COMPANY LAW

WINDING UP OF COMPANIES BY COURT

SUBMITTED BY: SUBMITTED TO:

Amarbir Singh Shergill Mrs. Alamdeep

Roll No: 267/14 UILS

B.A.LLB (8TH SEM) Panjab University

Section B
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Acknowledgement

I would like to express my special thanks of gratitude to my teacher, Mrs.

Alamdeep, as well as our principal, Dr. Rattan, who gave me the golden

opportunity to do this wonderful project on the topic, ‘Winding Up of Companies

by Courts’ which also helped me in doing a lot of research and I came to know

about so many new things I am really thankful to them.

Secondly I would also like to thank my parents and friends who helped me a lot in

finalizing this project within the limited time frame.

Amarbir
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Table of Contents

Title Page No.

1. Introduction 4

2. Discussion 5

3. Winding up by Court 6

4. Winding up Process 9

5. Final Order and its Contents 10

6. Bbibliography 12
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Introduction

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

to the company in accordance with Articles of the Company.”

In the words of Prof. L.C.B. Gower, Winding-up of a company is the process whereby its

life is ended and its property administered for the benefit of its creditors and members. A

liquidator is appointed and he takes control of the company, collects its debts and finally

distributes any surplus among the members in accordance with their rights. Thus, winding-up of

a company is a process of putting an end to the life of a company. It is a proceeding by means of

which a company is dissolved and in the course of such dissolution its assets are collected, its

debts are paid off out of the assets of the company or from contributions by its members, if

necessary. If any surplus is left, it is distributed among the members in accordance with their

rights. At the end of the winding up the company will have no assets or liabilities and it will,

therefore, be simply a formal step for it to be dissolved, that is, for its legal personality as a

corporation to be brought to an end.

Therefore, the main purpose of winding up of a company is to realize the assets and pay

the debts of the company expeditiously and fairly in accordance with the law. The Companies

Act, 2013 provides for effective time bound winding up process. It also provides for aspects such

as new grounds of winding up by NCLT, appointment of company liquidator, professional

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assistance, concurrence of creditors for voluntary winding up, simplification of provisions,

remedy for fraudulent preference and so on.

Discussion

Now as we traverse into the topic it needs to be duly noted that there exists a clear and

straight distinction between winding up of a company and the dissolution of a company. It is

only when a company is dissolved that it can be said to cease to exist, i.e., the company as such

does not cease to exist when it is being wound up. The administrative machinery of the company

gets changed as the administration is transferred in the hands of the liquidator. Even after

commencement of the winding-up, the property and assets of the company belong to the

company until dissolution takes place. On dissolution the company ceases to exist as a separate

entity and becomes incapable of keeping property, suing or being sued. Thus in between the

winding up and dissolution, the legal status of the company continues and it can be sued in the

court of law.

Distinction in brief: The entire procedure for bringing about a lawful end to the life of a company

is divided into two stages – ‘winding up’ and ‘dissolution’. Winding up is the first stage in the

process whereby assets are realised, liabilities are paid off and the surplus, if any, distributed

among its members. Dissolution is the final stage whereby the existence of the company is

withdrawn by the law. Winding up or liquidation order can be made by a Court of Law, even

when the Company is in a solvent state. Not all the companies which are being subjected to

liquidation proceedings are in financial trouble. For instance, a solvent company may be wound
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up, if there is a default in filing financial statements with the Registrar or when there is a

reduction in the number of membership etc.1

Winding up in all cases does not culminate in dissolution. Even after paying all the creditors

there may still be a surplus; company may earn profits during the course of beneficial winding

up.

Modes of winding up

Section 270 of the Companies Act, 2013 provides for two modes of winding up a registered

company:

1. By the Court i.e. compulsory winding up;

2. Voluntary winding up, which may be either:

(a) Members’ voluntary winding up; or

(b) Creditor’s voluntary winding up; (Distinction between the two has been omitted in the

Companies Act, 2013).

(Voluntary winding up of a company subject to the supervision of the court, a valid mode of

winding up as per Companies Act 1956,was again, omitted in the new act.)

Winding Up By The Court

Winding up by the Court or compulsory winding up is initiated by an application by way

of petition to the appropriate Court for a winding up order. A winding up petition has to be

1
Companies Act, 2013, at Section 271(1) - Circumstances in which Company may be wound up by Tribunal
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resorted to only when other means of healing an ailing company are of absolutely no avail. Thus

the irretrievable step of winding up must be resorted to only in very compelling circumstances.

In Bowes v. Hope Life Insurance and Guarantee Co. and in Re General Company for Promotion

of Land Credit it was stated that "a winding up order is not a normal alternative in the case of a

company to the ordinary procedure for the realisation of the debts due to it"; but nonetheless it is

a form of equitable execution.

Grounds on which a Company may be wound up by the Court

The Act prescribes the following grounds for winding up of a company:

(a) The company has passed a special resolution of its being wound up by the Court; or

(b) Default is made in delivering the statutory report to the Registrar or in holding the statutory

meeting; or

(c)It is unable to pay its debts; or

(d) The Court is of the opinion that it is just and equitable that it should be wound up.

(e) The company has made a default in filing with the registrar its balance sheet and profit and

loss account or annual returns for any five consecutive financial years.

(f) The company has acted against the interests of the sovereignty and integrity of India, the

security of the State, friendly relations with foreign States, public order, decency or morality.

The reasons for compulsory winding up under the Companies Act, 1956 (Old Act) and the New

Act remain same, except that the following grounds which were in the old act stand deleted as

reasons for compulsory winding up under the New Act:

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a. Suspension of the business for one year from the date of incorporation or suspension of

business for a whole year; or

b. Reduction in number of members of a company below two (in case of a private company) and

seven (in case of a public company).

