WINDING UP Flashcards
Meaning
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. 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 respective rights. In the words of Pennington1 winding up or liquidation is the process by which the management of a company’s affairs is taken out of its directors’ hands, its assets are realised by a liquidator, and its debts and liabilities are discharged out of the proceeds of realisation and any surplus of assets remaining is returned to its members or shareholders. 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.
Winding up of a company differs from insolvency of an individual inasmuch as a company cannot be made insolvent under the insolvency law. Besides, even a solvent company may be wound up.
Just and Equitable [Section 271(e)]
The Tribunal may also order for the winding up of a company if it is of the opinion that it is just and equitable that the company should be wound up. This is a separate and independent ground for a winding up order, and for a case to be made out under it, it is not necessary that the circumstances should be analogous to those which justify an order on one of the six other specific grounds already dealt with. In exercising its power on this ground, the Court (now Tribunal) shall give due weightage to the interest of the company, its employees, creditors and shareholders and the interest of the general public. The relief based on the just and equitable clause is in the nature of a last resort when the other remedies are not efficacious enough to protect the general interests of the company - Gadadhar Dixit v. Utkal Flour Mills (P.) Ltd. [1989] 66 Comp. Cas. 188 (Ori.). The Gujarat High Court held a similar view in Kiritbhai R. Patel v. Lavina Construction & Finance Ltd. [1999] 20 SCL 158. The Madras High Court in S. Palaniappan v. Tirupur Cotton Spg. & Wvg. Mills Ltd. [2004] 50 SCL 293 also followed the above principle and dismissed the winding up petition.
- Disappearance of substratum - A company’s substratum is the purpose or group of purposes which it was formed to achieve (in other words, its main objects). If the company has abandoned all of its main objects and not merely some of them, or if it cannot achieve any of its main objects, its substratum is gone, and it will be wound up.
- Illegality of Objects and Fraud - If any of a company’s objects are illegal, or apparently, if they become illegal by a change in the law, the Tribunal will order the company to be wound up on the ground that it is just and equitable to do so.
Similarly, if a company is promoted in order to perpetrate a serious fraud or deception on the persons who are invited to subscribe for its shares, the Tribunal will wind it up. Thus, a winding up order was made when the company’s prospectus stated that it had agreed to purchase the business of an existing firm, together with the right to use the firm’s name, for a very substantial sum, and subscribers for the company’s shares were intentionally misled by the name and the amount of the purchase price into thinking that the firm was a different and reputable concern, whose business name the vendor firm had, in fact, successfully but illegally imitated for a number of years. Again, a winding up order was made against a company whose promoters sold a business to them at a gross overvalue, and when the deception was discovered, bought up at a very low price most of the shares subscribed for by the public, so as to prevent the company from suing them for their misfeasance, and so as to wind the company up voluntarily and distribute its assets among themselves. - Deadlock in management - If it becomes impossible to manage a company’s affairs because the voting power at board and general meetings is divided between two dissenting groups, the court (now Tribunal) will resolve the deadlock by making a winding up order. The most obvious kind of deadlock is where the company has two directors who are its only shareholders and who hold an equal number of voting shares, if they disagree on major questions in respect of the management of the company, their disagreement cannot be resolved at a board meeting or by a general meeting, and management decisions will cease to be made. In this situation, the Tribunal will make a winding up order, even though there is a provision in the company’s articles that one director shall have a casting vote at board meetings, or that disputes shall be settled by arbitration
- When the company is a ‘bubble’ i.e. it never had any real business - Re London and County Coal Co. [1867] L.R. 3 Eq. 365. Such companies are commonly called as ‘fly-by-night’ companies.
- Oppression - A winding up petition may lie where the principal shareholders have adopted an aggressive or oppressive policy towards the minority - R. Sabapathy Rao v. Sabapathy Press Ltd. AIR 1925 Mad. 489.
