Winding Up -: In the words of Professor Gower “Winding Up of the company is a 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

according to their rights”.1

The company is not dissolved immediately at the commencement of winding up. Its corporate

status and power continue. Company remains a tax payer until dissolved by order of court

Gannon Dunkerley & Co Vs Asst Comr Urban Land Tax2 -: The contention was that there

was no use of winding up of company as all the assets of the company had already been sold, the

court ordered winding up.

Types of winding up

Under Sec 425 The Act 1956 provides for two kinds of winding up -:

1. Compulsory winding up under the order of a tribunal

2. Voluntary winding up , which itself is of two kinds -:

(a) Members voluntary winding up

(b) Creditors voluntary winding up

Winding Up By Court (Compulsary Winding Up) Under the act of 1956.

Section 433 states the cases in which company can be wound up by courts -:

(a) Special resolution -: 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

1 The Principles of Modern Company Law ,647 (3rd Edn,1969)2 (1992) 73 Comp Cas 168 Mad

1

company has so resolved. The power is discretionary and may not be exercised where

winding up would be opposed to the public or company’s interest.

Bombay Metropolitan transport Corpn Ltd Vs Employees3 -: Where the company

itself was the petitioner and the financial position of the company was eroded, the court

ordered winding up in public interest.

(b) Default in holding statutory meeting -: Section 433(b) states that if the company has

made a default in delivering the statutory report to the Registrar or in holding the

statutory meeting

Section 439(7) states that the petition for winding up on this ground can be presented

either by the Registrar or by a contributory. If it is brought by any other person e.g., a

creditor it must be filed before the expiration of 14 days after the last day on which the

statutory meeting ought to have been held.

Section 443(3) provides that the power of the tribunal is discretionary and instead of

making a winding up order the tribunal may direct the statutory report shall be delivered

or that the meeting shall be held.

This doesn’t apply to private Companies

S.R.Subramaniam Vs Drivers’ & Conductor’s Bus Service4-: Since private companies

are not required to hold such meetings Section 433(b) doesn’t apply to them

(c) Failure to commence business or suspension of business -:

Section 433(c) states that if a company does not commence its business within a year

from its corporation or has suspended business for a whole year, it may be ordered to be

wound up.

The power is discretionary and will be exercised only when there is fair indication that

there is no intention to carry on business.

3 (1991)81 Comp Cas 473 Bom4 (1978)48 Comp Cas672 Mad

2

If the suspension is satisfactorily accounted for and appears to be due to temporary

causes, the order may be refused.

Murlidhar Vs Bengal Steamship Co5-: To carry on its business, a company employed a

steamer and two flats. The flats were acquired by the Government during the First World

War and the company was not able to replace them immediately in view of the rice in

prices. This resulted in suspension of business for more than a year. In petition to wind up

the company, it was held that “the suspension of business for a whole year is accounted

After ordering winding up on this ground, the court can direct the liquidator to take care

of the interest of the financial institutions which had advanced large sums of money to

the company and also investigate whether a secured creditor band had hold the

company’s assets at prices lower than their real value6 .

(d) Reduction in membership -: Section 433(d) provides that if the number of members is

reduced, in the case of a public company, below seven, and in the case of a private

company, below two, the company may be ordered to be wound up.

(e) Inability to pay debts -: Section 433(e) provides for winding up if a company is unable to

pay its debts.

Section 434 states three cases in which a company shall be deemed to be unable to pay its

debts-:

(i) Statutory Notice -: Firstly, if a creditor to whom the company owes a sum exceeding

one lakh rupees has served on the company, a demand for payment and the company

has for three weeks neglected to pay or otherwise satisfy him. Where there was 21

days’ notice, the defect was held to be not curable even by a subsequent notice during

the pendency of the proceedings.7

5 AIR 1920 Cal 7226 Karnataka Rubbers Ltd Vs Karnataka SF , (1999)33 CLA 472 Kant7 Mangnese Ore (India) Ltd Vs Sandhur Mangnese & Iron Ores Ltd, (1999) 98 Comp Cas 755

3

The expression ‘neglects to pay the sum demanded’ in Section 434(1) (a) is not

equivalent to the word ‘omitted’. Neglect to pay a debt on demand is omission to pay

without reasonable cause.

