6 - Winding Up

Winding Up ➢

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Winding Up is the second method of putting and end to life of a Company Professor Gower: “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 assets, pays its debts and finally distributes any surplus among the members in accordance with their Rights” Company can’t be made insolvent under insolvency laws A solvent Company can be wound up Winding Up precedes dissolution

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Types of Winding Up (S425)  3 kinds a) Compulsory Winding Up under order of Court b) Voluntary Winding Up  By Member  By Creditors c) Voluntary Winding Up under supervision of Court

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Winding Up by Court  Cases 1. Special Resolution  Company can decide to wind up by Special Resolution  Court is not bound to, discretionary:  Opposed to public interest  Opposed to Company’s Interest 2.

Default in Holding Statutory Meeting  Failure to hold Statutory meeting and file statutory report  Ordered to be wound up  Petition to be filed by Registrar or Contributory  Any other person, within 14 days of having to hold meeting  Power of Court discretionary, may direct to hold statutory meeting and file statutory report

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Failure to Commence Business  Failed to commence business within one year  Failed to carry on business for one year  Discretionary -> only when no intention to carry on business  If temporary -> no direction

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Reduction in Membership  Public Company -> below 7  Private Company -> below 2

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Inability to Pay Debts  Inability to pay debts means a) Statutory Notice  Amount exceeding Rs. 500/- notice to be served on Company and for 3 weeks Company has failed to pay  Debt not to be a disputed debt  Defence available to Company i. Company acted in good faith ii. Company likely to succeed in point of law iii. Company has Prima Facie Proof  Notice to be served on Company’s Registered Office  Time barred not applicable  Company’s Power discretionary b) Decreed Debt  Amount decreed against Company and Company refuses to pay  Winding Up maybe stopped if Company Bonafide disputes the decree amount c) Commercial insolvency  That is, Company is unable to pay the debts

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Just and Equitable  Opinion of Court that it is Just and Equitable  Principle of ‘Ejusdem Generis’ apply earlier now not so  Wide discretionary powers given  Grounds are as follows: a) Dead lock 2

b) c) d)

e) f) g)

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Loss of Subscription  Main object failed  Should Not be temporary difficulty Losses  When Company can’t carry on business except at losses Oppression of Minority  Principle shareholders have adopted an aggressive, oppressive or squeezing policy towards minority Fraudulent Purpose  Company has been conceived and brought forth in fraud or illegal purpose Incorporated or Quasi Partnership  When the nature of Company is as above Public Interest  Against, then allowed

Who can Apply (S439) 1. Petition by Company  Company has passed special resolution 2. Creditor’s Petition  Creditor includes secured creditor, debenture holder and trustee for debenture holders  Secured and unsecured creditor enjoy same status  Initiation of civil proceedings not a bar to Winding Up, stay of suit can be ordered  Foreign creditor 3. Contributory’s Petition  On Winding Up, shareholders, known as contributory 4. Registrar’s Petition (S439(5))  All grounds except special resolution  To obtain prior permission of Central Government  And Central Government to sanction only after Company afforded an opportunity to represent 5. Central Government Petition  After investigation of the affairs of Company under Section 235 thereafter business of Company conducted for fraudulent or unlawful purposes

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Petition where Company under Voluntary Winding Up (S440)  Conversion of voluntary Winding Up into Winding Up by Court  Petition for Winding Up by Court my be presented where Company is already under a) Voluntary liquidation b) Under supervision of Court  Petition to be presented a) Company b) Contributory c) Registrar d) Creditor e) Central Government f) Official Liquidator

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Powers of Court (S443)  After hearing a. Dismiss with or without costs b. Adjourn the hearing c. Make interim order d. Make order for Winding Up e. Conditional order of Winding Up

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Commencement of Winding Up (S441)  Commencement a. Not from date of order b. But from date of presentation of petition c. If prior resolution has been passed by Company, from date of passing resolution d. More than one petition, from date of first petition

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Recission of Order (S443)  Anytime the Court may change its order on changed facts

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Stay of proceedings before order (S442)  Court on application can stay any other proceeding in any other Court, that is Civil, Criminal or Revenue in nature

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Appointment of Provisional Liquidator (S450)  Court may appoint Provisional Liquidator after presentation of application but before passing of Winding Up order when Official Liquidator is appointed  Court to inform Company before doing so 4

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Object of appointment is protection and preservation of Company’s assets Then Provisional Liquidator can become Official Liquidator

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Consequences of Winding Up order 1 Court to send intimation of Winding Up order to Official Liquidator and Registrar  Company to file copy of certified order with Registrar within 30 days of passing of orders  Registrar to record this in minutes and then notify in official gazette 2  Winding Up order means discharge of all officers and employees of Company except if business is to be continued 3  Order operates in favour of all creditors and contributories of Company 4  Official Liquidator becomes Liquidator of Company

