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Articles

Slow Process of Winding up of Companies


Dr. J. P. Sharma, FCS, Department of Commerce (SDC), Faculty of Commerce & Business,
Delhi School of Economics, Delhi.
Amrita Singh, Lecturer, Jagan Institute of Management (JIMS), New Delhi.
INTRODUCTION

Winding
up
of
companies is indeed a
time consuming and
complex process and
compulsory winding up
by the court takes ten to
fifteen years. This
article based on a study
undertaken by the
authors seeks to identify
the reasons for the long
delays.

e-mail :
drjps40@hotmail.com

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A company comes into existence by a legal process and when it desires to end its existence it must
again go through the legal process of winding up of its affairs. Winding up of company is the
process whereby its life is extinguished and its property administered for the benefit of its creditors
and members. An administrator is appointed and he takes control of the company, collects its
assets, pays its debts and finally distributes the surplus if any among the members in accordance
with their rights. Thus winding up is the last stage in the life of a company.
The Companies Act, 1956 provides a mechanism for winding up of companies. There are three modes
of winding up under the Act. A company may be wound up by an order of the Court that is called
compulsory winding up or winding up by the Court. Winding up by the creditors or members
without any intervention of the Court is called voluntary winding up. In voluntary winding up, the
company and its creditors are left free to settle their affairs without going to the Court. In the case of
voluntary winding up, the creditors or members may apply to the Court for directions or orders. Such
a winding up is known as winding up subject to the supervision of the Court.
Winding up of a company is a time consuming process. In the Indian context the process is very
slow and a large number of petitions are pending before the office of Official Liquidators appointed
by the Court. As per the data provided by the Minister of Company Affairs (now Minister of
Corporate Affairs) there were 6259 winding up petitions pending before different Courts in the
country as on March 31st, 2005(1) . As the entire process of winding-up currently takes, in some
cases, even more than 15 years as compared to only few (2 to 3) years in most of the developed
countries, it is imperative that the Indian law be remodeled on international lines. In the year
1999, the Government of India set up a High Level Committee headed by Justice V.B. Balakrishna
Eradi(2) . This Committee was asked to examine and make recommendations with regard to the
desirability of changes in existing law relating to winding up of companies so as to achieve more
transparency and avoid delays in the final liquidation of the companies; the mechanism through
which the management of companies will be conducted after the winding up of order is issued and
the authority which will supervise timely completion of proceedings; the rules of winding up and
adjudication of insolvency of companies; the manner in which the assets of the companies are
brought to sale and the proceeds are distributed efficiently and a self-contained note on winding
up of companies having regard to the Sick Industrial Companies (Special Provisions) Act, 1985 and
the Securities Contracts (Regulation) Act, 1956 with a view to creating confidence in the mind of
investors, creditors, labour and other shareholders. The committee presented its Report to the
Government on 31st August 2000.
The committee(3) highlighted the problems regarding winding up of a company that were causing
delays like delay in filing of statement of affairs, delay in handing over updated books of account
and records, delay in finalization of list of creditors and debtors, inadequate power and staff given
to Official Liquidator, non availability of funds etc. The reason for delays was also the multiplicity
of litigation before various Courts or quasi-judicial bodies. To enable the process of winding up to
be completed in a time bound manner the Eradi Committee recommended that the provisions of
Part VII of the Companies Act, 1956, be amended to include the provisions for setting up of a
National Tribunal which will have the jurisdiction and power presently exercised by Company
Law Board under the Companies Act, 1956; the power to consider rehabilitation and revival of
companies, a mandate presently entrusted to BIFR/AAFIR under SICA and the jurisdiction and
power relating to winding up of companies presently vested in the High Courts. In view of above
recommendations Article 323B of the Constitution was advised to be amended to set up National
Tribunal, SICA be repealed and the Companies Act, 1956 be amended. Accordingly the Companies
Act, 1956 was amended by the Companies (Second Amendment) Act, 2002. The amendment provided

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for establishment of National Company Law Tribunal (NCLT)
and National Company Law Appellate Tribunal (NCLAT) to
handle the winding up of companies. However, the constitution
of NCLT/NCLAT has been held up due to a legal challenge and
the matter is pending before the Supreme Court.(4)

