TERM PAPER ON WINDING UP OF A COMPANY BY COURT

SUBMITTED TO PROF. ANITA RAO GSIB, VISAKHAPATNAM

SUBMITTED BY G V RAVI KIRAN 1226111142 SECTION A

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WINDING UP OF A COMPANY BY COURT

Objective
To study the all the implications and cases relating the winding up of a company by a court.

Abstract
Winding up of a company by court is been a big process. It need to consider many cases and scenarios before calling for the winding up of a company. Winding up by the Court is also called as a Compulsory Winding up, may be ordered in case mentioned in Section 433. The Court will make an order for winding up on an application by any of the person enlisted in section 439. Section 438 to 483 specifically deals with winding up along with the sections 528 to 559.

Introduction
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. An administrator, called the liquidator, is appointed and he takes control of the company, collects its assets, pays debts and finally distributes any surplus among the members in accordance with their rights. 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. The procedure for winding up differs depending upon whether the company is registered or unregistered. A company formed by registration under the Companies Act, 1956 is known as a registered company. It also includes an existing company, which had been formed and registered under any of the earlier Companies Acts.

Types of winding up of a company

The act provides three kinds of winding up of a company 1) Winding up by court 2) Voluntary winding up(members and creditors) 3) Voluntary winding up under supervision.

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Winding up by court
Winding up subject to supervision of court, is different from "Winding up by court." Here the court only supervises the winding up procedure. Resolution for winding up is passed by members in the general meeting. It is only for some specific reasons, that court may supervise the winding up proceedings. The court may put up some special terms and conditions .Section 10 says-Courts having jurisdiction to wind up it shall be read with Section 2(11) which states jurisdiction of a court in respect of all matters relating to companies. In the case of Haryana Telecom Ltd. V Sterlite Industries Ltd., S.C. held that the H.C. should decide a petition for winding up of a company under the Companies Act and not under Arbitration and Reconciliation Act, even if there was an arbitration agreement between the parties. Even if there is an Agreement that dispute shall be resolved before any specific court, winding up petition can only be filed before the Court where registered office of the company is situated. Merely because any of the circumstances enumerated under section 433 exists, it does not follow that the court is bound to order winding up. No one can ask for winding up of a company as a matter of right. Once the Court exercises jurisdiction by reason of the fact that the registered office of the company is situated in the state over which the High Court has jurisdiction, its jurisdiction will automatically extend to all persons, whether they are residents of the state or not. Section 10, does not purport to invest the Company Court with jurisdiction over every matter arising under the Act. So, unless a power has been specifically conferred upon a Company Court, Civil Court will have the jurisdiction to entertain the petition. The Karnataka High Court held that Court/Courts, within whose jurisdiction registered office of the company is situated, alone would have the jurisdiction to try the case and not the Court within whose jurisdiction complainant/shareholder is residing. Section 433 gives the power to court to wind up the company under following cases

1.Special resolution
In business or commercial law, an extraordinary resolution or special resolution[1] is a resolution passed by the shareholders of a company by a greater majority than is required to pass an ordinary resolution. The precise figures vary in different countries, but commonly an extraordinary resolution must be affirmed by not less than 75% of members casting votes, whereas an ordinary resolution only requires a bare majority. Extraordinary resolutions are generally only required in certain specific situations required by statute. For example, in the United Kingdom, to wind up a company voluntarily on the ground that it cannot by reason of its insolvency continue its business, requires an extraordinary resolution. If the company itself, has passed a special resolution in the general meeting to wound up its affairs. Special resolution means, resolution passed by three-fourth (3/4") of the members present.
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2. Default in holding statutory meeting

Statutory meeting is the first meeting of the members of the public limited company. It is held only once in life of a public company. It can be convened by the directors of the company only. It is provided in companies' ordinance that the directors shall send a notice of statutory meeting at least 21 days before the day of the meeting to all the shareholders of the company. The directors shall not send the statutory report duly certified by not less than three directors, one of whom shall be the chief executive of the company. If there is a default, in holding the statutory meeting or in delivering the statutory report to the Registrar. A company which is limited by shares, and a company limited by guarantee having share capital, is required to hold a " Statutory meeting" of its members, within six months, and after one month, from the date of commencement of it's business. A statutory report of the meeting so held shall also be forwarded to the registrar. It comes under section 433 b and 433 c.