The debt must be presently payable and title of the petitioner demanding it must be

complete8. The debt must be really due9..

(ii) Decreed Debt -: Section 434(b) provides that a company shall be deemed to be unable

to pay its debts if execution or other process issued on a decree or order of any court

in favour of the creditor of the company is returned unsatisfied in whole or part.

It was held in Bows Vs Hope Life Insurance Guarantee Co 10that:

Even in the case of decretal debt, question of bona fide dispute may be raised and the

court may, instead of passing winding up order, allow the petition to stand over on an

undertaking by the company to file a suit for setting aside the decree.

(iii) Commercial Insolvency -: Section 434(1)(c) states that if it is proved to the

satisfaction of the Tribunal that the company is unable to pay debts, and, in

determining whether a company is unable to pay its debts, the Tribunal shall take into

account the contingent and prospective liabilities of a company.

What has to be ascertained is not whether if all assets were converted into cash, the

company would be able to discharge its debts, but whether in the commercial sense

the company is solvent. A perusal of the balance sheet of the company must show that

its assets are sufficient to meet its liabilities. If it is not so, the company may be

regarded as commercially insolvent.

Sree Shanmaugar Mills Vs Dharmaraja Nadar11 A company resisted a petition on

the ground that while its liabilities amounted only to Rs 8,72,414, its assets were of

the value of Rs 10,79,130. It was found that these assets included building and

8 Jumbad Coal Syndicate Ltd, Re, AIR1936Cal 6289 Mohd Amin Bros Ltd Vs Dominion of India, (1949)54 CWN 51410 (1865) 11 HL Cases 38911 AIR 1970 Mad 203

4

machinery, excluding which was only a sum of Rs 3, 00,000 would be available to

discharge the debts.

The court held that the value of such assets without which the company could not

carry out business, should not be taken into account. The proper test is whether in a

commercial sense the existing liability would be paid by it while it continued to carry

on as economy. However, the company is entitled to regard its uncalled capital as

money available for the discharge of its debts.

(f) Just and equitable -: Section 433(f) provides that if the court is of the opinion that it is

just and equitable that the company should be wound up.

For a long period ejusdem generis dominated interpretations’ of the just and equitable

provision. But the rule had been entirely abandoned and the words are to be treated as

conferring a discretionary power which is of the widest character and the courts are left to

work out for themselves the principles on which such orders should be granted.12

It is neither possible nor desirable to categorize facts that render it just and equitable to

wind up the company. “The tendency to create categories or heading is wrong; the

general words of the sub-section should remain general and not to be reduced to the sum

of particular instances.13

Illustrations

Yenidje Tobacco Co Ltd, Re14:

12 Jivabhai M.Patel Vs Extrusion Processes (P) Ltd [1966] 2 Comp LJ 7413 D.D. Prentice, Winding Up on the Just and Equitable Ground; The Partnership Analogy, (1973) 89 LQR 107,108 14 [1916]2 Ch 426

5

W and R, who traded separately as cigarette manufacturers, agreed to amalgamate their

business and formed a private limited company of which they are shareholders and the

only directors. They had equal voting rights and therefore the articles provided that any

dispute would be resolved by arbitration, but one of them dissented from the award. Both

then became so hostile that neither of them would speak to the other except through the

secretary. Thus there was a complete deadlock and consequently the company was

ordered to be wound up although its business was flourishing

Existence of Alternate Remedy

The remedy of winding up is a remedy for last resort. It may not be allowed where an

equally effective alternative remedy is available. Allegations of misuse of funds,

fraudulent transactions removal of a director under a forged registration, failure to supply

essential documents to shareholders, increase in remuneration of directors without

general body approval, illegal allotments of shares, could have been taken care of by a

petition under Section 398 against the mismanagement of the company’s affairs. A

petition for winding up was not entertained15

Provisions as to application of winding up

1. Petition by a company [Section 439(1)(a)] -: The company may itself may present a

condition for winding up, but there must be a valid resolution to enable the company to

take this step.