On the flipside, a new ground has been added for compulsory winding up under the New Act. On

the application by the Registrar or any other person authorised by the Central Government by

way of notification under the New Act, if the Tribunal is of the opinion that the affairs of the

company have been carried out in a fraudulent manner or unlawful purpose or any person

concerned or involved in the management or affairs of the company has acted in a fraudulent

manner or misfeasance or misconduct, that it is better to wind up the company.

No statutory definition for the term insolvency can be found under the Companies Act, 2013 or

in any other Indian insolvency legislations. However, Section 271(1)(a) of the Companies Act

provides that a Company may be wound up by the Tribunal if it is "unable to pay its debts".

Section 271 of the Companies Act, 2013 which deals with the circumstances in which a

Company may be wound up by the Tribunal uses the words "unable to pay its debts" to describe

the situation of commercial insolvency of a company. In this regard, the test to determine the

commercial insolvency was laid down by the English Courts in the case of In Re European Life

Assurance Society Ltd. In this case, the Court held that a company is said to be commercially

insolvent, “if the existing and probable assets of the Company would be insufficient to meet its

existing liabilities”. 2This test has been accepted and followed by the Indian Courts.

2
The Legal Regime of Liquidation in India, S Mohamed Azaad, Legal Bloc Journal, ISSN: 2395-0277
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Winding Up Process

Chapter XX, Part-I of the New Act deals with the compulsory winding up process. The petition

for compulsory winding up can be presented to the appropriate authority by:

1. The Company, in case of passing a special resolution for winding up.

2. A creditor, in case of a company's inability to pay debts.

3. A contributory or contributories, in case of a failure to hold a statutory meeting or to file a

statutory report or in case of reduction of members below the statutory minimum.

4. The Registrar, on any ground provided prior approval of the Central Government has been

obtained.

5. A person authorised by the Central Government, in case of investigation into the business of

the company where it appears from the report of the inspector that the affairs of the company

have been conducted with intent to defraud its creditors, members or any other person.

6. The Central or State Government, if the company has acted against the sovereignty, integrity

or security of India or against public order, decency, morality, etc.

Filing of Winding up Petition

The draft rules provide that a winding up petition (‘Petition’) is to be filed under section 272 of

the New Act in the prescribed form no 1, 2 or 3, whichever is applicable and is to be submitted in

three sets.

Statement of Affairs of the Company

If the company files the Petition, it shall be accompanied with the statement of affairs

(‘Statement’) in Form No. 4 read with section 272(5) of the New Act. The Petition shall state the

facts up to a specific date, which shall not be the date more than fifteen days prior to the date of
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making of the Statement. A Chartered Accountant in practice shall duly certify this Statement.

The fee for filing the Petition shall be submitted as prescribed in Annexure-B of the draft rules.

Advertisement of the Petition

Subject to the directions of the Tribunal, the petition shall be advertised in not less than fourteen

days before the date fixed for hearing in one daily newspaper in English language and one daily

newspaper in the principal regional language circulating in the State or union territory where the

registered office of company is situated. The advertisement needs to be carried out in Form No 6.

The previous requirement of publication in the official gazette of the State or union territory

mentioned in Company Court Rules (1959), has been done away with under the New Act.

Final Order and its Content

Thus the Tribunal, after hearing the Petition has the power to dismiss it, with or without cost, or

to make an interim order, as it thinks fit, or can appoint the provisional liquidator of the company

till the passing of the winding up order. An order for winding up of a company will be in Form

11 and contains the footnote prescribing the following duties:

a. To submit the complete and audited book of accounts up to the date of order;

b. To attend the company liquidator at the required time and place with all information;

c. To surrender the assets of the company and documents related to it, including those

documents from which the benefit from the assets accrues.

Liquidators and their appointment

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Section 275 lays down that, f or the purposes of winding up of a company by the Tribunal, the

Tribunal at the time of the passing of the order of winding up, shall appoint an Official

Liquidator or a liquidator as the Company Liquidator. The provisional liquidator or the Company

Liquidator, as the case may be, shall be appointed from a panel maintained by the Central

Government consisting of the names of chartered accountants, advocates, company secretaries,

cost accountants or firms or bodies corporate having such chartered accountants, advocates,

company secretaries, cost accountants and such other professionals as may be notified by the

Central Government or from a firm or a body corporate of persons having a combination of such

professionals as may be prescribed and having at least ten years’ experience in company matters.

Jurisdiction of the Tribunal

As per section 280 of the Act, the Tribunal has been vested with jurisdiction to entertain or

dispose of the following:

a. Any suit or proceeding by or against the company

b. Any claim made by or against the company including claims by or against any of its

branches in India

c. Any application made under section 233 for merger and amalgamation of certain

companies.

d. Any scheme submitted under section 262 for sanction for revival and rehabilitation

e. Any question of priorities or any other question whatsoever of law or fact

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Bibliography

Books Referred:

1) Companies Act, 2013 and Rules & Forms: With Concise Commentary and Referencer,

Second Edition, Corporate Professionals, 2015.

2) Business Law, Avtar Singh, 9th Edition, Eastern Book Company, 2011.

3) The Legal Regime of Liquidation and Corporate Insolvency Laws in India under The

Companies Act, 2013, S. Mohammed Azaad, Legal Bloc Journal.

Websites Referred:

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

2) http://www.diplomatist.com/dipom05y2014/article021.html

3) https://legalbloc.com/wp-content/uploads/2015/05/The-Legal-Regime-of-Liquidation-

and-Corporate-Insolvency-Laws-in-India-An-Inquisitive-Analysis-under-The-

Companies-Act-2013.pdf