hearing for the petition.

Fourthly, granting of winding-up order by the Court.

Fifthly, meeting of creditors and other relevant parties.

Sixthly, appointment of liquidator.

Seventhly, realization and distribution of company’s assets to the creditors.

Eighthly, release of duties for liquidator.

Lastly, dissolution of the company.

 Modes of Winding up of the company

 A Company may be wound up in any of the following modes:

1.  By the Tribunal i.e. compulsory winding up.

2. Voluntary winding up, which may be in two ways:

    (a) Member’s voluntary winding up.

    (b) Creditor’s voluntary winding up.

3. Winding up subject to supervision of Court.

 Winding up by the Tribunal

 1)    If the company has, by special resolution, resolved that the company may be wound-up by the tribunal.

2)    If default is made in delivering the statutory report to the registrar or in holding the statutory meeting.

3)     If the company does not commence its business within a year from its incorporation, or suspends its business for whole of a year.

4)     If the number of members are reduced then their required number.

5)     If the company is unable to pay its debts.6

6)     If the tribunal is of the opinion that it is just and equitable that the company should be wound up.

7)     If the company is in default in filing up with the Registrar its balance sheet and profit and loss account for five consecutive financial years.

8)     If the company has acted against the interests of the sovereignty and integrity of India or security of any state, friendly relation with foreign States, public order, decency and morality.

 Voluntary Winding Up

 In case of voluntary winding up, the entire process is done without Court Supervision[4]. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: –

1. When the period fixed for the duration of the company in its articles has expired

2. When an event on the happening of which the company is to be dissolved as per its articles happens

3. The company resolves by a special resolution at a general meeting to be voluntarily wound up.
A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.

 Winding up by the Court

 A company may be wound up by the court in following situations. Here, the court means “High Court”[5].

1. If the company itself, has passed a special resolution in the general meeting to wound up its affairs. Special resolution means, resolution passed by three-fourth (3/4″) of the members present.

2. If there is a default, in holding the statutory meeting or in delivering the statutory report to the Registrar.

3. A company which is limited by shares, and a company limited by guarantee having share capital, is required to hold a ” Statutory meeting” of its members, within six months, and after one month, from the date of commencement of its business. A statutory report of the meeting so held shall also be forwarded to the registrar. [ sec 165 (1) & (5)]

4. If the company fails to commence it’s business within one year from the date of it’s incorporation, or suspends it’s business for a whole year.

5. A company limited by shares, has to obtain a “certificate of commencement” of business from the registrar. Unless it obtains such certificate, it cannot carry on it’s business operation

6. If the number of members, in a public company is reduced to less than seven, and in case of private company less than two.

7. The statutory requirement of minimum number of members in a public company is seven, and in case of private company, it is two (sec 12)
8. If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets, it is still unable to extinguish it’s liabilities, it means that company is unable to pay it’s debts.

9. If the court, itself is of the opinion that the company should be wound up.

The court may form such an opinion, if it comes to the knowledge of court that, the company is mismanaged, or financially unsound, or carrying an illegal operations etc.

 Persons may petition the Court for winding up

 1. The Company: A company may itself present a petition to the court for winding up after it has passed a special resolution. A company does not often present a petition to have itself would up by the court as it can achieve this object more conveniently by passing a special resolution to wind up voluntarily[6].

2. Any creditor of the Company: [Section 439 (1) (b)]: A petition to the court for the winding up of a company may be filed by any creditor creators. The term ‘creditors’ is not limited to one to whom a debt is due at the date of petition and who can demand immediate payment. Every person having a pecuniary claim against the company whether actual or contingent is a creditor and such a person is competent to a petition for the winding up of the company.

 3. Any contributory or shareholder [Section 439 (1) (C)]: Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of its fully paid shares. While every member of a company becomes a contributory, not every contributory is a member. Besides members, any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory.

 4.Petition by all or any of the prior parties whether together or separately [section 439 (1) (d)]: A petition for the winding up of a company under section 433 may be presented by all or any of the parties, namely, the company, the creditors or the contributories specified in section 433 (a), (b) and (c) whether together or separately.

 5. The Registrar may petition for winding up in the following circumstances [section 439 (1) (e)]:

(i) If default is made in delivering statutory report or holding the statutory report.

(ii) If the company does not commence its business within one year from its incorporation or suspends its business for a whole year.

(iii) If it appears to him either from the financial position of the company as    disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts.

(iv) Where the Registrar is authorized by the Central Government to petition for winding up the company.

(v) Where the number of members of the company fall below the statutory minimum.

(vi) Where it is just and equitable that the company be wound up.

6. Any person authorized by the Central Government [section 439 (1) (j)]: Under section 243  If any report of an inspector appointed to investigate the affairs of the company discloses[7]: –

(i) That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose

(ii) That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report so to do, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so.

 6. The Official Liquidator

Official of the court attached to a Court where a company is already being voluntarily wound up and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributors or both.

Liquidator can be released from the relevant duties in a winding-up proceedings:

The liquidator can apply to the Court for the release of the duties once the followings have
been accomplished:

1.  All the assets of the company have been realized (i.e. all assets have been sold and converted
to cash);

2.  Investigations related to the winding-up proceedings are completed; and

3.  A final dividend (if any) has been paid to the creditors to settle the debts

The liquidator will send notices, together with a summary of the relevant receipts and payments in the liquidation, to the creditors and contributories of the company of the intention to apply to the Court for release from the duties as liquidator. At this point, any creditor or contributory has 21 days from the date of the notice to raise objection to the intended release of the liquidator.