Promoters, directors etc. to cooperate with the Company Liqui- dator (Section 284)
Section 284 casts a positive duty on the promoters, directors and employees, both present and past, to extend full cooperation to the Company Liquidator. Any failure will make the person in default punishable with imprisonment extending to six months or fine up to rupees fifty thousand or with both.
Dissolution of company [Section 302]
When the affairs of a company have been completely wound up, the Company Liquidator shall make an application to the Tribunal for dissolution of the company.
In Raj Kumar Sood v. Sood Tech. (P.) Ltd. [2012] 24 taxmann.com 329 (Delhi), all claims of company (In liquidation) had been settled and no other assets were available for further realization and no useful purpose would have been served in continuing with winding-up process, it was held that the Official Liquidator (now Company Liquidator) be discharged and company be dissolved under section 481 [now Section 302].
Upon receipt of the report from the Company Liquidator or otherwise, the Tribunal on forming an opinion that it is just and reasonable to order dissolution, shall make an order for dissolution of the company. The company shall be dissolved effective from the date of the order [Section 302(2)].
Within 30 days, the Company Liquidator should file a copy of the order with the ROC who shall make in his books a minute of the dissolution of the company. Failure to file a copy of the order of the Tribunal, as aforesaid, renders the Company Liquidator punishable with fine which may extend to rupees five thousand for every day during which the default continues.
Liquidators
The commencement of winding up of a company does not put an end to the existence of the company. Its assets are to be realised and distributed among the debenture-holders, creditors, shareholders etc. For the purpose, somebody has to act as an agent of the company. Such agent is called liquidator.
Rules relating to their appointment, rights, powers and duties can be discussed under the following heads:
1. In winding up by the Tribunal.
2. In summary procedure for winding up.
Powers and Duties of Company Liquidator in winding up by the Tribunal [Section 290]
The Company Liquidator can exercise certain powers subject to the directions and overall control of the Tribunal. The Tribunal may require the Company Liquidator to perform any other duty. The powers of the Company Liquidator as specified in section 290(1) are reproduced below:
(a) to carry on the business of the company so far as may be necessary for the beneficial winding up of the company;
(b) to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose, to use, when necessary, the company’s seal;
(c) to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels;
(d) to sell the whole of the undertaking of the company as a going concern;
(e) to raise any money required on the security of the assets of the company;
(f) to institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in the name and on behalf of the company;
(g) to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this Act;
(h) to inspect the records and returns of the company on the files of the Registrar
or any other authority;
(i) to prove rank and claim in the insolvency of any contributory for any balance against his estate, and to receive dividends in the insolvency, in respect of that balance, as a separate debt due from the insolvent, and rateably with the other separate creditors;
(j) to draw, accept, make and endorse any negotiable instruments including cheque, bill of exchange, hundi or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if such instruments had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business;
(k) to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company, and in all such cases, the money due shall, for the purpose of enabling the Company Liquidator to take out the letters of administration or recover the money, be deemed to be due to the Company Liquidator himself;
(l) to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities and for protection of the assets of the company, appoint an agent to do any business which the Company Liquidator is unable to do himself;
(m) to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond or instrument as may be necessary (i) for winding up of the company; (ii) for distribution of assets; (iii) in discharge of his duties and obligations and functions as Company Liqui- dator; and
(n) to apply to the Tribunal for such orders or directions as may be necessary for the winding up of the company.
Stay of suits etc. on winding up order [Section 279]
At any time after a winding-up order has been passed or a provisional liquidator has been appointed, no suit or proceedings against the company can be commenced without the leave of the Tribunal. Any pending suit or proceeding also cannot be proceeded with without Tribunal’s leave. The Tribunal has a right to permit such proceeding to be commenced or proceeded with subject to terms and conditions as it may impose. The Tribunal needs to dispose of the application for such a leave within sixty days. The stay will not affect any proceeding pending in appeal before the Supreme Court or a High Court.
