BBM 501 – CORPORATE LAW

October 18, 2010

WINDING UP OF A COMPANY

DISSOLUTION
◊ Dissolution – A co. is created by a legal process like registration, can be
dissolved by any of the following methods –
I. Scheme for reconstruction or amalgamation by which co. may be
dissolved without winding up
II. In case of a defunct co., it can be struck off from the register by the
Registrar & then dissolved
III. Winding up process
◊ Winding up – Process by which the life of the co. is ended & its property is
administered for the benefit of creditors & shareholders
◊ Winding up of a co. is different from insolvency of individuals. Co. can
never be insolvent. Dissolution is the final step of winding up
◊ When a co. is wound up, the management of the co.’s affairs is taken out
of its director’s hands, its assets are realized by a liquidator & its debts
are paid out of the proceeds of realization & any remaining balance is
returned to its members
◊ 3 modes of winding up –
1. Winding up by the Court
2. Voluntary winding up (Members & Creditors)
3. Winding up subject to supervision of the court

WINDING UP BY ORDER OF THE COURT

♣ Winding up by court’s order is called as Compulsory Winding up
♣ Sec.433 – Power of the court to issue an order for winding up
♣ Grounds for winding up by order of court –

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1. Special Resolution – If a co. passes special resolution for winding up,

then Court may issue an order for winding up. This is a discretionary
power of the court
2. Default in holding statutory meeting – If the statutory meeting is not
held within the prescribed period, Court may issue an order of winding
up. A petition for this, can be made by the Registrar or by a
Contributory. A petition by a contributory can be filed only after the
expiry of 4 days from the days of statutory meeting. Power of the Court
to order winding up is discretionary
3. Failure to commence business – If the co. has failed to commence its
business within 1 year of incorporation or has suspended its business
for more than one year, the Court may wind up the co. The Court does
not wind up the co. If there are reasonable prospects of business for
the co. & if there are good reasons for the delay
4. Reduction in membership – If the no. of members has been reduced to
below 7 for public co. & below 2 for private co., it is a ground for
winding up by the Court
5. Inability to pay debts – Circumstances when the co. cannot repay debt
are as follows:-
a. If a creditor has given loans for Rs.100 or more to the co. & if the
co. has neglected to pay back the debt for 3 weeks after a
demand notice by the creditor, then the co. is said to be unable to
pay its debts
b. A co. is unable to pay its debts if an execution or other process on
the decree of a Court is returned unsatisfied
c. If the co. is commercially insolvent, then it is said to be unable to
pay its debts. Commercial insolvency – Insufficiency of assets to
meet the existing liabilities like being unable to pay taxes, etc.
etc.
However, winding up is not ordered if the co. has bonafide debt or

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bonafide counter claim put forward by the co. or where there is a

bonafide & reasonable dispute regarding a part of the debt upon
which petition for winding up has been made
6. Just & Equitable grounds – When the Court feels that it is just &
equitable to wind up the co., then it can issue the order of winding up.
It is purely the discretionary power of the court. Instances under which
the court can grant winding up on just & equitable grounds are as
follows –
I. Deadlock of the co. – if the members of a co. are not on speaking
terms, then it is construed to be a deadlock. Mere dispute is not
considered as deadlock
Case: In Re Yenidji Tobacco Co. Ltd
W & R, major shareholders & directors of the co., had equal
rights of managing & voting in the co. They were bitter
enemies of each other & all communication was conducted
through secretaries. Though the co. was making profits, the co.
was wound up due to deadlock in the management

II. Loss of substratum – If the main object of the business has failed to
materialize, it results in a loss of substratum
Case: In Re German Date Coffee Co.
Co. was formed for manufacturing coffee from date fruit.
German Govt. had to grant patent right but the Govt
subsequently refused the same. Held, that there was loss of
substratum & so it could be wound up
III. Loss – When business of a co. is running at a loss, co. can be wound
up on just & equitable grounds. Here, the remaining assets must be
insufficient to pay for the loss. If the majority shareholders are
against winding up, it will not be made

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IV. Oppression of Minority – If a majority of shareholders adopt an

aggressive method to oppress the minority’s view, it is a ground for
winding up
V. Fraudulent purpose – when the business of the co. is fraudulent or
illegal, then it can be wound up
VI. Incorporated or Quasi Partnership – Sometimes, a small private co.
is a quasi – partnership. If it is so, it can be wound up due to the
legal vacuum to form a valid co.
VII. When the co. is a mere bubble without business or property, it shall
be wound up

♣ A private co. shall be wound up on just & equitable grounds like exclusion
of the petitioner from participation in co.’s business & also in case of small
private co., the co. was a partnership & the facts justify the dissolution of
the partnership