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Legal Proceedings (S446)  After order  No legal proceeding  Or subject to terms as the Court may impose  Pending suits to be proceeded with only by leave of Court  Object -> to prevent assets of Company from being frittered away in vexatious litigations  Winding Up Court to have jurisdiction to decide a) Any suit or proceeding by or against the Company b) Any claim made by or against the Company c) Any application made for compromise or arrangement with creditors d) Any question of priorities or any question whatsoever whether of law or fact which may relate to or arise in the course of Winding Up

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Procedure of Winding Up by Court  Central Government to attach to each High Court an Official Liquidator  Act of Liquidator valid notwithstanding defect in appointment 

Statement of Affairs  Within 21 days of order of Winding Up or appointment of Official Liquidator, statement of 5

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affairs to be submitted by Company to Official Liquidator Statement to be verified by a) Director b) Manager c) Secretary d) Chief Officer e) Such other person as Court directs Particulars to be contained i. Assets of Company – cash in hand and at Bank and negotiable securities ii. Debts and liabilities iii. Details of creditors iv. Details of debts due to Company v. Required information

Report by Official Liquidator  Within 6 months Official Liquidator to submit Preliminary Report to Court showing i. Amount of issued and paid up capital / assets and liabilities ii. If Company has failed – reasons iii. Whether further inquiry required

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Custody of Company’s property (S456)  Official Liquidator to take into custody all of Company’s property; effects and actionable claims

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Powers of Liquidator (S457)  i. Institute and defend legal proceedings ii. To carry on business of Company iii. Sell immovable and moveable property and actionable claims iv. To raise security v. Other things necessary  Above powers with sanction of Court  Without sanction of Court i. To do all acts of Company ii. Inspect records and returns of Company and files of Registrar without payment of fee iii. To prove and claim dues iv. To draw, endorse and accept Negotiable Instruments on behalf of Company 6

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To execute letters of administration on behalf of deceased vi. To appoint agent on his behalf  But subject to control of Court Official Liquidator may seek directions of Court Official Liquidator to call meetings of creditors and contributories and consider their decisions Person aggrieved by act or decision of Official Liquidator may apply to Court Official Liquidator to present to the Court twice a year an account Moneys received by Official Liquidator to be paid into the public account of India in Reserve Bank of India Court to get all accounts audited Official Liquidator to send copy of accounts to every creditor and contributory Where liquidation is of Central Government to be sent to Central Government Central Government to take cognizance of misconduct on part of Official Liquidators

Committee of Inspection (S464)  Court to appoint Committee of Inspection to act with Official Liquidator  Official Liquidator within 2 months call creditors to decide membership and then within 14 days meeting of contributories  In case of conflict, Official Liquidator to apply to Court for final decision 

Features a) 12 members b) Right to inspect accounts of Official Liquidator c) Member to resign by notice in writing to Official Liquidator d) Quorum 1/3 of the members or 2, whichever is higher e) Office to be vacant i. Adjudged insolvent ii. Compounding or arrangement with creditors iii. Absent from 5 consecutive meetings without leave of absence f) Meeting to be called by Official Liquidator or by themselves 7

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General Power of Court 1. Power to stay Winding Up (S466)  On application of Official Liquidator, creditor or contributory  Sufficient reason 2. Settlement of list of contributories (S467)  That is, the list of assets and liabilities 3. Adjustment of rights of contributories (S475)  And then distribute surplus among persons entitled to it 4. Power to arrest absconding contributory (S479)  Arrest and seize 5. Saving of existing powers (S480)  General powers of Court for recovery also applicable 6. The right of set off (S469)  Any other dues to be set off  Limited right of set off in following cases i. Unlimited Company – only against money due to him from Company or independent dealing, that is, of debt of contributory ii. Limited Company – those whose liability is unlimited same right as above iii. Any other Company – set off against money due on call 7. Delivery of property (S468)  Court to call for information from person or persons  Private enquiry can be held 8. Power to order deposit in the Reserve Bank (S471)  All moneys received to be deposited in public account of Reserve Bank 9. Power to exclude creditors (S474)  Can exclude those creditors who are entitled to benefits 10. Public Examination (S478)  In case of report of fraud by Official Liquidator to Court – specific allegation – not an accusation  Pre-requisite conditions i. Official Liquidator has made further report ii. Such report contains a finding of fraud iii. Finding of fraud against the person whose examination is sought iv. Individual is one who has taken part in promotion of Company and is officer of Company 

Official Liquidator to take part 8

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Opportunity of being heard

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Dissolution of Company (S481)  If Winding Up can’t take place, Court to direct dissolution  Within 30 days Official Liquidator to file report with Registrar

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Enforcement of Orders and Appeals  Enforcement of Orders (S482)  Enforceable though out the country through Courts having appropriate Jurisdiction  Appeals from Orders (S483)  Appeal can be filed in same Court which passed or delivered them

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