A company in respect of which winding up petition has been made, borrowed money concealing the above fact. When suit was filed for recovery, it made application for stay claiming winding up petition has been admitted and also a reference has been made to BIFR for stay of the suit. The application was dismissed as the company did not come to the court (now Tribunal) with clean hands - Apollo Finance Ltd. v. GSL (I) Ltd. [2001] 34 SCL 951 (Delhi). As against the above, as per section 446 [now Section 279], when the winding up order has been made or the official liquidator has been appointed as the provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company except by leave of the Tribunal and subject to such terms as the Tribunal may impose. However, any proceeding pending before the Supreme Court or the High Court will not come within the above power of the Tribunal which has made the winding-up order. In case leave of the Court (now Tribunal) has not been taken prior to the institution of the suit, it may grant leave subsequently if approached, but the concerned proceeding should be considered to have commenced from the date the leave was granted - Erach Boman Khavar v. Tukaram Sridhar Bhat [2008] 81 SCL 416 (Bom.).
Appointment of Company Liquidator
Section 275 of the Act provides that for the purposes of winding up by the Tribunal, it is authorized to appoint an Official Liquidator or a liquidator from the panel maintained amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016, as the Company Liquidator. The Tribunal is also empowered to appoint a provisional liquidator till the making of a winding up order. Within seven days of the appointment of a company liquidator or provisional liquidator, the Tribunal shall intimate to the liquidator so appointed and the Registrar [Section 277(1)].
Remuneration of Company Liquidator - The terms and conditions for the appoint- ment of provisional liquidator or Company Official Liquidator and the remunera- tion payable to him shall be fixed by the Tribunal. The fees shall be specified by the Tribunal taking into consideration the task required to be performed, size of the company and experience and qualification of the liquidator [Section 275(5)]. The provisional liquidator shall have the same powers as a liquidator unless the powers are restricted by the Tribunal by an order [Section 275(3)].
Removal and Replacement of liquidator [Section 276] - The Company Liquidator shall conduct proceedings in the winding up and perform such duties in reference thereto as the Tribunal may specify. The Tribunal, however, has the power to remove any Company Liquidator or provisional liquidator on sufficient cause on the grounds of misconduct, fraud or misfeasance, professional incompetence or failure to exercise due care and diligence in performance of the powers and functions, inability to act as provisional liquidator or as the case may be, Company Liquidator or conflict of interest or lack of independence during the term of his appointment after giving a reasonable opportunity of being heard. In case of death, resignation or removal of a liquidator, the Tribunal may transfer the work to another liquidator.
Any loss caused due to fraud, misfeasance or failure to exercise due care and diligence etc. by the liquidator may be ordered to be recovered from him by the Tribunal after giving a reasonable opportunity of being heard to such liquidator. [Section 276(3) and (4)]
Provisional Liquidator
The Tribunal before which the winding up petition has been made, at its discretion, can appoint a provisional liquidator, before the winding up order is made. Before making appointment of the Provisional Liquidator, notice shall be issued to the company and reasonable opportunity shall be given to it to make representation, if any. The Tribunal may not issue the notice if special reasons exist to that effect but it will then record the special reasons in writing. [Section 273(1)(c)]. The objective of appointment of the provisional liquidator is to safeguard the assets of the company till Company Liquidator is appointed. Ordinarily, the provisional liquida- tor shall possess all the powers of a liquidator unless the Tribunal imposes restrictions/limitations on exercise of such powers by the provisional liquidator [Section 275(3)]. The Punjab and Haryana High Court in Marigold Leasing (P.) Ltd. v. Shashi Bhushan [2009] 90 SCL 229 allowed the provisional liquidator to sell property not only of the company concerned but also assets belonging to others but obtained with funds of the company lying in the company premise.
Duties of Company Liquidator in winding up by the Tribunal
- He must conduct equitably and impartially all proceedings in the winding up according to the provisions of the law, and must perform such duties in reference thereto as the Tribunal may impose.
