CREDITOR’S PETITION FOR

WINDING UP

Submitted by –Amit Kumar, R.No. 1007 (Sem–VIII), B.B.A.LL.B. (H)

Submitted to :- Mrs. Nandita S. Jha (Faculty of Corporate Laws )

CHANAKYA NATIONAL LAW UNIVERSITY

PATNA

Date of submission:- 03/05/2017

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 DECLARATION

I hereby declare that the project work entitled “Creditor’s Petition for
Winding up” submitted to Chanakya National Law University, Patna, is a
record of an original work done by me under the guidance of Mrs. Nandita
S. Jha, Faculty-in-Charge (Corporate Laws), CNLU, Patna, and this
project work is submitted in the final fulfillment of the requirements for
the Project Work for Corporate Laws II (Semester VIII), CNLU, Patna.
The results embodied in this project have not been submitted to any other
University or Institute for any purpose.

Date – 03/05/2017 Amit Kumar

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 TABLE OF CONTENTS

 Introduction
 Object of the study
 Hypothesis
 Research Methodology
 Chapterisation
 Insolvency and Winding up in India
 Petition for Winding up
 Voluntary Winding Up
 Winding up as per Insolvency and Bankruptcy Code,2016
 Conclusion
 Bibliography

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 ACKNOWLEDGEMENT

In making of this project many people helped me immensely directly or indirectly. It would
not have been possible without the kind support and help of many individuals. I would like
to extend my sincere thanks to all of them.

I am highly indebted to Mrs. Nandita S. Jha for her guidance and constant supervision as
well as for providing necessary information regarding the project & also for her support in
completing the project.

My sincere thanks and appreciations also go to my colleagues in developing the project and
the people who have willingly helped me out with their abilities.

Thanking you!

Amit Kumar

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 Introduction
The right to apply for winding up is the creature of statute and not of contract. In the absence
of any prohibited provisions in the Act winding up proceedings u/s 433(e), 434,439 can be
allowed even if a civil suit is already pending against the debtor company. 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.

Objectives of Study:
 The objectives of the study are to know about the winding up of a company.
 To know the statutes which regulate the procedure .

Hypothesis

The researcher hypothesizes that the creditor can get a company to wind up for which the
provisions have been laid down in Companies Act, 1956 and Insolvency and Bankruptcy
Code, 2016.

Research Methodology
The researcher has primarily relied on the “Doctrinal Method”. The research is based on
comprehensive study of sources which are primarily study of various books, other web
resources, news articles etc. Analytical, critical and Comparative methods are used as major
tools of study in support of the arguments.

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 Insolvency and Winding up in India

The insolvency and bankruptcy regime in India is made up of several bodies of laws and
administrative authorities with sometimes overlapping and conflicting provisions and
authority, which makes navigating the insolvency landscape in India treacherous for the
unaware.

The most relevant laws governing corporate insolvency and bankruptcy in India are:

The Companies Act of 1956 (the Companies Act). The Companies Act governs liquidation of
a company in financial distress via: (i) voluntary winding-up; (ii) involuntary winding-up by
the courts; or (iii) winding-up subject to supervision by the courts.

The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). SICA was developed
as India’s version of a comprehensive bankruptcy framework for “sick” industrial companies
(defined below) and provides a program for the reconstruction of these companies under the
supervision of the Board for Industrial and Financial Reconstruction (BIFR). SICA, however,
only applies to “sick” companies in select industries that have been incorporated for at least
five years, have at least 50 workers on any day in the preceding 12 months and have a factory
license. Although technically, SICA has been repealed by the Sick Industrial Companies
(Special Provisions) Repeal Act, 2003 (the Repealing Act), it still continues to be good law
today because, to date, the Repealing Act has not yet come into force.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interests Act, 2002 (SARFAESIA)1. SARFAESIA empowers banks or financial institutions
with a presence in India or which have been notified by the Government of India to recover
on non-performing assets without court intervention. An asset is classified as non-performing
if interest or installments of principal due remain unpaid for more than 180 days.
SARFAESIA provides three alternative methods for recovery of non-performing assets,
including taking possession, selling and leasing the assets underlying the security interests
such as movable property (tangible or intangible, including accounts receivable) and
immovable property without the intervention of the courts. The SARFESIA is not available to
secured creditors, which are not Indian banks, or financial institutions notified by the
Government of India.

