Winding up (or liquidation) is the process by which a company’s assets are collected and sold to pay off its debts. Any monies remaining after all debts, expenses and costs have been paid off are distributed amongst the company’s shareholders. The company will be dissolved and will no longer exist after winding up.
In other words, it is the process whereby the life of the company comes to an end and its property is administered for the benefits of its members and creators. Winding Up is defined under section 270 of the Companies Act, 2013.
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.
Voluntary Winding Up is of 2 types:
- Members’ Voluntary Winding Up — This occurs when the company is solvent and able to pay its debts in full within a specified period. The directors must make a declaration of solvency, followed by a resolution passed by the members in a general meeting. An official liquidator is then appointed to wind up the company’s affairs.
- Creditors’ Voluntary Winding Up — This occurs when the company is insolvent and unable to pay its debts. The process begins with a resolution by the members, followed by a meeting of the creditors. The creditors have a significant role in appointing the liquidator and overseeing the winding-up process.
Who can file for Winding Up under section 272:
– The company itself
– Contributory
– Registrar
– Person authority by Central Govt.
– Central Govt. or State Govt.
Procedures for Winding Up of a Company:
- Company have to pass a special resolution
- Appointment of Liquidator
- Notice for Resolution or Petition is to be published in the official gazette or local newspaper to inform the public or shareholders
- Collection and Realization of Assets
- Settlement of Liabilities
- Distribution of Remaining Assets
- Final meeting and Dissolution
- Final filing of Documents
- Official Dissolution when the company satisfies that winding up has been conducted properly
RELEVANT CASE LAWS
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?
Judgement: 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.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 AIR 1968 SC 772
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,m or when it is impossible to carry on the business of the company except at a loss, or th eexisting 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. AIR 1978 All. 452
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.
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.
PRESENT CASE
Q. 5/2020. Since the dispute over payment appears to be a commercial matter rather than an inability to pay debts, it would not meet the criteria for winding up under section 271. They can seek other remedies such as arbitration or recovery of dues, instead of winding up.
Q. 6/2019. Win2luck is a game of chance an dthe object with which the company was initially incorporated has failed and the government’s decision has knocked out the company’s bottom. Hence, it is just and equitable ground to wind up the company.
Q. 6a/2018 & 6a/2017. In the light of German Date Coffee, the shareholder will succeed on the ground of loss of substratum under section 271.
