Compulsory Winding up of companies: Need for reforms

In the market oriented economy of todays collapse of the businesses is inevitable especially corporate collapses. This means failure of the business of a company , which may happen due to inadequate capital, huge unpaid debts, management inexperience, excessive gearing, fraudulent business practices etc. A company is a artificial person created by law. Being an artificial person, it cannot die natural death. Whenever the life of a company is put to an end, it must be through a legal process. The companies Act, 1956 provides various remedies to deal with such situations like capital reconstruction, compromises and arrangements, mergers, amalgamations, winding up, liquidation. There is another mode of such remedy available for failing businesses that is provided by another legislation that is Sick Industrial Companies (special provisions) Act. The winding up is a proceeding by means of which a company is dissolved and in course of such dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions from it members if necessary. If any surplus if left it is distributed among the members according to their rights. If the company does not realize the money sufficient enough to pay off its creditors, the company asks for money from its shareholders (if there is any uncalled money on the shares) or stakeholders (such as promoters). A company remains in existence until the process of its winding up is completed. Modes of winding up and the courts jurisdiction Section 425 of the companies act, 1956 enumerates following three ways to wind up a company: (i) (ii) Winding up by the court1, by making a winding up order (compulsory winding up). By passing a resolution for voluntary winding up. Voluntary winding up can be categorized into two parts that is members voluntary winding up and creditors voluntary winding up. By a voluntary winding up which by order of court to be continued under supervision of court.2

(iii)

However, there is another mode of winding up but that is not covered under the companies act,1956 rather it is governed by the Sick Industrial companies (special provisions) Act, 1985.
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Substituted by Tribunal by companies (second amendment) act, 2002 w.e.f. a date yet to be notified. Voluntary winding up under supervision of court has been removed by companies (second amendment Act, 2002) yet to take effect.

Under this Act it has been provided that on recommendation made by the Board of Industrial and financial reconstruction (BIFR) the company court may order for winding up of a company. However after the company court makes order for winding up on recommendation of BIFR but the procedure for winding up shall be the same as in compulsory winding up under companies Act, 1956.3 Courts having jurisdiction to wind up is the High Court having jurisdiction in relation to the place where the company has its registered office. However, district court of the area subordinate to the High Court may also take up a winding up matter in circumstances where such jurisdiction have been conferred upon District Court by the High Court. Such courts are appropriately called as company courts. However, the companies act provides further that winding up petition of a company having a paid up capital of rupees one lakh or above must be taken up by the High Court. Later on new definitions for the words Public limited company and Private limited company have been induced by the companies (amendment) act, 2000 and having regard to the definitions now almost every company comes under direct jurisdiction of High Court. Grounds for winding up The present regime that is companies act, 1956 describes grounds that will lead to winding up of a company either by order of court or by voluntary winding up. Various grounds for which a company may be wound up by the order of the Court have been provided in the section 433 of the companies act and for voluntary winding up the companies act does not provides any specific reasons for which a company can go for a voluntary winding up it is left on the members and creditors to settle their affairs without intervention of court. However they can choose to apply for directions or orders of court if the Official Liquidator attached to the said High Court takes possession of the companys assets, books of accounts, etc. and liquidates the company as per the further orders of the High Court. and when necessary. For compulsory winding up of a company the grounds are enumerated under section 433 elaborately. The company court upon the petition made by the person so authorized according to the section 439 of the companies act, 1956 may issue a winding up order.

The Sick Industrial Companies (special Provisions) Act (SICA), 1985 has been repealed by Sick Industrial companies (special provisions) Repeal Act, 2003. Many provisions of SICA however in much diluted form has been incorporated under sections 424A 424L of the companies Act, 1956.

Consequences of a compulsory winding up order and its overriding effect The procedure for winding up has been prescribed under companies act, 1956 and the companies (courts) rule, 1959. These rules are approved by the Honorable Supreme Court of India and notified by the Central Government. As soon the company court issues a winding up order by virtue of section 448 and 449 of the companies act, 1956 an official liquidator attached to the concerned High Court is appointed as the liquidator of the company in liquidation. The official liquidator takes over the administration and all assets and liabilities of the company in liquidation. The 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 in liquidation has been continued by the order of company court for the beneficial winding up of the company. Apart from this all suits and legal actions against the company are stayed except where an appeal lies before Honorable Supreme Court or High Court or it has been stayed. Similarly any disposition of the company property and any transfer of shares made after the issuance of winding up order shall be held void4 unless court otherwise orders. On commencement of winding up, the limitation ceases to run in favour of the company. The period from the date of commencement of winding up to the date of the making of the winding up order (both inclusive) and a period of one year from the date of winding up order is excluded for computing the period of limitation for any suit or application in the name and on behalf of the company, Notwithstanding the provisions of the limitation Act, 1963 or any other law for the time being in force. The suit or application must satisfy both the conditions.5 In Karnataka Steel & Wire Products v. Kohinoor Rolling Shutters & Engg. Works,6 It was decided that this relaxation and extension is only in favor of the company in other words it is only in respect of suit or application in the name and on behalf of the company. It is not applicable to suits filed against the company. The benefit of this provision is restricted to such debts which were not barred by limitation on the day the winding up petition was made. The Bottlenecks The courts are overburdened with the cases and a high rate of filing of fresh cases makes it more horrible. There are already too many cases which are delayed for many years in a row already.

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Section 536(2) of the companies Act, 1956. Section 458(A) of the companies Act, 1956. 6 [2002] 40 SCL 516 (SC).