Where a judge passed an order for winding up on the ground that the majority of the

shareholders at a meeting were in favor of winding up, it was held that that was not in the

absence of a valid special resolution, a sufficient ground of compulsory winding up.16

Patiala Banaspati Co, Re:17

15 M.Mohan Babu Vs Heritage Foods India Ltd, (2002)108 Comp Cas 793 AP16 Oriental Navigation Co Vs Bhanaram Agarwal, AIR 1922 Cal 36517 AIR 1953 Pepsu 195

6

An application for winding up a company was made by the managing director of the

company. Rejecting the petition the court said, “The petition by the company must have

behind it the decision of the general meeting. The managing director or directors can’t

constitute the company for the purpose.

2. Creditor’s Petition S.493 (2) - : The word ‘creditor’ includes a secured creditor,

debenture-holder, and a trustee for debenture-holders. Accordingly a secured creditor is

as much entitled as of right to file a petition as an unsecured creditor. 18 It is not even

necessary for a secured creditor to apply that he should give up his security.19

Section 493(8) provides that where a petition is brought by a contingent or prospective

creditor, it shall not be admitted unless the leave of the leave of the court is obtained for

its admission. Such leave is not to be granted unless the court is satisfied that there is a

prima facie case for winding up the company and reasonable security for costs has been

given.

3. Contributory’s Petition -: On the commencement of the winding up of a company, its

shareholders are called contributories20. Any contributory or contributories may present a

petition for winding up.21 Where the ground for winding up is the reduction in

membership below the statutory minimum, any contributory or contributories may

apply22. But when the application is founded on any other ground, it will be requisite that

the shares in respect of which the petitioner is contributory were originally allotted to him

or he has been the registered holder for at least six months during the eighteen months

immediately before the commencement of the winding up, or shares have developed on

him through the death of the former holder

Section 439(3) states that a contributory shall be entitled to present a petition for winding

up, notwithstanding that he may be the holder of fully paid up shares or that the company

may have no assets at all, or may have no surplus assets at all, or may have no surplus left

for distribution among the shareholders after the satisfaction of its liabilities.

18 Karnataka Vegetable Oils & Refineries Ltd Vs Madras Industrial Investment Corp., AIR 1985 Mad 58219 Indian Electric Works Re, (1969)2 Comp LJ 353 Del 20 S.42621 S.439(1) (c)22S. 439(4) (a)

7

Hence at present want of assets may be an element in determining whether the petition is

bona fide, but except to the extent, it will not be a relevant consideration for determining

whether winding up should be ordered or not”.23

4. Registrar’s Petition -: Under Section 439(5) the Registrar of Companies is also entitled to

present a petition for winding up on any of the grounds of winding up by the court,

except when the company has passed a special resolution [S.433 (a)]. But he shall not

present a petition on the ground of the company’s inability to pay its debts “unless it

appears to him either from the financial condition of the company as disclosed in its

balance-sheet or from the report of a special auditor appointed under sec 233-A or an

inspector appointed under Section 235 or 237, that the company is unable to pay debts”.

In all cases, however, the Registrar has to obtain sanction of the Central Government to

the presentation of a petition and the latter shall not grant the sanction unless the

company has been afforded an opportunity to make its representation if any24.

5. Central Government’s Petition -: Under Section 439(1) (f) The Central Government is

also authorized to present a petition for winding up. Section 243 enables the Government

to petition for winding up where it appears from the report of inspectors appointed to

investigate the affairs of the company under S235 that the business of the company has

been conducted for fraudulent or unlawful purposes as explained in sub-clauses (i) and

(ii) of clause (b) of Section 237.

6. Central Government or State Government’s Petition -: If a case falls under S.433(h) i.e.

acts against the nation , the Central or the State Government may apply to the court for

winding up of a company[S.439(1)(g)].

Voluntary winding up of sections under 1956

Section 440 - Petition where company under voluntary winding up

A petition for an order of winding up by the court may be presented where the company

is already under voluntary liquidation. Such a petition may be presented by any one of

those specified in Section 439 or by the Official Liquidator. The court shall not make a

23 Cine Industries & Recording Co Ltd, Re, AIR 1942 Bom 23124 S. 439(6)

8

winding up order, unless it is satisfied that the voluntary winding up can’t be continued

with due regard to the interests of creditors or contributories both.