HISTORY OF WINDING UP LAWS


The law of company winding up India is the cherished child of
English parents born and brought up in England. Such laws enacted
in India from time to time have been following the English
provisions with, minor changes here and there. Therefore, a brief
resume of the origin and growth of winding up laws in England is
essential for logical understanding of winding up laws in India.
Four phases are discernible in the course of this development viz.,
- the first covers the period up to 1844; the second phase relates to
the period between 1844 and 1856; the third which may be regarded
as the period modeled on English Provisions, commences with
the passing of the Joint Stock Companies Act, 1846, and extends to
1956 and the final phase that starts from 1956 and extends to the
present day is known as the era of modern company law.
In England, prior to 1844, there was no distinct body of legal
principles that could be regarded as the law of company
liquidation. All companies, except those that enjoyed the privilege
of incorporation by statute, or charter, were of the settlement
deed type, and were treated as enlarged partnerships. To their
winding up, therefore, the law of partnership applied. The
liability of the members of a company, like partners, was
unlimited. Secondly, no satisfactory procedure existed for
compulsory winding up at the instance of contributories. Thus,
a need was felt for a simple form of procedure for making
companys assets available for the payment of debts, as well as
some means by which the members could bring an unsuccessful
venture to an end, and also fix a limit to the extent of their
liabilities. To achieve these objects, various Acts were passed
from 1844 to 1856, which were known as winding up Acts. These
Acts had some defects, such as no provision was made to limit
the liability of shareholders. While corporate assets constituted
the primary fund out of which liabilities were to be satisfied, any
deficiency could be made good by resorting to the members
private property. Secondly no attempt was made to limit the
remedies of creditors as to levy execution on the personal
property of the shareholders. The Companies Act of 1856
removed these defects. With the passing of this Act, a single
system of winding up, which could be set in motion by any
contributory, creditor, or by the company itself, was introduced.
The Act also provided for the limited liabilities of shareholders
as to the nominal value of their respective shares. A procedure
for enabling voluntary winding up subject to courts supervision
was introduced by the Act of 1857, and extended in the following
year. These Acts were repealed by the Companies Act of 1862
providing for three modes of winding up - winding up by the
court; voluntary winding up; and voluntary winding up subject
to supervision of the court, The Act of 1890 and the Rules there
under introduced a procedure for winding up. These provisions
subsequently were reproduced by the English Companies Act of
1948, which now constitutes the existing legislation, and also
governs the company liquidation in England today.

Slow Process of Winding up of Companies

In India, following the English Act of 1844, an Act was passed in


1850 containing similar provisions of company liquidation.
Another Act was passed in 1860 on the lines of the English Act of
1856 and 1857. After enacting various amending Acts between
1882 and 1913, the Act of 1913 came into force that modified the
winding up provisions to a great extent. Gradually, the Companies
Act, 1956, amending the law and procedure relating to compulsory
winding up, came into operation and is operational till date.

METHODOLOGY
Winding up of the company is the process by which the
management of a companys affairs is taken from the directors
hands, its assets realized by a Liquidator, and its debts paid out
of the proceeds of realization. It is conducted in accordance with
the rules laid down in the Companies Act. Due to the lengthy
process of winding up various cases are lying before High Courts
in the country. This article based on a study attempts to study the
reasons for slow winding up of the companies.

LIMITATIONS OF THE STUDY


Apart from the basic limitation of inadequacy of time and
resources needed for conducting a study of this type, following
were some of the other limitations of the study. They have been
identified in the course of conducting this study and need to be
kept in mind while examining the conclusions emerging out of
this study.
(i) The study only concentrates on compulsory winding up
by the Court and does not cover other modes of winding
up i.e. members voluntary winding up and creditors
voluntary winding up.
(ii) Although in-depth interviews were conducted with various
government Officials linked with the process of winding
up for obtaining valuable inputs, it was felt during the
course of interview that many issues were kept hidden.
(iii) As is common with most of the work related with
behavioral sciences, some degree of subjectiveness has a
tendency to creep in. However; careful efforts were made
to prevent these from affecting the findings.

