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Winding up of companies
Melam Ram Pav an Kum ar on 18 January 2011 Comments
MEANING OF WINDING UP Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realised assets (or from contributions from its members), and the surplus, if any, is then distributed among the members in proportion to their holdings in the company. The two terms winding up and liquidation are used interchangeably. According to Prof. Gower, winding up of a company is a process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator, called 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 rights. MODES OF WINDING UP There are three modes of winding up of a company, viz., 1. Winding up by the Court (Section 433 to 483). 2. Voluntary winding up (Section 484 to 521). This may be (1) members voluntary winding up, or (2) creditors voluntary winding up. 3. Winding up subject to supervision of Court. WINDING UP BY THE COURT (Sections 433 to 483) Winding up of a company under the order of a Court is also known as compulsory winding up. GROUNDS FOR COMPULSORY WINDING UP (Section 433) A company may be wound up by the Court in the following cases: 1. Special resolution of the company [Sec. 433 (a)]. Winding up order under this head is not common because normally the members of a company prefer to wind up the company voluntarily for in such a case they shall have a voice in its winding up. Moreover, a voluntary winding up is far cheaper and speedier than a winding up by the Court. 2. Default in delivering the statutory report to the Registrar or in holding statutory meeting [Sec. 433 (b)]. A petition on this ground can be made either by the Registrar or by a contributory. In the latter case the petition for winding up can filled only after the expiry of 14 days from the day on which the statutory meeting ought to have been held [Section 439 (7)]. The Court may, instead of making a winding up order, direct that the statutory report be delivered or that a statutory meeting be held. The Court may order the costs to be paid by any persons who are responsible for the default [section 443 (3)]. 3. Failure to commence, or suspension of, business [Section 433 (c)]. The Court
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exercises power in this case only if the company has no intention of carrying on its business
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exercises power in this case only if the company has no intention of carrying on its business or if it is not possible for it to carry on its business.
If a company has not begun to carry on business within a year from its incorporation or suspend its business for a whole year, the Court will not wind It up if (a) there are reasonable prospects of the company starting business within a reasonable time, and (b) there are good reasons for the delay, i.e., the suspension of business is satisfactorily accounted for and appears to be due to temporary causes. 4. Reduction in membership [section 433 (d)]: If, at any time, the number of members of a company is reduced in the case a public company, below 7 or in the case of a private company, below 2, the company may be ordered to be wound up by the Court. If the company carries on business for more than 6 months while the number is so reduced every member who is cognizant of the fact that it is carrying on business with members fewer than the statutory minimum, will be severally liable for the payment of the whole of the debts of the company contracted after those 6 months (section 45). 5. Inability to pay its debts [Section 433 (e)]: A company may be wound up by the Court if it is unable to pay its debts. The test is whether the company has reached a stage where it is commercially insolvent that is to say, that its existing and probable assets would be insufficient to meet the existing liabilities. Commercially insolvent means that the company is unable to pay debts or liabilities as they arise in the ordinary course of business. When is a company unable to pay its debts? According to section 434, a company shall be deemed to be unable to pay its debts in the following cases: (1) Demand for payment neglected: If a creditor to whom the company is indebted for a sum exceeding Rs. 500 has served on the company at its registered office, a demand for payment and the company has for 3 weeks thereafter neglected to pay or otherwise satisfy him, the company is unable to pay its debts. The demand may be signed by any agent or legal adviser duly authorised or in the case of a firm, by such agent or legal adviser or by any member of the firm.
