ACADEMIC SESSION: 2015-16

FINAL DRAFT:

ON THE TOPIC

Effect Of Insolvency and Bankruptcy code on Winding up of a

Company
UNDER THE GUIDANCE OF:

Dr. Manish Singh

Associate Professor

Dr. Ram Manohar Lohiya National Law University

SUBMITTED BY:

Aditya Joshi

Roll No. 13, Section-A

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ACKNOWLEDGMENT:

I would like to extend special thanks and gratitude to my subject teacher Dr. Manish Singh who
gave me the golden opportunity to work on this wonderful research topic Effect of IBC Act 2016
on winding up of company which has helped me gain a lot of standpoint regarding relevant
provisions of the Constitution of India as well as the vast growing dynamics of Special Leave
Petitions in the country. Throughout the research period I have been time and again guided by my
teachers whenever I faced any hurdles or was in a state of stupor not being able to figure out the
intricacies of the subject.
I would like to thank my university Dr. Ram Manohar Lohiya National Law University for giving
me the chance to be a part of a unique research oriented curriculum which indeed boosts the
understanding of the subject.
I would also like to thank my parents, mentors and well-wishers who have been a constant support
and have time and again reviewed my work and have provided their insights on the matter.

- Aditya Joshi

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 Introduction
Winding up of a company represents the last stage in its life. In the words of Professor Gower:
Winding up of company is the process whereby its life is ended and its property administered for
the benefit of its creditors and members. An administrator, called 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.1 The assets of the company are disposed of,
the debts are paid off out of the realised assets (or from contributions from its members), and the
surplus, if any, is then distributed among the members in proportion to their holdings in the
company.

The company is not dissolved immediately at the commencement of winding up. Its corporate
status and power continue. Winding up precedes dissolution.

Objective:
To understand the concept of winding up.
To study the effect of winding up.

Research methodology
This Research Project titled the various grounds of winding up has been written using the
doctrinal or principled method of research, which involves the collection of data from secondary
sources, like articles found in journals and websites.

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THE PRINCIPLES OF MODERN COMPANY LAW,647 (3 rd Edn, 1969)
MODES OF WINDING UP

Before the Amendment of 2016 there were two modes of winding up of a company, now there
remains only one mode i:e by the order of tribunal.

There are two modes of winding up of a company, viz.,

1. Winding up under the order of the Tribunal2

1. WINDING UP BY THE TRIBUNAL

Winding up of a company under the order of a Court is also known as compulsory winding up.

GROUNDS FOR COMPULSORY WINDING UP (Section 433)

A company may be wound up by the Court in the following cases:

1. Special resolution of the company3

If the company has, by special resolution, resolved that it be wound up by the court. The court is,
however, not bound to order winding up simply because the company has so resolved. The power
is discretionary and may not be exercised where winding up would be opposed to the public or
companys interests.

In Bombay Metropolitan Transport Corpn Ltd v. Employees 4 where the company itself was
the petitioner and the financial position of the company was eroded, the court ordered for its
winding up in public interest.

2. Default in delivering the statutory report to the Registrar or in holding statutory meeting5

If a company has made a default in delivering the statutory report to the registrar or in holding the
statutory meeting, it may be ordered to be wound up. A petition on this ground can be made either
by the Registrar or by a contributory. In the latter case the petition for winding up can filled only
after the expiry of 14 days from the day on which the statutory meeting ought to have been held .
If it is brought by any other person e.g., a credito , it must be filed before the expiration of fourteen
days after the last day on which the statutory meeting ought to have been held.

The Court may, instead of making a winding up order, direct that the statutory report be delivered
or that a statutory meeting be held. The Court may order the costs to be paid by any persons who
are responsible for the default.
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2
Substituted for court by companies (second amanement )act,2002 (11 of 2003),
3
Section 271(a) of the Companies Act, 2013
4
(1991) 71 Comp Cas 473 Bom.
5
Section 271(d) of the Companies Act,2013
3. Failure to commence, or suspension of, business

The Court exercises power in this case only if the company has no intention of carrying on its
business or if it is not possible for it to carry on its business.