1
A STUDY ON INSOLVENCY LAWS IN India available athttp://www.lexology.com/library/detail.aspx?g=127f9c74-02a2-4749-bd6c-
760c9459065d last seen on 28/04/2017

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The High Courts are the principal civil courts of original jurisdiction and the highest courts of
appeal in any state. High Courts have the power to order the winding up and liquidation of
companies under the Companies Act.

The Company Law Board has been constituted by the Central Government of India as an
independent quasi-judicial body to exercise powers conferred on it by the Companies Act, or
the powers of the Central Government delegated to it.

The BIFR is a quasi-judicial body established and empowered by SICA to prescribe

appropriate measures for the revival and rehabilitation of potentially viable sick companies
and recommend the liquidation of non-viable companies to the High Courts.

Under the Companies Act, a “sick” industrial company is an industrial company that at the
end of any financial year had accumulated losses that have eroded 50 percent or more of its
average net worth during the four years immediately preceding that financial year, or has
failed to repay debts to its creditor(s) within three consecutive quarters on demand made in
writing for such repayment.

There are several ways for a company to end up in insolvency and bankruptcy
proceedings in India:

Winding up by the Courts: The High Court may, upon an application by the company; its
creditors; its contributories; the company registrar; or, in certain circumstances set out under
Section 439 of the Companies Act, a person authorized by the Central or State Government;
wind-up the company under the following circumstances:

 The company passes a special resolution at a general meeting to wind up its affairs
 There is a default, in holding the statutory meeting or in delivering the statutory report
to the Registrar of Companies
 The company fails to commence its business within one year from the date of its
incorporation, or suspends its business for a whole year
 The number of members in a public company is reduced to less than seven, and in a
private company to less than two
 The company is unable to pay its debts
 The court is of the opinion that the company should be wound up.

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If the court orders the winding up of the company, it will appoint a liquidator to wind up the
affairs of the company. Proceedings involving a liquidator in India are usually very lengthy.

Voluntary Winding Up: A company may voluntarily wind up its affairs if the purpose for
which it was formed has been accomplished or if it is unable to carry out its business or meet
its financial obligations upon:

 A declaration by the Board of Directors that the company has no debt or can pay off
its debts within 3 months, or
 The Board of Directors calling a creditors’ meeting, which in turn shall resolve that
the company should be wound up.

In a voluntary winding up, either the shareholders of the company or the creditors, as
applicable, will need to appoint a liquidator to liquidate the company. If the liquidator does
not complete the liquidation of the company within a year, the liquidator will call a general
meeting of the shareholders of the company and will give an account of the winding-up
procedures followed in the past year. Again, proceedings involving a liquidator in India can
be very lengthy. Typically, in a voluntary winding up, the courts do not play any role, unless
an application is made requesting court supervision by any person described in Section 439 of
the Companies Act or the official liquidator. Upon such application, the court may order that
the voluntary winding up continue subject to the supervision of the court.

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 Petition for Winding up

The petition for winding up to the Tribunal may be made 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.

In Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami, (1965) 35 Company

Cases 456 (SC)2, this Court held that "It is well-settled that a winding up petition is not a
legitimate means of seeking to enforce payment of the debt which is bona fide disputed by
the company. A petition presented ostensibly for a winding up order but really to exercise
pressure will be dismissed, and under circumstances may be stigmatized as a scandalous
abuse of the process of the court."

The above mentioned decision was later followed by this Court in Madhusudan Gordhandas
and Co. v. Madhu Woollen Industries Pvt. Ltd3. it was further stated that if the court is
satisfied, that sufficient reasons exist in the petition for winding up, then it will pass a
winding up order. Once the winding up order is passed, following consequences follow:

1. Court will send notice to an official liquidator, to take change of the company. He shall
carry out the process of winding up, ( sec. 444)

2
(1965) 35 Company Cases 456 (SC)
3
. (1971) 3 SCC 632
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2. The winding up order, shall be applicable on all the creditors and contributories, whether
they have filed the winding up petition or not.

3. The official liquidator is appointed by central Government ( sec. 448).

4. The company shall relevant particulars, relating to, assets, cash in hand, bank balance,
liabilities, particulars of creditors etc, to the official liquidator. ( sec. 454).

5. The official liquidator shall within six months, from the date of winding up order, submit a
preliminary report to the court regarding :

· Particulars of Capital

· Cash and negotiable securities

· Liabilities

· Movable and immovable properties

· Unpaid calls,

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 Voluntary Winding up of a Company

"A winding up petition is a perfectly proper remedy for enforcing payment of a just debt. It is
the mode of execution which the Court gives to a creditor against a company unable to pay its
debts."