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(2) Decreed debt unsatisfied: If execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part the company is deemed to be unable to pay its debt. (3) Commercial insolvency: A company is deemed to be unable to pay its debts, if it is proved to the satisfaction of the Court that the company is unable to pay its debts. In determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company also. 6. Just and equitable [Section 433 (f)]. The words just and equitable are of the widest significance and do not limit the jurisdiction of the Court to any particular case. The principle of just and equitable clause baffles a precise definition. It must rest with the judicial discretion of the Court depending upon the facts and circumstances of each case [Hind Overseas (Pvt.) Ltd. v. R.P. Jhunjhunwalla, (1976) 46 Comp. Cas. 91 (S.C.)]. What is just and equitable clause? It depends upon the facts of each case. The Court may order winding up under the just and equitable clause in the following cases: (1) When the substratum of a company is gone: The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. The substratum of a company disappears: (i) When the very basis for the survival of the company is gone: Pirie v. Stewart. (1904) 6 F. 847. A shipping company lost its only ship, the remaining asset being a paltry[1] sum of 363. A majority in number and value of shareholders petitioned for its compulsory winding up but a minority shareholder opposed this and desired to carry on the business as charterer. Held, it was just and equitable that the company should be wound up. (ii) When the main object of the company has substantially failed or become Impracticable: Where a companys main object fails, its substratum is gone and it may be wound up even though it is carrying on its business in pursuit of a subsidiary object.
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German Date Coffee Co., Re (1882) 20 Ch. D. 169. In this case, the objects clause of the German Date Coffee Co. stated that it was formed for the working of a German patent which would be granted for making a partial substitute for coffee from dates and for the acquisition of inventions incidental thereto and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee was made from dates, but not under the protection of a patent. Held, on a petition by 2 shareholders, that the main object could not be achieved and, therefore, it was just and equitable that the company should be wound up. (iii) When the company is carrying on its business at a loss and there is no reasonable hope that the object of trading at a profit can be attained. However, where the majority shareholders are against it, the Court will not order a company to be wound up merely because it is making a loss. (iv) When the existing and probable assets of the company are insufficient to meet its existing liabilities. Where a company is totally unable to pay off creditors and there is everincreasing burden of interest and deteriorating state of management and control of business owing to sharp differences between shareholders, the Court will order winding up. (2) When the management is carried on in such a way that the minority is disregarded or oppressed. Oppression of minority shareholders will be a just and equitable ground where those who control the company abuse their power to such an extent as to seriously prejudice the interest of minority shareholders. (3) Where there is a deadlock in the management of the company: When shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity[2] in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. 426. A and B were the only shareholders and directors of a company with equal rights of management and voting power. After a time they became bitterly hostile to each other and disagreed about the appointment of important servants of the company. All communications between them were made through the secretary as they were not on speaking terms with each other. The company made large profits in spite of the disagreement. Held, there was a complete deadlock in the management and the company was ordered to be wound up. (4) Where public interest is likely to be prejudiced. Having regard to the provisions of section 397 and 398 (dealing with prevention of oppression and mismanagement) where the concept of prejudice to public interest is introduced, would appear that the Court winding up a company will have to take into consideration not only the interest of shareholders and creditors but also public interest in the shape of need of the community, interest of the employees, etc. (5) When the company was formed to carry out fraudulent or illegal business or when the business of the company becomes illegal. (6) When the company is a mere bubble and does not carry on any business or does not have any property (London & County Coal Co.. Re (1867) L.R. 3 Eq. 355]. PETITION (Section 439) An application to the Court for the winding up of a company is made by a petition. A petition for the winding up of a company may be presented, subject to the provisions of this Section, in the following cases 1. Petition by the company [section 439 (1) (a)]: A company may itself present a petition to the Court for winding up after it has passed a special resolution. A company does not often present a petition to have itself wound up by the Court as it can achieve this object more conveniently by passing a special resolution to wind up voluntarily. 2. Petition by any creditor or creditors [Section 439 (1) (b)]: A petition to the Court for the winding up of a company may be filed by any creditor or creditors. The term creditor is not limited to one to whom a debt is due at the date of the petition and who can demand immediate payment. Every person having a pecuniary claim against the company whether actual or contingent is a creditor and such a person is competent to file a petition for the winding up of the company. 3. Petition by any contributory or contributories [section 439 (1) (c)]. A contributory