- He must bring into his custody and control the property of the company [Section 283]. Supreme Court of Indian Official Liquidator, U.P. & Uttarakhand v. Allahabad Bank [2013] 31 taxmann.com 150 held that Company Judge under Companies Act has no jurisdiction at instance of Official Liquidator to
set aside auction or sale held by Recovery Officer under RDB Act. - He must submit a preliminary report to the Tribunal within sixty days from the winding up order.
- Within thirty days from the date of the direction of the Tribunal, the Company Liquidator must call a meeting of the creditors and contributories for determining the persons who are to be members of the Advisory Committee, if such committee is to be appointed. The Company Liquidator shall chair the Advisory Committee [Section 287(3)].
He must keep all sums received by him, on behalf of the company into some scheduled bank, unless the Tribunal otherwise allows deposit in a non- scheduled bank [Section 350]. - Rule 32 of the Draft Companies (Winding Up) Rules, 2013* requires the money to be credited to a special account with the State Bank of India or any other nationalized bank. Petty cash of rupees five thousand may be kept to meet day to day expenses. Any bills, hundies, notes and other securities shall be deposited by the Company Liquidator in the bank. Any surplus money not immediately required by the company shall be invested in Government Securities or interest-bearing deposits in the State Bank of India or any other nationalized bank [Rule 33 of the Draft Companies (Winding Up) Rules, 2013]*
Recall of winding up order
If on the date of passing the winding up order a reference was pending before BIFR, the order may only be recalled if the reference was genuine and not sham - Real Value Appliances Ltd. v. Canara Bank AIR 1998 SC 2064. Following the test of genuineness laid down by the Apex Court that the BIFR reference must have been registered, scrutinised and numbered, the application for recall was refused in Miranka Ispat Ltd. v. Ispat Industries Ltd. [2000] 24 SCL 10 (Kar.).
In a case where ex parte winding up order was issued, the petitioner prayed either a recall of the order or permanent stay on the order under section 466 [now section 289] and the prayer was rejected. On appeal, it was seen that petitioner for the winding up petition was not the creditor himself but purportedly was his constituted attorney. All throughout the proceedings all the paper including Vakalatnama were signed not by the creditor but by the attorney. A question arose as regards the life- status of the creditor; it was not on records whether he was alive. As per provisions of section 108 of the Evidence Act, 1972, he is to be presumed to be dead. The appeal Court held that the court (now Tribunal) has to be satisfied that the concerned creditor was alive at the time of initiation of the proceedings and there was no such satisfaction in this case. Therefore, the court granted permanent stay on the winding up order earlier passed by the court - Parbati Dasgupta v. Official Liquidator [2005] 64 SCL 169 (Cal.).
When a winding up order is issued based on wrong information, the same order can be recalled by the Court (now Tribunal) concerned and the parties would revert to their respective positions as they stood before the winding up order - Amin Traders v. Textile Labour Association [2008] 87 SCL 39 (Guj.). In Venkateshwar Somani v. O.L. of Shree Niwas Cotton Mills Ltd. [2009] 96 SCL 445 (Bom.), the court allowed revival of the company in liquidation based on the facts of the case and petitioner agreeing to comply with the conditions laid down by the court.
Commencement of winding up [Section 357]
The winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up. If no order for winding up is made and the winding up petition is dismissed, the date of presentation of the winding up petition has no relevance.
As such, until the winding up order is made, the company will have to comply with the requirements of the Act as are required of a company not wound up. Also, the words ‘shall be deemed to commence’ indicate that although the winding up of a company does not in fact commence at the time of the presentation of the petition; it nevertheless shall be taken to commence from that time if and when the winding up order is made.
Different winding up proceedings are impermissible for different benefits under the jurisdiction of the same High Court - Tata Iron & Steel Co. Ltd. v. Kumardhubi Metal Casting and Engineering Ltd. [2001] 34 SCL 982 (Pat.). Also see Official Liquidator of Piramal Financial Services Ltd. v. RBI [2004] 51 SCL 691 (Guj.). This decision held that once winding up order has been issued by the court, subsequent petition for winding up of the company would automatically attract section 441 [now Section 357]. On fraudulent preference, the decision held that giving a favoured treatment is essential to establish fraudulent preference.