RESULTS
On studying the process of winding up it can be easily concluded
that it is relatively easy to incorporate a company in India, but it is
a time and money consuming process to wind up a company. The
problems that emerged out of the study mainly relate to delay in
filing of statement of affairs, delay in handing over updated books
of account and records, delay in finalization of list of creditors and
debtors, inadequate power and supportive staff given to the Official
Liquidator, non availability of funds etc.
Under the current provisions of the Companies Act, on specified
matters, powers of decision are reserved either for the Central
Government itself or available to CLB or High Court. There is a
need to consolidate and entrust to a single body like the one
introduced in the Companies Act, 2002 called the Tribunal (NCLT)
the powers and jurisdiction presently being exercised by various
bodies. The NCLT shall serve as a single window settlement of
cases, related to the corporate affairs. The multiplicity of litigation
before multiple quasi judicial bodies like the Company Law
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Slow Process of Winding up of Companies

Board, BIFR and High Courts causes delay in winding up


proceedings. The establishment of NCLT/NCLAT will prove to
be of great help to the corporate world by speeding-up the entire
process of winding up. Civil courts under the amended provisions
have also been barred from granting injunctions which would
avoid unnecessary long-drawn civil suits.
The study also suggests that every company should file its
statement of affairs synchronous with the petition for winding
up or while opposing a petition for its winding up. The statement
shall be filed along with the names and addresses of the directors,
creditors and debtors of the company and the location of assets
and their values and such other information as ordered by the
Tribunal. This provision will reduce the delay that occurs in
making of statement of affairs of the company.
To tackle the problem of paucity of funds it has been proposed to
put in place Revival and Rehabilitation Fund through collection
of a cess which will be levied at the rate of .005% -1% on the annual
turnover or the gross receipts of the company. This proposed fund
will take care of the interim payment of wages to the workers,
protection of assets and for other rehabilitation measures.
Further, the Official Liquidator should also be entrusted with
wide powers such as appointment of Chartered Surveyors and
Chartered Accountants to value the assets of the Company.