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time after the presentation of a winding up petition and before a winding up order has been restraint of, further proceedings in the Court. Powers of Court on hearing petition (section 443): On hearing a winding up petition the Court may (a) dismiss it, with or without costs; or (b) adjourn the hearing conditionally or unconditionally; or (c) make any interim order that it thinks fit; or (d) make an order for winding up the company with or without costs or any other order as it thinks fit. The Court shall not refuse to make a winding up order merely because the assets have been fully mortgaged or because there are no assets at all. Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the Court may refuse to make a winding up order if the petitioners are acting unreasonably in seeking to have the company wound up instead of pursuing some other remedy available to them. CONSEQUENCES OF WINDING UP ORDER
made, the company or any creditor or contributory may apply to the Court for a stay of, or
Once the Court makes an order for the winding up of a company, its consequences date back to the commencement of wining up. The other consequences of winding up by the Court are as follows:
1. Intimation to Official Liquidator and Registrar (section 444): Where the Court makes an order for the winding up of a company, it shall forthwith cause intimation to be sent to the Official Liquidator and the Registrar of the order of winding up. 2. Copy of winding up order to be filed with the Registrar [section 455 (1) (1-A) and (2)1. On the making of the winding up order it shall be the duty of the petitioner and of the company to file with the Registrar within 30 days a certified copy of the order. 3. Order for winding up deemed to be notice of discharge [section 455 (3)]: The order for winding up shall be deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued. Where a servant of the company is on a contract of service for a fixed term and that term has not expired on the date of the order of the winding up of the company, the order operates as a wrongful discharge and damages are allowed for breach of contract of service and the servant is free from his agreement not to compete with the company. 4. Suits Stayed [section 446 (1)]. When a winding up order has been made, no suit or other legal proceeding shall be commenced against the company except by leave of the Court. Similarly pending suits shall not be proceeded with except by leave of the Court. 5. Powers of the Court [section 446 (2) and (3)]: The Court which is winding up the company shall have jurisdiction to entertain, or dispose of (a) any suit or proceeding by or against the company; (b) any claim made or against the company; (c) any application made under section 391 for compromise with creditors and/or members; (d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company. 6. Effect of winding up order (section 447): An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on their joint petition. 7. Official Liquidator to be Liquidator (section 449): On a winding up order being made in respect of a company, the official Liquidator shall, by virtue of his office, become the liquidator of the company. PROCEDURE OF WINDING UP BY THE COURT Official Liquidator (section 448): For the purpose of winding up of companies the Court (a) there shall be attached to each High Court an Official Liquidator appointed by the Central Government. The Official Liquidator shall be a whole-time officer. If the Central Government considers that there will not be sufficient work for a whole time officer, it may appoint a parttime officer to act as Official Liquidator: (b) the Official Receiver attached to a District Court for insolvency purposes shall be the
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seal;
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and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his conduct and dealings as an officer thereof.
8. Arrest of absconding contributory (Sec. 479). If at any time either before or after making a winding up order, the Court believes that a contributory is about to quit India or to abscond or to remove and conceal any pperty for the pmpose of avoid ingpayinent or avoiding examination. he may be arrested anjhe relevant books, papers and movable property may be seized. 9. Meeting of creditors or contributories (Section 557): In all matters relating to the winding up of a company the Court may convene meetings of creditors or contributories for the purpose of ascertaining their wishes.