Section 443 –Powers of Court on hearing petition

After hearing a winding up petition, the court may dismiss it with or without costs, or

adjourn the hearing or make any interim order or make an order for winding up or any

other order it thinks fit. The court may also issue a conditional order of winding up.

Pratibha Inderjit Kapur Vs Nilesh Lalit Parekh,25

The court passed a decree in favour of the creditor on consent terms, the managing

director guaranteeing the payment. It was not a fraudulent preference within the meaning

of Section 531. Neither the company nor the managing director could pay. The creditor

could proceed against the managing director.

Section.443 (3) provides that where a petition is presented on the ground of default in

delivering the statutory report to the Registrar, or in holding the statutory meeting, the

court may instead of giving the winding up order, direct that the statutory report shall be

delivered or that a meeting shall be held or order the costs to be paid by any person who,

in the opinion of the tribunal, are responsible for the default.

Commencement of Winding up S.441

Winding Up commences not from the date of the order, it shall be deemed to commence from the

time of the presentation of the petition26. But where, before the presentation of the petition, a

resolution has been passed by the company for winding up, the winding up shall be deemed to

have commenced at the time of the passing of the resolution.27 Where there was more than one

petitions, winding up was deemed to have commenced from the date of the earliest of the

25 (2002) 111 Comp Cas 117 Bom26 S.441(2)27 S.441(1)

9

creditor’s petition. The agreement to sell the company’s property executed after the date became

void.28

Appointment of Provisional Liquidator[S.450]

After the presentation of a petition but before the winding up order the Tribunal may appoint the

Official Liquidator to be the provisional liquidator of the company. He becomes the Official

Liquidator as soon as the winding up order is passed. Before making such appointment the

Tribunal should inform the company so as to enable it to make its representation. This is

necessary because the appointment of a provisional liquidator is likely to cause a serious setback

to the name of the company and its business, if ultimately, the Tribunal does not pass a winding

up order.29

Where, however, the circumstances too obviously demand for the protection of company’s

property, the Tribunal may record its reasons in writing and appoint a provisional liquidator

without giving an opportunity to the company to explain its position.30

The Tribunal can appoint the official receiver as a provisional liquidator in respect of a company

that is already in the process of winding up if such an appointment is necessary to ensure that a

full investigation is carried out of the company’s affair in order to protect the public. The official

receiver has wider reach than voluntary liquidators when it comes to matters of investigation.31

After Effects of Winding Up

Under S.444 the court has forthwith to cause intimation of the winding up order to be sent to the

Official Liquidator and the Registrar.

Section 445 provides that it is also the duty of the petitioner and of the company to file with the

registrar, within 30 days, a certified copy of the order.

28 Y.S.Spinners Ltd Vs Official Liquidator, Shri Ambica Mills Ltd, (2003) 114 Comp Cas 547 Guj29 Arvind Steel (P) Ltd Vs Trichy Steel Rolling Mills Ltd, (1992) 73 Comp Cas 607 Mad30 Brunton and Co Engineers Ltd, Re, (1988)63 Comp Cas 299 Ker31 A Company (No 007070 of 1996), Re (1997) 2 BCLC 139

10

Under S.445(2) The Registrar should then make minutes of the order in his books relating to the

company and notify in the Official Gazette that such an order has been made.

Winding up order is deemed to be a notice of discharge to the officers and employees of the

company, except when the business of the company is continued.32

Section 447 says that the order operates in favour of all the creditors and all the contributories of

the company.

Under S.448 the Central Government attaches Official Liquidator to High Courts.

Section.452 permits them to function under the style of Official Liquidator of the particular

company.

Under S.449 on a winding up order being made in respect of a company, the Official Liquidator,

by virtue of his office, becomes the liquidator of the company.

S.453 provides that a receiver can’t be appointed of assets in the hands of a liquidator except by

or with the leave of the Tribunal.

Legal Proceedings[S.446]

S.446 provides that after the order no suit or legal proceedings can be commenced against the

company except by leave of the court and subject to such terms as the court may impose.

Sub clause (1) states that if a suit or proceedings is pending at the date of the order, it shall not be

proceeded with except with the leave of the court.