If a company has not begun to carry on business within a year from its incorporation or suspend
its business for a whole year, the Court will not wind it up if

(a) There are reasonable prospects of the company starting business within a reasonable time, and

(b) There are good reasons for the delay, i.e., the suspension of business are satisfactorily
accounted for and appear to be due to temporary causes.

4. Reduction in membership If, at any time, the number of members of a company is reduced
in the case a public company, below seven or in the case of a private company, below two, the
company may be ordered to be wound up by the Court.

What is just and equitable clause:-

It depends upon the facts of each case. The Court may order winding up under the just and
equitable clause in the following cases:

a. Loss of substratum :

The substratum of a company can be 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.

The substratum of a company disappears:

(i) When the very basis for the survival of the company is gone.

In Pirie v. Stewart. 6a shipping company lost its only ship, the remaining asset being a paltry sum
of 363. A majority in number and value of shareholders petitioned for its compulsory winding up
but a minority shareholder opposed this and desired to carry on the business as charterer. Held, it
was just and equitable that the company should be wound up.
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(1904) 6 F. 847.
(ii) When the main object of the company has substantially failed or become Impracticable: Where
a companys main object fails, its substratum is gone and it may be wound up even though it is
carrying on its business in pursuit of a subsidiary object.

In German Date Coffee Co., Re 7, the objects clause of the German Date Coffee Co. stated that
it was formed for the working of a German patent which would be granted for making a partial
substitute for coffee from dates and for the acquisition of inventions incidental thereto and also
other inventions for similar purposes. The German patent was never granted but the company did
acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee
was made from dates, but not under the protection of a patent. Held, on a petition by 2 shareholders,
that the main object could not be achieved and, therefore, it was just and equitable that the
company should be wound up.

b. Losses:

Secondly,it is considered to wind up the company when it cannot carry on business except at losses.
It will be needless indeed,for a company to carry on business when there is nohope of achieving
the object of trading at a profit. But a mere apprehension on the part of some shareholders that the
assets of the company will be frittered away and that loss instead of gain will result has been held
to be no ground.

c. Oppression of Minority

When the management is carried on in such a way that the minority is disregarded or oppressed.
Oppression of minority shareholders will be a just and equitable ground where those who control
the company abuse their power to such an extent as to seriously prejudice the interest of minority
shareholders.

d. Where there is a deadlock in the management of the company:

When shareholding is more or less equal and there is a case of complete deadlock in the company
on account of lack of probity in the management of the company and there is no hope or possibility
of smooth and efficient continuance of the company as a commercial concern, there may arise a
case for winding up on the just and equitable ground.

e. Where public interest is likely to be prejudiced.

Having regard to the provisions of section 397 and 398 (dealing with prevention of oppression and
mismanagement) where the concept of prejudice to public interest is introduced, would appear that
the Court winding up a company will have to take into consideration not only the interest of
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(1882) 20 Ch. D. 169.
shareholders and creditors but also public interest in the shape of need of the community, interest
of the employees, etc.

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Conclusion

Winding up i. e. to bring to a conclusion or an end by putting in order is the process by which the
life of a company is ended and its property is administered for the benefit of its members and
creditors. It represnts the last stage in life of the company but it should be used as the last resort.

After analyzing and observing various legal propositions and situations it is found that the
right to apply for winding up is the creature of statute and not of contract, and the winding up
orders passed by the court are not judgments in rem. But it should be marked 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, where a suit has already been instituted for
recovery of debt, under such circumstances, the proceeding are in the nature of parallel proceedings
in respect of the same cause of action. As a result, such course should not be considered by the
court more so to avoid conflict of jurisdiction of findings by two parallel courts of competent
jurisdiction. Thus at last it can be said that a genuine case has to be made out rejecting the malafide
contention, in the interest of good faith and justice.

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Bibliography
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Books:
 Gowers Principles of Modern Company Law, Paul. Davies.
A Ramaiya,Guide to the Companies Act, Sixteenth Edition Rprint,2006.
Singh Avtar, Company Law, Fifteenth Edition,2007, Eastern book Company, Lucknow.

Statutes used:

Company Law,1956

Websites used:

www.mca.gov.in
www.jestore.com
http://www.legalserviceindia.com
www.companyliquidator.gov.in

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