JUDICIAL PRONOUNCEMENTS
Winding up in India is conducted in accordance with the rules
laid down in the Companies Act, 1956. As per section 10 of the
Act, the High Court has been given the jurisdiction to deal with
the company affairs and its winding up. Due to the lengthy
process of winding up of the companies, cases are pending before
various High Courts in the country. The succeeding paragraphs
tend to analyse the probable reasons for delay in winding up
proceedings and also the problems faced by the petitioners during
the process. An analysis of some judicial pronouncements on
winding up cases has also been done to give support to the study.
(i) L.R.Rangaier and Sons v. Coffee Board and others, AIR 1999
(Kerela) 258. The appellant company was incorporated in
1954 with a paid up share capital of Rs. 4,75,000. Winding up
petition was filed by two creditors in 1990 to wind up the
company under sections 433 and 434 of the Companies Act,
1956 and soon a provisional liquidator was appointed by
the company Court. When the Coffee Board, which was a
prime supplier of coffee to the company, came to know of
the initiation of the liquidation proceedings it got impleaded
in the company petition and obtained permission from the
court to remove the coffee kept in-the godown of the
company. In view of the objection from the workers against
the removal of coffee, an Advocate Commissioner was
appointed for supervising the curing operation. When the
Advocate Commissioner inspected the godown it was
revealed that 17 tons of coffee kept in the godown worth
Rs.43, 52,977.64 was found missing. Thereafter the Coffee
Board filed a petition to be substituted as original petitioner
and to prosecute the winding up proceedings at the instance
of the coffee board by substituting it in the place of the
petitioners in Company Petition. The company made a plea
saying that it was a case of disputed debt as there were certain
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counter claims from the coffee board. The case went on for
nine years after which the petition was accepted and the
company was ordered winding up.
(ii) Garodia Hardware Store v. Nimodia Plantations and Industries
Pvt. Ltd. AIR 1998 (Gau). Nimodia Plantations and Industries
Pvt. Ltd was a Pvt. Ltd. Company incorporated under the
Companies Act 1956. The Company owned and possessed
a tea garden, namely, Hautley Tea Estate within the Sub
Division of Gloaghat, in Assam. The petitioners were a
partnership firm registered under Indian Partnership Act.
The firms filed petition under Section 433 (e) and (f).
According to the petitioner firms the company was not in
a position to meet the liabilities and was running at a loss
and there was no chance to make profit. The petition filed
by the creditors of the company on the ground of inability
of the company to pay debts even after regular reminders
and evidence showing the inability of the company to pay
wages to workers. On the other hand the company filed an
affidavit in opposition saying that they had sold the
undertaking to another company but the sale deed was not
completed. A suit for injunction had been obtained against
the property of the company and thus the company was
not in a position to pay the debts. The company also pleaded
that they were not served any notice in this regard. The
court though admitted this fact, but as the company was
facing financial difficulties and was unable to pay its debts
ordered the winding up of the company in 1996 i.e. after
almost nine years after filing of petition.
(iii) Karam Chand Thapar and Bros. (Coal) Sales Ltd. v. Acme Paper
Ltd. AIR 1994 (Delhi) 1. The petition was filed by the
creditors of the company in 1987 on ground of non-payment
of the money due to them. The petitioner had sent regular
reminders to the company but when no response was
received they filed a petition for winding up. The plea of
the respondent company in this regard was on two grounds.
Firstly as per the company as the creditors had offered to
take back the goods, there was novation of the earlier
contract and thus no amount was due to them. The second
plea of the company was that a suit had also been filed
with the civil court and hence winding up could not be
ordered. However, the plea of the company was rejected.
The company was ordered to be wound up in 1998. Thus it
took almost eleven years for the court to decide a simple
case of inability to pay debt by a company.
(iv) Andhra Steel Corporation Ltd. v. Bank of Baroda, AIR 1995 (Cal)
367. In this case, the bank had certain dues from the company
and hence it filed a petition in 1986 for winding up the
company. The court did not order winding up but directed
the company to make payment to the bank in instalments.
The company however failed to pay even the instalments
on time and thus the petitioner requested the court for
winding up of the company. However, the company pleaded
that the court could not order winding up by virtue of the
Recovery of Debts due to Banks and Financial Institutions
Act, 1993. As per this Act the banks and financial institutions
are required to file cases with the Tribunal set for the purpose
under the Act of 1993. The plea was rejected as it was
submitted that the Tribunal had no authority to decide the

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winding up as this right was reserved with the High Court.
Thus the company was ordered to be wound up in the year
1994 taking about nine years for the case to be decided.
(v) Shri Sham Lal Gupta v. Hamco Industries Pvt. Ltd. AIR 1995
(P&H) 6. The petitioner, filed this petition for winding up of
M/s Hamco Industries Pvt. Ltd., on the ground that it was
unable to pay its debts. As per the facts of the case the company
wanted to float some shares with a view to increase its capital.
The petitioner, who along with his family members was
shareholder of the company applied for allotment of 110
shares in his name and sent the share application form duly
filed to the company along with a sum of Rs. 1.10 lacs in
1982, but the company did not float any fresh shares and,
therefore, none was allotted to the petitioner. According to
the petitioner, the share money paid by him continued to
remain in deposit with the company for a couple of years. In
the year 1990 the petitioner demanded the return of his
money and wrote some letters to the company in this regard.
The petition for winding up was made in 1990, eight years
after depositing the money. However as per the company
version the payment had already been made to the petitioner
in 1988. The petitioner pleaded that the amount paid to him
in 1988 was not related with the share application money;
rather it was for settlement of the shares transferred by the
petitioner to his brother who was a shareholder in the
company. On analyzing the facts of the case the company
admitted the claim of the petitioner but because the amount
had become time barred their plea was rejected. The court
took almost eight years to decide the petition.
(vi) SBI Mutual Fund v. Vikas WSP Ltd. AIR 2006 (P & H) 368. SBI
Mutual Fund, the petitioner, filed a petition under sections
433(e) and 433(f) seeking winding-up of the respondentcompany, alleging that the respondent, after having
declared dividend for the year 2000-01, failed to remit the
said amount. The petitioner filed the petition before the
High Court of Punjab and Haryana in the year 2001. As per
the petitioner the company had declared the dividend but
failed to pay the amount. The petitioners had sent regular
reminders to the company but they received no response.
On the other hand the respondent company contended that
they had dispatched the dividend vouchers and later on
made a statement that the dividend warrant got burnt and
hence could not pay the amount. The company however
pleaded that they had deposited the money in a bank under
current account but did not name the bank. Thus it was
submitted that the claim of the petitioners was admissible
and the company was ordered winding up taking about six
years for the court to decide.