Section 280 provides for the Tribunal passing winding-up order an unhindered jurisdiction to entertain or dispose of :
(a) any suit or proceedings 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; and
(d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of winding up of the company.
Consequences of winding up order
- The Tribunal must, as soon as the winding up order is made, (within a period not exceeding seven days from the date of passing of the order) cause intimation thereof to be sent to the Company Liquidator or provisional liquidator and the Registrar [Section 277(1)].
- The Registrar should then make an endorsement of the order in his records relating to the company and notify in the Official Gazette that such an order has been made. The Registrar shall also inform the stock exchange(s) where the securities of the company are listed [Section 277(2)].
A copy each of the petition, statement of affairs and affidavit, in any, in support thereof is also required to be sent along with the winding up order. The order shall in the footnote state that the person responsible are liable to submit duly completed and audited books of account to the liquidator and handover possession of the property, books or papers, cash or other assets etc. to surrender the same to the company liquidator. The Tribunal may make further orders requiring the advertisement of winding up order of service of the same. [Rule 7 of the Draft Companies (Winding Up) Rules, 2013]*. - The order for winding up 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 for the beneficial winding up of the company [Section 277(3)]. The Bombay High Court in the case of BIFR v. KMA Ltd. [2016] 66 taxmann.com 243 affirms that a contract of employment comes to an end on passing of a winding up order and a winding up order is a deemed notice of discharge to all employees of a company-in-liquidation. The court also held that bonus is not included in the category of wages under sections 325 and 326 of the Act and cannot be accorded priority.
- The Tribunal gets jurisdiction to entertain or dispose of any suit or proceedings or claim made by or against the company before or after the winding up order. The Tribunal also has jurisdiction over any application made under section 233 (merger and amalgamation of specified companies). Any question arising out of or in relation to winding up including those relating to priorities assets, business, actions, rights, entitlements, privileges, benefits, duties, responsibilities, and obligations shall be decided by the Tribunal (Section 280).
Once the winding-up process of company-in-liquidation has been completed by Official Liquidator and funds were distributed among stakeholders, applications filed by ex-directors seeking leave to file some kind of scheme or arrangement for the revival of the company were held to be sheer abuse of the process of law and was dismissed with exemplary cost. [M. Raghunath Chowdhary v. Mysore Tools (P.) Ltd. [2018] 100 taxmann.com 45 (Karnataka)] - All actions and suits against the company except cases on appeal pending before the Supreme Court or the High Court stay unless the Tribunal gives leave to continue or commence proceedings [Section 279].
Does the Board of Directors become functus officio when a company is ordered to be wound up?
Though section 277(3) of the Act provides for deeming the order for winding up to be a notice of discharge to officers and employees of the company, the Apex Court in Rishabh Agro Industries Ltd. v. PNB Capital Services Ltd. [2001] 101 Comp. Cas. 284 has held that it cannot be said that after the order of winding up and appointment of the liquidator is passed, the Board does not have the jurisdiction to move the BIFR by passing a resolution. In a winding-up petition the liquidator is appointed to protect the assets of the company for the benefit of its creditors and others. It is not the function of the official liquidator [now company liquidator] to start the process of rehabilitation of the company. Despite the appointment of the official liquidator, the Board continues to hold all the residuary powers for the benefit of the company. On the issue as to whether a company in respect of which winding up order has been passed and official liquidator appointed can be allowed to be revived by the company, the Punjab and Haryana High Court in Kundanmal Dabriwala v. Dabriwala Steels & Engineering Co. Ltd. (In Liquidation) [2009] 94 SCL 336 has held that when facts support a possibility of revival, same cannot be denied.