After obtaining the order for release from the court, the liquidator will file a “Certificate of Release of Liquidator” with the Registrar of Companies. The company shall be dissolved two years after the filing of the “Certificate of Release of Liquidator”.

 What Orders, The Court May Pass? (SECTION 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. Make any interim order, as it thinks fit, or
3. 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 follow :

1. Court will send notice 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 official liquidator is appointed by central Government ( sec. 448)
4. The company shall relevant particulars, relating to, assets, cash in hand, bank balance, liabilities, particulars of creditors etc, to the official liquidator. ( sec. 454)
5. 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 ( 455)

The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. (463)

 Stay Order

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. (466)

Dissolution of Company

Finally the court will order for dissolution[8] 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: 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 it’s ordinary jurisdiction.

 Winding up of unregistered companies

 Any partnership, association or company, consisting of more than 7 persons at the time of winding up of petition is presented before the Court, will be deemed to be an unregistered company and may be wound up by the order of the Court.

An unregistered company may be wound up by the court in the following circumstances:

1.     Where the company has ceased to carry on its business.

2.     Where the company is unable to pay its debts.

3.     Where just and equitable, in the opinion of the Court.

It may be noted that since an unregistered company is not a company as defined in the Companies Act, 1956, it cannot be wound up under Part VII of the Companies Act, 1956, which deals with winding up of companies. Thus, an unregistered company is wound up as per the provision of Part X of the Companies Act 1956.

Leading Cases on Winding up

 1.  DUBAI Dry Docks Co. Ltd v. Hede Navigation Ltd. (1988) 64 Com Cases 1 Bom[9],

In this case the company admitted its liability to pay repair charges and only wanted rescheduling of installments, the court ordered that the petition be advertise but after giving time to the company to establish its Bonafides.

2.  CHEMICAL ENTERPRISES v. Kalpanalok Ltd. (1984) 55 Com Cases 522 P&H

It was held by the court that where the creditor has not given his own notice, he cannot ask for the advertisement on the basis of another creditor’s notice if that other creditor has already been paid off by the company.

3.  VYSYA Bank Ltd. v. RAHDHIT STEEL AND ALLOYS P. LTD (1993) 76 COM CASES 244 BOM

It was held by the court that where the registered office of the company was not functioning and a different address was being given for correspondence, a service at that address and not at the registered office was held to be not sufficient to found a petition. The Petition was accordingly dismissed.

4.  NAGESWAR RAO v. RAJAHEMUNDRY ELECTRIC SUPPLY CORPORATION LTD. (1957)

The Court taking into account all the facts and circumstances of the case, the Court will have to see whether there is anything in the management and conduct of the company which shows to the Court that it should no longer be allowed to continue.

5.     MOOL CHAND RASTOOGI v. ALLODIAL CHEMICAL MFG LTD., 1988 BCLC 63 COM CASES 22 (All)

A winding up order becomes effective forthwith and the properties and assets of the company are custodia legis. A compromise arrived at between the same parties in another court without disclosing to that Court that the company was ordered to be wound up is effective and unenforceable and winding of order cannot be recalled

 Conclusion

 After analyzing, it is found that the right to apply for winding up is the creature of statute and not of contract. It is within the power of the courts to wind up a company within its own motion. But it should be noted 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. It is the stage, where by the company takes its last breath. Liquidation being the responsibility of the official liquidator is a risky process and needs expertise. Going by the experience, the official liquidator and their office attached to the High Courts had their own difficulty and limitations in effectively completing the liquidation process. The New companies Bill contains a provision for appointing experts as liquidators and It is to be seen as to how the liquidation is done in future. It is very complicated area in Indian Company Law needing many reforms

          Bibliography

1. 1.      http://www.lexvidhi.com/article-details/a-study-of-the-winding-up-of-the-206.html; Retrieved on  july 18,2012.
2. 2.      http://www.hklii.hk/eng/hk/legis/ord/32/
3. 3.      Community Legal Information Centre. Accessed: April 12, 2012.
4. 4.      section 433  of the Insolvency Act 1986.
5. 5.      Sections 433 to 483.
6. 6.      Section439(1)(a)also   available at,www.caclubindia.com/articles/details.asp?mod_id=8246#.UAaiJJEoPDc.
7. 7.      Under section 235.
8. 8.      Section 481.
9. 9.      http://www.indiankanoon.org/doc/382278/.
10. 10.  http://laws-lois.justice.gc.ca/eng/regulations/SOR-2007-258/FullText.html
11. 11.  http://www.caclubindia.com/articles/details.asp?mod_id=8246#.UAaiJJEoPDc
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13. 13.  www.companyliquidator.gov.in/winding_up_3.html
14. 14.  http://www.caclubindia.com/articles/details.asp?mod_id=8246#_ftnref1
15. 15.  http://www.hyneslawyers.com.au/articles/Stay-or-termination-of-a-winding-up—review-of-recent-case-law.html; Accessed: January 20, 2012
16. 16.  AlMA (1997). Corporate Governance and Business Ethics. New Delhi: Excel Books.
17. 17.  Arora, Ramesh K and Tanjul Saxena (eds.) (2004). Corporate Governance:Issues and Perspectives.
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Issues and Perspective