CONCLUSION
The Ministry of Corporate Affairs has since introduced online
registration of companies in the country. The first such company
registered online was in south India (Coimbatore) in the summer
of 2006, when the Ministry of Corporate Affairs launched its new
web site www.mca.gov.in. Around 18000 companies(5) have been
incorporated on line up-to November 2006. With the launch of
MCA 21, companies in the country can be formed in less than an
hour. But, when it comes to closing a company, as revealed by

Slow Process of Winding up of Companies

the present study, the process in many cases has taken more than
10 years and in some cases even more than 15 years. The findings
of this study have been supported by one another recent study,
which revealed that it takes just 35 days to register a business in
India, but when it comes to winding up a company, it can drag to
as long as 10 years(6) . Acknowledging the unduly slow process of
winding of companies in the country, the Minister of Company
Affairs (now Minister of Corporate Affairs) in the Rajya Sabha
on 12th December 2006 stated that there were 6259 winding up
petitions filed pending before different courts of the country as
on 31st March, 2005. Such companies are undergoing the lengthy
process to wind up their businesses. There is an urgent need to
take the process of liberalization a step further and recognize
that so long as a company is acting in the interest of shareholders
and otherwise observing the law of the land it should have the
freedom to manage its affairs, merge, amalgamate, restructure
and reorganize or plan its affairs as it considers best in the interest
of the stakeholders. The process of winding up should be
simplified and the interference by the Government or Court or
any other authority should only be in the event of any detriment
to the interest of shareholders. Ministry of Corporate Affairs is
on the job and once the NCLT/NCLAT are made functional, the
problems faced by companies and other petitioners may be solved
to a greater extent.

Footnotes
1. Answer to a question raised by Shri Jai Prakash Aggarwal, Rajya
Sabha and answered by the Minister of Company Affairs, (unstarred
question no. 2133, 12th December06.)
2. The Government had constituted on 22.10.99 a Committee consisting
of experts to examine the existing law relating to winding up
proceedings of companies in order to re-model it in line with the
latest developments and innovations in the corporate law and
governance and to suggest reforms in the procedure at various
stages followed in the insolvency proceedings of companies to avoid
unnecessary delays in tune with the international practice in this
field.
3. The Eradi Committee had also visited Offices of Official
Liquidators, Ministry of Company Affairs (MCA) at a few
Metropolitan Centres to actually see the difficulties faced by them.
It had also constituted a Sub-Group to study the Insolvency Laws
of other countries including UK, Singapore etc.
4. Replying to a question of a Member of Parliament, raised in the
Rajya Sabha on 8th August, 2006, the Minister of Company Affairs
Mr. Prem Chand Gupta stated that the Company Law Board (CLB)
is functional currently and both the National Company Law
Tribunal (NCLT) and the National Company Law Appellate
Tribunal (NCLAT) have not been constituted as yet. The reason
given is, the provisions of the Companies Act, 1956 relating to
setting up of NCLT/NCLAT faced a legal challenge, and the matter
is sub-judice on account of a Special Leave Petition (SLP) filed by
the Central Government in the Supreme Court, following a ruling
by the Madras High Court in the matter. As the NCLT has not yet
been constituted by the Central Government, the Company Law
Board (CLB), the Board for Industrial and Financial Reconstruction
(BIFR) and the High Courts continue to discharge their function as
before.
5. News statement of the Minister of Company Affairs Mr. Prem
Chand Gupta published in the Indian Express (business page) of
11th November 2006.
6. Doing Business in South Asia 2007, World Bank Report.

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