DISSOLUTION OF COMPANY (Section 481) Dissolution puts an end to the existence of a company. A company which has been dissolved no longer exists as a separate entity capable of holding property or of being sued in the Court [Employers Liability Assurance Corpn. v. Sedgwick Collins & Co.. (1927) A.C. 95]. Grounds for dissolution: The Court shall make an order for the dissolution of a company (1) when the affairs of the company have been completely wound up, or (2) when the Court is of opinion that the liquidator cannot proceed with the winding up for want of funds and assets, or (3) for any other reason. The Court shall make an order for the dissolution of the company only when it is just and reasonable in the circumstances of the case that such an order should be made. The company shall be dissolved from the date of the order of the Court. Within 30 days of the order of the Court, the liquidator shall send a copy of the order to the Registrar who shall make in his books a minute of the dissolution of the company. CONTRIBUTORY Definition of contributory (Section 428): The term contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes the holder of any shares which are fully paid up. List of contributories: The list shall be prepared in two parts, viz., List A and List B. List A shall include the present members of the company, i.e., members whose names appear in the companys register of members at the time of the winding up of the company. List B shall include the past members of the company. i.e. members who ceased to be members within one year preceding the commencement of the winding up of the company. Liability of contributories (Section 426): in the event of a company being wound up every present and past member shall be liable to contribute to the assets of the company to an amount sufficient (a) for payment of (1) its debts and liabilities, and (ii) costs, charges and expenses of the winding up, and (b) for the adjustment of the rights of the contributories among themselves. Liability of present members: The liability of a present member (i.e. List A contributory) shall be limited (1) in the case of a company limited by shares, to the amount remaining unpaid on the shares; and (2) in the case of a company limited by guarantee, to the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up. Liability of past members: A past member (i.e. List B contributory) shall not be liable to contribute (1) if he has ceased to be a member for 1 year or more before the commencement of the winding up; (2) in respect of any debt or liability of the company contracted after he ceased to be a member; (3) if it appears to the Court that the present members will be able to satisfy the contributions required to be made by them. Where there have been several transfers of the same shares within a year before the winding
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A winding up in the case of which a declaration has been made and delivered is referred to as a member voluntary winding up and a winding up in the case of which a declaration has not been so made and delivered is referred to as a creditors voluntary winding up. Provisions applicable to a members voluntary winding up: Section 490 to 498 shall apply in relation to a members voluntary winding up (section 489). The provisions of these Sections are as follows:
1. Appointment and remuneration of liquidators (section 490): The company in general meeting shall appoint one or more liquidators for the purpose of winding up its affairs and distributing its assets. It shall also fix the remuneration, if any, to be paid to the liquidator or liquidators. Any remuneration so fixed shall not be increased in any circumstances, The liquidator shall not take charge of his office before his remuneration is fixed as aforesaid. 2. Boards powers to cease on appointment of a liquidator (section 491): On the appointment of a .liquidator, all the powers of the Board of directors, the managing or wholetime directors, and manager, shall cease except when the company in general meeting or the liquidator may sanction them to continue. 3. Power to fill vacancy in office of liquidator (section 492): If a vacancy occurs by death, resignation or otherwise in the office of any liquidator appointed by the company, the company in general meeting may fill the vacancy. For this purpose a general meeting may be convened by any contributory or by the continuing liquidator or liquidators, if any. 4. Notice of appointment of liquidator to be given to Registrar (section 493): The company shall give notice to the Registrar of the appointment of a liquidator or liquidators. It shall also give notice of every vacancy occurring in the office of liquidator and of the names of the liquidators appointed to fill every such vacancy. The notice shall be given by the company within 10 days of the event to which it relates. 5. Power of liquidator to accept shares, etc. as the consideration for sale of property (section 494): This was discussed in detail in the Chapter on Compromises, Amalgamations and Reconstructions. 6. Duty of liquidator to call creditors meeting in case of insolvency (section 495): if the liquidator is at any time of opinion that the company will not be able to pay its debts in full within the period stated in the declaration, he shall forthwith summon a meeting of the creditors. He shall lay before the meeting a statement of the assets and liabilities of the company. Thereafter the winding up shall become creditors voluntary winding up. 7. Duty to call general meeting at the end of each year (section 496): In the event of the winding up continuing for more than 1 year the liquidator shall call a general meeting of the company at the end of the first year from the commencement of the winding up. Likewise, he shall call a general meeting at the end of each succeeding year. He shall lay before the meeting an account of his acts and dealings and of the conduct of the winding up during the year. 8. Final meeting and dissolution (section 497): As soon as the affairs of the company are fully wound up, the liquidator shall make up an account of the winding up showing how the winding up has been conducted and how the property of the company has been disposed of. He shall then call a general meeting of the company and lay before it the accounts showing how the winding up has been conducted. The meeting shall be called by advertisement (a) specifying the time, place and object of the meeting; and (b) published not less than one month before the meeting in the Official Gazette, and also in some newspaper circulating in the district of the registered office of the company. Within one week after the meeting, the liquidator shall send to the Registrar and the Official Liquidator a copy each of the account and shall make a return to each of the holding of the meeting and of the date thereof. If a quorum is not present at the final meeting, the liquidator shall make a return that the meeting was duly called but could not be held for want of quorum. The Registrar on receiving the account and return shall register them. The Official Liquidator on receiving them, shall make a scrutiny of the books and papers of the company. The liquidator of the company and present officers shall give the Official Liquidator all reasonable facilities to make the scrutiny. On such scrutiny the Official Liquidator shall make a report to the Court. If the report shows that the affairs of the company have been conducted in a manner not prejudicial to the interests of its members or to public interest, then from the date of the submission of the report to the Court, the company shall be deemed to be
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date of the submission of the report to the Court, the company shall be deemed to be dissolved.