APPLICATION FOR WINDING UP BY COURT

♣ Petition for winding up is presented by the following –
1. By the Co. – A co. may present a petition for winding up, to the
Court, after passing a special resolution to that effect
2. By any Creditor or Creditors – Every person having a pecuniary
claim against the co., whether actual or contingent, is a creditor &
such person can file for winding up of the co. A creditor includes –
Contingent or prospective creditor, secured creditor, holder of any
debentures, any person having pecuniary claim against the co. & an
assignee of debt

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3. By any contributory or contributories – Contributor is a person liable

to contribute to assets of the co. in the event of it being wound up.
Contributory’s right to seek winding up is a statutory right & cannot
be modified or altered by AoA
♣ A contributory may petition for winding up on the following grounds –
A. Membership in the co. is reduced below the statutory minimum
B. He is an original allotee of the shares
C. He has held the shares for any six out of previous eighteen months
D. Shares have devolved on him through the death of the former
holder
♣ A holder of fully paid up shares shall be entitled to present a petition for
winding up even if the co. has no assets or has surplus assets left for
distribution among the share holders after the satisfaction

PETITION BY THE REGISTRAR

♣ Grounds for Registrar to commence winding up by petition are –
1. Default by Co. in delivering the Statutory Report or holding the
Statutory Meeting
2. Co. not commenced business within 1 year of incorporation or
suspension of business for 1 year
3. If the no. of members in case of public co. falls below 7 & for private
co., falls below 2
4. Inability of co. to pay its debts
5. If the Court feels that it is just & equitable to wind up the co.
♣ In case of inability to pay off debts, RoC must depend on balance sheet or
auditor’s reports to judge the financial position of the co.
♣ Central Govt. may apply to the court for winding up, on the basis of
inspector’s report (on just & equitable grounds)

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CONSEQUENCES OF WINDING UP
 In case of winding up by court, if a resolution is passed by the co. for
voluntary winding up, before the presentation of the petition, the winding
up is deemed to commence from the date of the resolution
 If the co. has not previously passed a resolution for voluntary winding up,
the winding up is deemed to have commenced from the time of
presentation of petition for winding up
 Powers of court on hearing petition –
a. Court may dismiss with or without costs
b. Adjourn the hearing conditionally or unconditionally
c. May make an interim order as it thinks fit
d. Make an order for winding up of the co. with conditional order

VOLUNTARY WINDING UP
¢ Voluntary winding up – Winding up of the members or creditors of the co.,
without interference by the Court
¢ Helpful to settle the affairs of the co. freely without going to the Court of
Law
¢ Brought about by passing an ordinary or special resolution, as required by
AoA
¢ Co. to provide notice of the resolution by advertisement in the Official
Gazette & in local newspaper within 14 days of passing the resolution.
Every officer of the co. is responsible with fine in case of default
¢ Time of commencement of voluntary winding up is from the date of
passing the resolution

CONSEQUENCES OF VOLUNTARY WINDING UP

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o Business of the co. is stopped except in case when there is necessity for
business of beneficial winding up
o Assets are realized. Debt & liabilities are calculated
o Board of Directors and other Managing Directors cease to hold the power
of administration of the co., but with the permission of the creditors or the
liquidator, may continue the employment of co.’s servants to wind up the
co. (This amounts to a new contract)
o There may be stay of actions and Legal proceedings against or in favour
of the co. subject to such conditions as the Court thinks fit
o Assets of the co. are distributed in proportion to the liability under
preferential payments as provided under the Act
o Every invoice, order for goods, business letters & other documents must
contain a statement that the co. is being wound up. If any person defaults
to do so, he is punishable with a fine up to Rs.500

TYPES OF VOLUNTARY WINDING UP

∇ Members’ voluntary Winding up –
a. If there is a declaration of solvency under Sec.488, it is a
members’ voluntary winding up
b. Declaration must be by a majority of directors at a Board
meeting
c. It must state that the co. has no debts or is able to pay its debts
in full within 3 years from the commencement of winding up
d. Declaration must be made within 5 weeks prior to ate o winding
up & delivered to RoC for registration
e. Copies of report of auditors regarding profit & loss accounts &
balance sheet must also be enclosed with declaration
f. If there is no such declaration, winding up becomes creditors’
voluntary winding up

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∇ Creditors’ Voluntary Winding up –

i. This is a voluntary winding up in which a solvency declaration is
not made
ii. Creditors control the Liquidator of the co.
iii. There is a meeting of the creditors for this winding up,
up, in which a
Liquidator is appointed and the remuneration is fixed by the
Committee of Inspection
iv. Creditors appoint the Committee of Inspection
v. Liquidator can exercise certain powers only with sanction of the
Court or Committee of Inspection or a meeting of Creditors
vi. As soon as the affairs of the company are fully wound up, the
Liquidator shall account the winding up & dispose of the property
of the co.