It is possible in the case of insolvent companies. It requires the holding of meetings of

creditors besides those of the members right from the beginning of the process of voluntary
winding up. It is the creditors who get the right to appoint liquidator and hence, the winding
up proceedings are dominated by the creditors. In Pankaj Mehra v. State Of Maharashtra,4 it
was laid down that once a petition for winding up is presented it is not a necessary
concomitant that the winding up would follow. This position is made clear in Section 440(2)
which says that "the court shall not make a winding up order on a petition presented to it
under Sub-section (1), unless it is satisfied that the voluntary winding up or winding up
subject to the supervision of the Court cannot be continued with due regard to the interests of
the creditors or contributories or both." So a judicial exercise is called for to reach the
satisfaction of the court that winding up has to be continued with due regard to the interest of
the creditors or the contributors. The provisions applicable to creditors' voluntary winding up
are as follows:-

1) The Board of Directors shall convene a meeting of creditors on the same day or the next
day after the meeting at which winding up resolution is to be proposed. Notice of meeting
shall be sent by post to the creditors simultaneously while sending notice to members. It shall
also be advertised in the Official Gazette and also in two newspapers circulating in the place
of registered office.

2) A statement of position of the company and a list of creditors along with list of their claims
shall be placed before the meeting of creditors.

3) A copy of resolution passed at creditors' meeting shall be filed with Registrar within 30
days of its passing.

4) It shall be done at respective meetings of members and creditors. In case of difference, the
nominee of creditors shall be the liquidator.

4
2000 100 CompCas 417 SC

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5) A five-member Committee of Inspection is appointed by creditors to supervise the work of
liquidator.

6) Fixation of remuneration of liquidator by creditors or committee of inspection.

7) Cessation of board's powers on appointment of liquidator.

The above provision does not confer on any person a right to seek an order that a company
shall be wound up. It confers power to the court to pass an order of winding up in appropriate
cases, i.e. the remedy is discretionary and cannot be claimed as a matter of right. However,
the right to petition, being a statutory right cannot be excluded by a clause in the articles of
association. A company will not be wound up merely because it is unable to pay its debts so
long as it can be revived or resurrected by a scheme or arrangement or it still has prospects of
coming back to life.

A debt for a company must be determined or definite sum of money payable immediately or
at a future date. A conditional or contingent liability is not a debt, unless the contingency or
condition has already happened. Where a company acts as a guarantor for repayment of a
loan, and the principle debtor has committed default, the amount guaranteed is a 'debt' in
respect of which a petition for winding up will lie under this section. When a dividend is
declared by the company, it becomes a debt due by the company and entitles the shareholder
to apply under this section in case the company is unable to pay the amount of the dividend.
A winding up petition cannot be sustained on the basis of a debt which became due before
prior to the company's incorporation even if one of the objects of the company was to pay off
the debt.

The scope of the meaning to be given to the phrase "unable to pay its debts" is explained by
McPherson in his book "The Law of Company Liquidation" (3rd Editon) at page 54 as
follows5:

The phrase "unable to pay its debts" is susceptible of two interpretations. One meaning which
may properly be attached to it is that a company is unable to pay its debts if it is shown to be
financially insolvent in the sense that its liabilities exceed its assets. But to require proof of
this in every case would impose upon an applicant the often near-impossible task of
establishing the true financial position of the company and the weight of authority

5
India Restructuring & Insolvency available at http://www.lexology.com/library/detail.aspx?g=127f9c74-02a2-4749-bd6c-760c9459065d
last seen on 28/04/2017

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undoubtedly supports the view that the primary meaning to the phrase is insolvency in the
commercial sense - that is inability to meet current demands irrespective of whether the
company is possessed of assets which, if realised, would enable it to discharge its liabilities in
full. The company is not liable to be wound up if it is financially sound and refuses to pay the
debts. Winding up is not an alternative to a civil suit.

The Procedure:

1. Company in the general meeting [ in which resolution for winding up is passed] , and the
creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if
two names are suggested, then liquidator appointed by creditor shall act.

2. Any director, member or creditor may approach the court, for direction that; Liquidator
appointed in general meeting shall act, or He shall act jointly with liquidator appointed by
creditor, or Appointing official liquidator, or Some other person to be appointed as liquidator.
502 (2).6

3. The remuneration of liquidator shall be fixed by the creditors, or by the court. (504)7

4. On appointment of liquidator, all the power of Board of Directors shall cease. (505)8

5. In case, the winding up procedure, takes more than one year, then he will have to call a
general meeting, and meeting of creditors, at the end of each year, and he shall present, a
complete account of the procedure, and the status / position of liquidation (505).9

As soon as the affairs of the company are wound up, the liquidator shall call a final meeting
of the company as well as that of the creditors through an advertisement in local newspapers
as well as in the Official Gazette at least one month before the meeting and place the
accounts before it. Within one week of meeting, liquidator shall send to Registrar a copy of
accounts and a return of resolutions.