9. Provisions as to annual and final meeting in case of insolvency (section 498): If in the case of a members voluntary winding up the liquidator finds that the company is insolvent, sections 508 and 509 which deal with the duty of the liquidator to call a meeting of the company and of creditors at the end of each year (section 508) and final meeting and dissolution (section 509) in case of a creditors voluntary winding up shall apply as if the winding up were a creditors voluntary winding up and not a members voluntary winding up. It should be noted that in such a case section 508 and 509 shall apply to the exclusion of sections 496 and 497. 2. CREDITORS VOLUNTARY WINDING UP: A voluntary winding up of a company in which declaration of its solvency is not made is referred to as a creditors voluntary winding up. Provisions applicable to creditors voluntary winding up Sections 500 to 509 shall apply in relation to a creditors voluntary winding up (section 499). The provisions of these Sections are as follows: 1. Meeting of creditors (section 500): The company shall call a meeting of the creditors of the company on the day on which there is to be held the general meeting of the company at which the resolution for voluntary winding up is to be proposed, or on the next day. It shall send notices of the meeting to the creditors by post simultaneously with the sending of the notices of meeting of the company. It shall also cause notice of the meeting of the creditors to be advertised once at least in the Official Gazette and once at least in 2 newspapers circulating in the district of the registered office of the company. The Board of directors of the company shall cause a full statement of the position of the companys affairs together with a list of the creditors and the estimated amount of their claims to be laid before the meeting. It shall also appoint one of their members to preside at this meeting. It shall be the duty of the director so appointed to attend the meeting and preside thereat. 2. Notice of resolution to be given to Registrar (Section 501): Notice of any resolution passed at the creditors meeting shall be given by the company to the Registrar within 10 days of the passing thereof. 3. Appointment of liquidator (Section 502): The creditors and the members at their respective meetings may nominate a liquidator. If they nominate different persons, the creditors nominee shall be the liquidator. But any director, member or creditor of the company may apply to the Court for an order that the person nominated as liquidator by the company or any other person shall be the liquidator. The application shall be made to the Court within 7 days after the date on which the nomination was made by the creditors. If no person is nominated by the creditors, the person nominated by the members shall be the liquidator. Likewise, if no person is nominated by the company, the person nominated by the creditors shall be the liquidator. 4. Appointment of committee of inspection (section 503): The creditors at their meeting may if they think fit, appoint a committee of inspection consisting of not more than 5 persons. If such a committee is appointed, the company may also at a general meeting appoint not more than 5 members to the committee. However, the creditors may, if they think fit resolve that all or any of the persons appointed by the company ought not to be members of the committee of inspection. If the creditors and members do not agree on a common list, the Court may constitute a committee of inspection. 5. Liquidators remuneration (section 504): The committee of inspection, or if there is no such committee, the creditors, may fix the remuneration of the liquidator. Where the remuneration is not so fixed, it shall be determined by the Court. The remuneration shall not be increased in any circumstances. 6. Boards powers to cease on appointment of liquidator (section 505): On the appointment of a liquidator, all the powers of the Board of directors shall cease. But the committee of inspection, or if there is no such committee, the creditors in general meeting, may sanction the continuance of the Board. 7. Power to fill vacancy in office of liquidator (Section 506): If a vacancy occurs by death, resignation or otherwise, in the office of a liquidator (other than a liquidator appointed by, or by the direction of, the Court), the creditors in general meeting may fill the vacancy. 8. Power of liquidator to accept shares etc., as www.caclubindia.com/articles/winding-up-of-companies-8246.asp consideration for sale of property
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(i) in the case of a compulsory winding up of a company, the date on which a provisional