OFFICIAL LIQUIDATOR

¢ Official Liquidator – Person appointed by the High Court on the direction of

the Central Government, who is a full time officer

¢ If there is no sufficient work for a full time officer, part time officer may be
appointed

¢ Official Receiver attached to a District Court for insolvency purposes is the

Official Liquidator of the District

¢ One or more Deputy or Assistant Official Liquidators may be appointed for

assisting the Official Liquidator

¢ Object of appointment of a liquidator is to settle the accounts amicably &

bring about beneficial winding up

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¢ He also safeguards the shareholders and creditors.

creditors. If winding up is done
by Directors, they may misappropriate money, falsify accounts, defraud
creditors & settle accounts improperly

PROVISIONAL LIQUIDATOR
 He is appointed before the winding up order & after the presentation of
petition to the Court
 The Co. is provided an opportunity to represent in the manner of
appointment of liquidator
 He must submit the statements of affairs of the Co. within 21 days of
the order of winding up to the Official Liquidator
 This statement is verified by the Directors of the Co.
 Statement of affairs by provisional liquidator to contain the following –
i. All the assets of the co. like cash in hand, in the bank & securities
must be stated
ii. All debts & liabilities of co. should be stated
iii. Names & addresses of the creditors (secured & unsecured)
iv. Debts due to the co. & all the names & address of debtors
v. Any other required information

POWERS OF THE LIQUIDATOR

 Following powers are exercised by Official Liquidator with the sanction of
the Court
a. He is the legal agent who can institute or defend both civil &
criminal cases on behalf of the co.
b. He can carry on the business, if it is necessary for the beneficial
winding up of the co.
c. He can sell the movable & immovable properties by public auctions,
private contracts, etc
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d. He can raise money on securities of the co.

e. To do any other act for the winding up of the co. & distribution of
assets
 Following functions are exercised by the OL without sanction of the Court
–
i. To do all necessary acts in the name of the co.
ii. To execute all deeds, receipts & other documents. He can sue the
co.’s seal for this purpose
iii. He can inspect the records & the files of the co.
iv. He can draw, accept & endorse negotiable instruments
v. He can carry out the letters of administration of a deceased
contributory obtaining money
vi. He can appoint an agent for him

DUTIES OF THE LIQUIDATOR

1. Proceeding in winding up –
o OL should conduct all proceedings in the winding up of the co. after
his appointment
2. Report –
o After receipt of statement of affairs of the co., he must submit a
preliminary report to the Court within 6 months from the date of the
order of winding up
o Report must contain the following –
o Amount of capital issued, subscribed & paid up, assets & liabilities
of the co.
o Causes of failure of the co.
o Liquidators’ option as to whether further inquiry is required as to
promotion, formation or failure of the co.
3. Additional Reports –

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o Any additional reports regarding the formation of a co. or any fraud

committed, etc, which is to be brought to the notice of the court
4. Custody of co.’s property –
o OL should take custody of the co.’s property, actionable claims, etc,
to which the co .is entitled
5. Control of Powers –
o He must consider the directions given by the resolution of creditors
or contributories, in the administration of assets of the co.
6. Meeting of creditors & contributories –
o General meetings of creditors & contributories may be summoned
7. Directions –
o For any particular matter, OL may apply to the Court for directions
o In the administration of assets of the co., he must use his
discretionary powers
o Any person aggrieved by the OL can apply to the Court for revising
or modifying the OL’s order
8. Books –
o For making entries or for recording meetings, OL must keep books
o Any creditor or contributory has the right to inspect such books
9. Audit –
o Twice a year or within prescribed period, the OL must present his
accounts (payments & receipts) to the Court for auditing
o A copy of audited accounts to be provided to the RoC for filing
o Each copy of accounts to be available for inspection by any creditor,
contributory or person interested
10. Committee for Inspection –
o Within 2 months from the date of directions by the Court, Court may
convene a meeting to decide the members of the Inspection
Committee
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11. Pending Liquidation Proceedings –

o From the commencement of winding up, within 2 months from the
expiry of each year, OL to file a statement regarding the
proceedings & position of the liquidation

CONTROL OF THE POWERS OF OL

¢ Court can exercise control over the OL
¢ Creditor or contributor can apply to the Court
¢ Any other aggrieved person may apply to the court
¢ Central Government may appoint an enquiry commission if the OL does
not perform his duties faithfully. He can be examined on oath
¢ If the powers are excessive, the control should be increased
¢ Liabilities –
a. Liquidator is liable for negligence if he distributes the assets of the
co. without making due provisions for liabilities
b. If he applies for the co.’s assets in playing a doubtful claim without
taking proper legal advice, he will be personally liable to pay the
amount
c. For breach of his statutory duties, OL is liable for damages to a
creditor or to a contributory for loss to him