The court has jurisdiction to decide -:

1. Any suit or proceedings by or against the company;

2. Any claim made by or against the company;

32 S.445(3)

11

3. Any application made for compromise or arrangement with creditors under S.391;

4. Any question of priorities or any question whatsoever, whether of law or fact, which may

relate to, or arise in the course of the winding up.33

“Winding up of the company by the act of 2013.

A company may, on a petition under section 272 of the Companies Act, 2013, be wound up by

the Tribunal of the Tribunal is of the opinion that it is just and equitable that the company should

be wound up (Under clause (g) of section 272). The literal meaning of just and equitable can be

fair and impartial or reasonable.

In the UK, a compulsory winding-up can be achieved on grounds of fairness under the

Insolvency Act 1986, section 122 (1) (g). This may occur, for example, when the purpose of the

company cannot be achieved, when the management is deadlocked or has been guilty of serious

irregularities, or, in small companies run on the basis of mutual trust between members, when the

majority has exercised their legal rights in breach of a common understanding between the

members when the company was formed. No order will be made if another form of minority

protection would be more appropriate (Insolvency Act, section 125 (2); this might, for example,

be a relief for unfair prejudice under the Companies Act 2006 (section 994–96).

The expression “just and equitable” used in section 433 (f) of the Companies Act, 1956 is not

ejusdem generis (of the same kind or nature) with the other clauses for winding-up in the

statute.34 In the other words, the Court (now Tribunal) will consider such grounds to wind up a

company for just and equitable reason as are not like those specified in the preceding clauses. All

these grounds are not extensive, but distinctly independent. In application of just and equitable

rule, the Tribunal will consider not only the interest of the shareholders but also that of the

creditors.35 Where the respondent’s application for winding-up is not motivated by desire to do

justice to the company or to see that justice is done to shareholders, but for private reasons, that

33 S.446(2)34 Sulekha Works ltd. (in Re), AIR 1965 Cal 98.35 Mohanlal vs Grain Chambers, AIR 1968 SC 772.

12

is to injure directors for acts of omission and commission in which the respondent himself is

party, the stay of winding up in such circumstance may be granted.36

Where the substratum of the company has failed

The substratum of a company is deemed to have failed-

1. When the subject-matter of the company is gone or the raison de’ entre (the reason for

existence of the company is gone).

2. Where it is impossible to carry on the business of the company except at a loss which means

that there is reasonable hope that the object of trading at a profit can be attained.

3. Where the object for which it was incorporated has substantially failed.

4. When the existing or probable assets are insufficient to meet the existing liabilities.

When none of these four tests can apply to the facts of the case, the company cannot be wound

up on the ground of disappearance of substratum of a company. It is just and equitable to order

winding-up a company when the paramount or main object of a company for which it was

incorporated cannot be achieved at all or has failed.

But the substratum of a company is not deemed to have gone where there has been loss of certain

means through which it has been carrying out the objects of a company provided those objects

can still be carried on through other means or by the employment of other agencies.37 In Bleriot

Aircraft Co.38, the company was ordered to be wound up when its substratum was gone. The

company was incorporated to acquire the English portion of the aircraft of the business of M.

Bleriot, but he refused to perform the contract. Similarly, in the other case, the company was

formed with the object of manufacturing coffee from dates under patent to be obtained from the

German Government and other product. The German Government did not grant the said patent.

The company acquired a Swedish patent for the same purpose. On a petition for winding up of

the company, it was held that the company should be wound up, for the substratum of the

company has failed.

36 Jagannath Gupta vs Mulchand Gupta, AIR 1969.37 (1916) 32 TLR 253.38 (1882) 20 Ch D 1109.

13

In Madhusudan Goverdhandas vs Madhu Wollen Industries39 case, the Supreme Court in dealing

with the question whether or not the substratum of the company has gone, observed that, “the

mere fact that the company has suffered trading losses will not destroy its substratum unless

there is no reasonable prospect of it even making a profit in the future and the court is reluctant

to hold that it has not such prospect.”

In Kumarapuran Gopalkrishnan vs Burdwan-Cutwa Rly ltd40, it was held by examining the

principles enunciated in the subtrantum cases that the question whether or not the company

substratum has gone in a case would primarily depend on the true construction of the

memorandum of the company in so far as its objects are concerned.