3. Failure to commence business

If the company fails to commence it's business within one year from the date of its incorporation, or suspends its business for a whole year. A company limited by shares, has to obtain a "certificate of commencement" of business from the registrar. Unless it obtains such certificate, it cannot carry on its business operation. Even if business in all units of company is suspended it would be still open to court to examine whether it would be possible for the company to resume its business.

4. Reduction in membership
If the number of members, in a public company is reduced to less than seven, and in case of private company less than two. The statutory requirement of minimum number of members in a public company is seven, and in case of private company, it is two (sec 12)

5. Inabilty to pay debts

If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets, it is still unable to extinguish it's liabilities, it means that company is unable to pay it's debts Madhusudan Gordhandas & Co vs Madhu Woollen Industries Pvt ltd case The appellants filed a petition for winding up of the respondent company, on the grounds : (1) that the company was unable to pay the debts due to the appellants, (2) that the company showed their indebtedness in their books of account for a much smaller amount, (3) that the company was indebted to other creditors, (4) that the company was effecting an unauthorised sale of its machinery, and (5) that the company had incurred losses and
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stopped functioning, and therefore the substratum of the company disappeared and there was no possibility of the company doing any business at profit. But the High Court dismissed the petition. Similarly even if the assets are unable to meet its liabilities ,in that case also court can call for winding up. Even if assets and liabilities are equal , due to insolvency situation, there wont be any fixed assets , so it will be difficult to run a company , in that case also we can call for a winding up of a company.

6. Just and equitable

If the court, itself is of the opinion that the company should be wound up. The court may form such an opinion, if it comes to the knowledge of court that, the company is mismanaged, or financially unsound, or carrying an illegal operations Winding up under this ground can be passed under following cases Firstly when there is deadlock in the management of a company. Consider yenidije tobacco co case where Yenidje Tobacco Company Limited had two shareholders with equal shares and each were directors. They could not agree how the company could be managed. There was no provision for breaking the deadlock. So court gave the judgement to wind up the company in order to break the deadlock. Secondly when object of company had failed .thirdly when the business of company cannot be carried out except at losses.and lastly if the court finds that the company had participated in quasi partnership. A quasi partnership is a type of business strategy that joins two or more entities. It resembles a partnership but is actually not a partnership. Consider Ebrahimi v Westbourne Galleries Ltd case , where Mr Ebrahimi and Mr Nazar were partners. They decided to incorporate as the business was highly successful, buying and selling expensive rugs. Mr Ebrahimi and Mr Nazar were the sole shareholders in the company and took a Directors' salary rather than dividends for tax reasons. A few years later, when Mr Nazar's son came of age, he was appointed to the board of directors and Mr Ebrahimi and Mr Nazar both transferred shares to him. Mr Nazar and son then called a company meeting, at which they passed an ordinary resolution to have Mr Ebrahimi removed as a Director. Mr Ebrahimi, clearly unhappy at this, applied to the court for a remedy to have the company wound up. The court gave the judgement as The House of Lords stated that as a company is a separate legal person, the court would not normally entertain such an application. However, they believed that as the company was so similar in its operation as it was when it was a partnership, they created what is now known as a Quasi-Partnership. The company was wound up and Ebrahimi received his capital interest.

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Conclusion
The court initially don t want to wind up a company even though it is not performing well. It still want to see weather there is any chance to resume the operations of a company. It also want to resume the operations of a company because the technology the companies were using will help for the development of a country also. But if the companies not maintaining the records well and not responding correctly the court can immediately call for a winding up a company.

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References
http://www.companyliquidator.gov.in/winding_up_4.html http://www.lexvidhi.com/article-details/winding-up-of-a-company-67.html http://www.cro.ie/en/business-termination-court.aspx

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