Once the company is fully wound up, and assets of the company sold or distributed, the
proceedings collected are utilised to pay off the liabilities. The proceedings so collected shall

6
The Companies Act ,1956
7
ibid
8
ibid
9
ibid

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be utilised to pay off the creditors in equal proportion. Thereafter any money or property left,
may be distributed among members according to their rights and interests in the company.

Distinguish between ‘Members’ Voluntary Winding-up’ and ‘Creditors’:

Members’ voluntary winding-up can be resorted to by solvent companies and thus requires
the filing of Declaration of Solvency by the Directors of the company with the Registrar.
Creditors’ winding-up, on the other hand, is resorted to by insolvent companies. In Members’
voluntary winding-up there is no need to have creditors’ meeting. But, in the case of
creditors’ voluntary winding-up, a meeting of the creditors must be called immediately after
the meeting of the members.

Liquidator, in the case of members’ winding-up, is appointed by the members. But in the case
of creditors’ voluntary winding-up, if the members and creditors nominate two different
persons as liquidators, creditors’ nominee shall become the liquidator. In the case of
Creditor’s voluntary winding-up, if the creditors so wish, a ‘Committee of Inspection’ may be
appointed. In the case of Members’ voluntary winding-up, there is no provision for any such
Committee.

The remuneration of liquidator/(s) is fixed by the members in case of Members’ voluntary

winding-up (Section 490) whereas the same is to be fixed by the Committee of Inspection, if
any, or by the creditors in case of Creditors’ voluntary winding-up (Section 504).10

10
Summarising the Insolvency and Bankruptcy Code, 2016 available at http://www.legalservicesindia.com/article/article/winding-up-
of-a-company-1319-1.html last seen on 29/04/2016

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 Winding up Procedure as per Insolvency and Bankruptcy
Code,2016

The Insolvency Resolution Process

1. A financial creditor (himself or jointly with other financial creditors), an operational
creditor or the corporate debtor (through Corporate applicant i.e. corporate debtor itself; or
an authorised member, partner of corporate debtor; or a person who has control and
supervision over the financial affairs of the corporate debtor) may initiate corporate
insolvency resolution process in case a default is committed by corporate debtor. An
application can be made before the National Company Law Tribunal (NCLT) for initiating
the resolution process. Operational creditor needs to give demand notice of 10 days to
corporate debtor before approaching the NCLT. If corporate debtor fails to repay dues to
operational creditor or fails to show any existing dispute or arbitration, then the
operational creditor can approach NCLT.
2. Corporate insolvency process shall be completed within 180 days of admission of
application by NCLT. Upon admission of application by NCLT, Creditors’ claims will be
frozen for 180 days, during which time NCLT will hear proposals for revival and decide
on the future course of action. And thereupon, no coercive proceedings can be launched
against the corporate debtor in any other forum or under any other law, until approval of
resolution plan or until initiation of liquidation process.11
3. NCLT appoints an interim Insolvency Professional (IP) upon confirmation by the
Insolvency and Bankruptcy Board (hereinafter, “the Board”) within 14 days of acceptance
of application. Interim IP holds office for 30 days only. Interim IP takes control of the
debtor’s assets and company’s operations, collect financial information of the debtor from
information utilities.
4. NCLT causes public announcement to be made of the initiation of corporate insolvency
process and calls for submission of claims by any other creditors.
5. After receiving claims pursuant to public announcement, interim IP constitutes the
creditors’ committee. All financial creditors shall be part of creditors’ committee and if
any financial creditor is related party of corporate debtor, then such financial creditor will
not have any right of representation, participation or voting. Operational creditors should

11
Winding up of Companies available at http://www.trilegal.com/index.php/publications/update/the-insolvency-and-bankruptcy-code-
2016-key-highlights last seen on 29/04/2017