CONTRIBUTORIES
 Contributory – Every person liable to contribute to the assets of the co.
during its winding up
 The holder of fully paid up shares is not a contributory except when
surplus assets are likely to be available for distribution
 Persons liable for contributories –
1. Present & past members – A member of a limited co. is liable to
contribute the amount unpaid on the shares or the amount he has
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guaranteed to pay during winding up. A past member is liable only

when he had ceased to be a member within one year before the
commencing of winding up & present members failed to contribute
2. Legal representatives of deceased members – They are liable to
contribute upon the death of a contributory. Liability extends to the
amount received from deceased shareholder
3. Official Assignee or Receiver of Contributory – if contributory is
insolvent, his OA or OR becomes the contributory
4. Liquidator of body corporate which is a member – When a body
corporate is a member & is wound up, its OL becomes contributory
5. Directors & Management with Unlimited Liability - He is liable as if he
is a member of an unlimited co. but for such a contribution, a court
order is needed
LIABILITY OF CONTRIBUTORIES
⊕ List of contributories contains present members whose names can be
found in the register of members
⊕ Liability extends to the extent of uncalled shares of guarantee, only if the
finance of the co. is less than its debt
⊕ Once a call is made, it becomes a statutory debt
⊕ A call may be made before or after winding up
⊕ Time is not a bar for such calls
⊕ If a contributory dies, his assets are liable to the extent of uncalled shares
⊕ If he has no assets, his legal representatives are personally liable
⊕ If a contributory becomes insolvent, assignee of shares is liable
CONSEQUENCES OF WINDING UP
• OL assesses the debt & liabilities of the co.
• He will recover possession of all properties
• He sends notices to all uncalled capital
A. Consequences as to shareholders –
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o Shareholders contribute to assets of the co. in winding up & pay off

its debt
B. Consequences as to Officers –
o Directors, Secretaries & Managers have unlimited liabilities
o Their liabilities are just like the liability of shareholders of an
unlimited co.
o Both present & past officers are liable. However, past officer who
has left the service of the co. before 1 year is not liable
C. Consequences as to Creditors –
o Creditors have got the right to claim their debts from the
liquidator
o Liquidator makes just & reasonable estimation of all debts
o If a co. is insolvent, then the law of insolvency will apply
o A proportionate rebate or reduction in payment will take place
o Creditors may be secured or unsecured
o Secured creditors –
 He has 3 alternatives - May replay on security & ignore
liquidation, May value his security & prove for deficit or he
may surrender his security & prove the whole debt
o Unsecured creditors –
 They are paid after making preferential payments

PREFERENTIAL PAYMENTS
◊ Preferential payments are paid in priority to all other debts
◊ Types of preferential payments are –
a. All revenues, taxes, cesses, rates due from the co. to Central &
State Govt.s or Local Authorities
b. All wages & salaries of employees

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c. All accrued holiday remuneration payable to an employee on

termination of his employment due to winding up
d. All sums due to employees from Provident Fund, Pension Fund,
Gratuity Fund, etc
e. All amounts payable as contribution towards Employees State
Insurance Scheme during 12 months prior to winding up
f. All payments by way of compensation under Workmen’s
Compensation Act, 1923 for death or disablement of employees
g. All expenses for investigation held, so far they are payable by the
Co.
◊ These claims have equal rank & need to be paid in full
◊ If the assets of the co. are not sufficient to meet them in full, they are paid
in equal proportion

OTHER CONSEQUENCES
1. As to Servants & Officers –
∇ Winding up acts as a discharge to officers and employees of the co.
∇ It relieves them of all obligations under their contract of service
2. As to Proceedings against the Co. –
∇ When winding up order is made, no suit or other legal proceedings can
be commenced without the permission of the Court
∇ Even a pending suit cannot be proceeded without the Court’s
permission
3. As to costs –
∇ If assets are insufficient to satisfy liabilities, Court may order for
payment of costs, charges & expenses of winding up, out of co.’s
assets
∇ All costs, charges & expenses, including remuneration of OL is paid out
of assets of the Co.
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WINDING UP SUBJECT TO SUPERVISION OF THE COURT

∇ After the resolution is passed for voluntary winding up, Court may take
an order of winding up subject to supervision of the Court
∇ A petition for winding up may be presented by any authorised persons
or OL
∇ Court shall not make an order for winding up under the supervision, if it
is against the wishes of the majority
∇ In such a condition, Court may appoint an Additional Liquidator or
Official Liquidator, who has the same powers, obligations, as if he had
been appointed in a voluntary winding up
∇ Liquidator can exercise all his powers without intervention of the Court,
as in voluntary winding up
∇ Advantages –
1. After the order is made, suits & other actions are automatically
stayed
2. Court may lay down terms & conditions to safeguard the interests of
creditors & contributories
3. Court can make or enforce calls made by liquidators

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