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reasonable cause to believe that a company is not carrying on business or is not in operation, business or is in operation. 2. Registered letter if no reply received within one month: If the Registrar does not
he shall send to the company by post a letter inquiring whether the company is carrying on
receive an answer within one month of the sending of the letter, he shall, within 14 days after the expiry of the month, send to the company by post a registered letter referring to the first letter, and stating that no answer thereto has been received. He shall further mention in the letter that if no reply is received to the second letter within one month, a notice will be published in the Official Gazette with a view to striking the name of the company off the Register. 3. Publication in the Official Gazette to strike off name: If the Registrar either receives an answer that the company is not carrying on business or does not receive any answer within one month of the sending of the registered letter, he may publish in the Official Gazette and send to the company by registered post, a notice that at the expiration of 3 months from the date of that notice, the name of the company will be struck off the Register and the company will be dissolved. The company may, however, within three months show cause why it should not be dissolved. 4. Same procedure in winding up if no liquidator is acting or no return is received: The above procedure is also followed where a company is being wound up and the Registrar has reasonable cause to believe either that no liquidator is acting, or that the affairs of the company have been completely wound up, and returns required to be made by the liquidator have not been made for a period of 6 consecutive months. When is a company dissolved? At the expiry of the time (i.e. 3 months) mentioned in the notice aforesaid, the Registrar may strike the name of the company off the Register, unless cause to the contrary is previously shown by the company. He shall then publish notice of this fact in the Official Gazette. It is on the publication in the Official Gazette of this notice that the company shall stand dissolved. Restoration of companys name Where the Registrar has struck the name of a company off the Register as a defunct company, the power of the Court to order the name of the company to be restored to the Register lasts for 20 years. The procedure to be followed for the restoration of the name of the company to the Register is as follows: 1. Application by aggrieved member or creditor within 20 years: If the company, or any member or creditor of the company, feels aggrieved by the name of the company having been struck off the Register, he may, within 20 years from the publication in the Official Gazette of the notice aforesaid, apply to the Court. 2. Restoration of name by Court on being satisfied: The Court may order that the name of the company be restored to the Register if it is satisfied that the company was, at the time of striking off the name, carrying on business or was in operation or otherwise that it is just that the name of the company be restored to the Register. 3. Directions by the Court: The Court may on passing any such order give necessary directions for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off. 4. Certified copy of order of court to be delivered to Registrar: Upon a certified copy of the order of the Court being delivered to the Registrar for registration, the company shall be deemed to have continued in existence as if its name had not been struck off. Letter or notice to company to be sent at registered office or care of director etc. or to subscribers to Memorandum: A letter or notice to be sent to the company under section 560 may be addressed to the company at its registered office, or if no office has been registered, to the care of some director, manager or other officer of the company. If there is no director, manager or officer of the company whose name and address are known to the Registrar, the notice may be sent to each of the persons who subscribed the Memorandum, addressed to him at the address mentioned in the Memorandum. The notice to be sent to the liquidator may be addressed to the liquidator at his last known place of business.
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Published in Corporate Law Source : self and ND Kapoor Other Articles by Melam Ram Pav an Kum ar
i believe the procedure, as narrated by you have undergone a change AnD the third mode of winding up no longer exist in the COMPANIES ACT, 1956. Kindly confirm..it would be of great help.
jyoti Wrote on 19 January 2011 Thnx sir. its just lyk summary of whole winding up chapter
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