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 be part of Creditors’ Committee (without voting right) if their aggregate dues are not less
than 10% of the debt.
6. Creditors’ committee shall meet first within seven days of its constitution and decide by
75% of votes either to replace or confirm interim IP as Resolution Professional.
Thereupon, Resolution Professional is appointed by the NCLT upon confirmation by the
Board. The creditors’ committee,with a majority of 75% votes, can change Resolution
Professional any time.
7. The creditors’ committee has to then take decisions regarding insolvency resolution
by a 75% majority voting.12
8. If three-fourths of the financial creditors consider the case complex and require
extension of time beyond 180 days, the NCLT can grant a one-time extension of up to
90 days.
9. Resolution Professional to conduct entire corporate insolvency resolution process and
manage the corporate debtor during the period.
10. Resolution Professional shall prepare information memorandum for the purpose of
enabling resolution applicant to prepare resolution plan. A resolution applicant means
any person who submits resolution plan to the resolution professional. And upon
receipt of resolution plans, Resolution Professional shall place it before the creditors’
committee for its approval.
11. Once a resolution is passed, the creditors’ committee has to decide on the
restructuring process that could either be a revised repayment plan for the company,
or liquidation of the assets of the company. If no decision is made during the
resolution process, the debtor’s assets will be liquidated to repay the debt.
12. The resolution plan will be sent to NCLT for final approval, and implemented once
approved.

Liquidation
1. The commencement of liquidation process takes place on account of:
1. failure to submit the resolution plan to the NCLT within the prescribed period, or
2. rejection of resolution plan for non-compliance with the requirements of the Code,
3. or decision of creditors’ committee based on vote of majority, or

12
Winding up under Companies Act ,1956 available http://www.indialaw.in/blog/commercialcorporate/summarising-insolvency-
bankruptcy-code-2016/ last seen on 30/04/2017

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 4. contravention of resolution plan by the debtor.
2. During liquidation, no suit or other proceedings shall be instituted by or against the
corporate debtor; except through the liquidator on behalf of corporate debtor with
permission of the NCLT.
3. The Resolution Professional shall act as liquidator unless replaced.
4. The liquidator shall form an estate of all assets of corporate debtor called the liquidation
estate.
5. Liquidator shall receive, verify and admit or reject, as the case may be, the claims of
creditors within the prescribed time. Creditor may appeal to the adjudicator within 14
days.
6. A secured creditor may either relinquish its security interest to the liquidation estate and
receive on first priority, the proceeds of the sale by the liquidator or realise its security
interest by enforcing, realising, settling, compromising or dealing with the secured asset in
accordance with such law as applicable to the secured interest. Any surplus amount so
realised shall be tendered to the liquidator. In case of any shortfall in recovery, the secured
creditors will be paid by the liquidator out of the assets of the corporate debtor. However,
his claim will be junior to the unsecured creditors to the extent of the shortfall.
7. Assets will be distributed by the liquidator in the manner of priorities of debts laid in the
Code. Individual claimants or those claiming to have any special rights on assets of the
debtor will form part of the liquidation process.13
8. All sums due to any workman or employee from the provident fund, the pension fund and
the gratuity fund will be considered as priority dues and is not to be included in the
liquidation estate and estate of bankrupt.
9. Upon the assets of corporate debtor completely liquidated and the liquidator making an
application, the NCLT shall pass an order dissolving the corporate debtor.
Note:-

 Financial creditor is defined under the code in Section4(7) as any person to whom a
financial debt is owed and includes a person to whom such debt has been legally
assigned or transferred to.

13
Indian corporate Insolvency available on http://www.caclubindia.com/articles/winding-up-of-companies-3971.asp last seen on
30/04/2017

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  Operational creditor is defined in Section4(20) as a person to whom an operational
debt is owed and includes any person to whom such debt has been legally assigned or
transferred.

Conclusion

India currently ranks 136 out of 189 countries in the World Bank's index on the
ease of resolving insolvencies. India's weak insolvency regime, its significant
inefficiencies and systematic abuse are some of the reasons for the distressed
state of credit markets in India today. The Code promises to bring about far -
reaching reforms with a thrust on creditor driven insolvency resolution. It aims
at early identification of financial failure and maximising the asset value of
insolvent firms. The Code also has provisions to address cross border insolvency
through bilateral agreements and reciprocal arrangements with other countries.
The unified regime envisages a structured and time-bound process for insolvency
resolution and liquidation, which should significantly improve debt recovery
rates and revitalise the ailing Indian corporate bond markets.

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 Bibliography

Statutes :

 Companies Act, 1956

 Companies Act, 2013
 Insolvency and Bankruptcy Code, 2016

Websites :

 http://www.lexology.com
 http://www.legalservicesindia.com
 http://www.lakshmisri.com
 http://www.companyrescue.co.uk

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