Where there is a deadlock on the Management

If on the facts of a case it appears that there is a deadlock in the management of the company, the

Tribunal will order winding-up on the just and equitable ground. In Yenidje Tobacco Co ltd41,

there was a complete deadlock in the management due to bitter hostility between two directors of

the company. In spite of large profits of the company, it was ordered to be wound up. Similarly,

in Davis and Collet ltd42, rivalry between directors was held to be a good ground to wind up the

company. But the Clcutta HC held the view that the winding-up of a company should not be

ordered merely on the grounds of friction and disputed between the directors.43 It seems that not

scramble for power between two rival groups of directors is sufficient ground to wind up the

company.44

Where there is Mismanagement by the Directors

In a domestic or family company if there has been a continuous mismanagement by the majority

of the directors, the company may be wound up for just and equitable ground. A simple example

would be the managing director holding majority shares does not convene meetings regularly,

39 (19720 Comp Cas 125.40 (1978( 48 Comp Cas 211.41 (1916) 2 Ch 426 (CA).42 (1953) Ch 693.43 Hind Overseas Ltd (1968).44 Saharay H.K., Company Law (textbook) 5th Edn.

14

submits improper accounts, and there is suspicion of his ill motive in doing all these. In such

case, the company is wound up.45

Where the company is formed for a fraudulent purpose

If a company is formed with intent to carry out a fraud or to carry on the illegal business, it is just

and equitable to order winding-up that company. Of course, fraud is the issue of prospect, or

fraud in carrying the business46, is not a ground for winding up of the company. On the other

hand, single or isolated fraud other than a series of fraud on a planned basis to enrich the

company, is not to be considered a just and equitable ground to wind up the company. The only

condition is that an isolated fraud to enrich the company.47

In Hind Overseas Pvt Ltd Vs Raghunath Prasad48, it was held that “it is now well established that

the sixth clause, namely, 'just and equitable' is not to be read as being ejusdem generis with the

preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled

for the one or the other to be attracted in a given case, the just and equitable clause leaves the

entire matter to the wide and wise judicial discretion of the court. The only limitations are the

force and content of the words themselves, 'just and equitable.”

Conclusion

Winding up of a company is defined as a process by which the life of a company is brought to an

end and its property administered for the benefit of its members and creditors. In words of

Professor Gower, “Winding up of a company is the process whereby its life is ended and its

Property is administered for the benefit of its members & creditors. 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.”

According to Halsburry's Laws of England, “Winding up is a proceeding by means of which the

dissolution of a company is brought about & in the course of which its assets are collected and

realised; and applied in payment of its debts; and when these are satisfied, the remaining amount

45 Loch vs John Blackwood ltd (1924) AC 783.46 Haven Gold Co. and Medical Battery Co cases. 47 Gonga P P S, Textbook on Company Law.48 1976 AIR 565

15

is applied for returning to its members the sums which they have contributed to the company in

accordance with Articles of the Company.” Winding up is a legal process.

There are differences between winding up and dissolution. At the end of winding up, the

company will have no assets or liabilities. When the affairs of a company are completely wound

up, the dissolution of the company takes place. On dissolution, the company's name is struck off

the register of the companies and its legal personality as a corporation comes to an end

Bibliography

1. http://www.legalservicesindia.com/article/article/winding-up-of-a-company-1319-1.html

2. http://www.businessdictionary.com/definition/winding-up.html

3. http://www.caclubindia.com/articles/winding-up-of-companies-8246.asp

4. http://www.helplinelaw.com/business-law/WIND/winding-up-of-company.html

5. https://en.wikipedia.org/wiki/Liquidation

6. http://legal-dictionary.thefreedictionary.com/Wind+Up

16

7. http://www.chasecambria.com/site/journal/article.php?id=64

8. http://www.gov.hk/en/business/supportenterprises/businesstopics/windingup.htm

9. Book- A Comparative Study of COMPANIES ACT 2013 and COMPANIES ACT 1956

10. Book- Analysis of Companies Act, 2013

11. Book –Company law- Ajeet tripathi .

17