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A study of the winding up of the

A study of the winding up of the COMPANY

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Winding up of Company: 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 thecompany, collects its debts and finally distributes any surplus among the members in accordance with their rights. All the provisions for winding up of the Company are enshrined from section 425 to section 590 and divided in eight parts. Object of Winding up of Company The object of winding up of a company is to realize the assets and pay the debts of the company expeditiously and fairly in accordance with law. At the end of the winding up the company will have no assets and liabilities. But that does not mean that the company ceases to exist on winding up. It continues to exist even after winding up and ceases to exist only after dissolution order is passed by the court. Thus, in between the winding p and dissolution, the legal status of the company continues. Kind of Companies can be wound up: Only a limited company can be wound-up. The term "winding-up" (or "wound-up") bears a similar meaning of "liquidation". It generally means that all the assets of the company would be realized (sold off and converted to cash) through a legal process in order to repay its debts. Winding-up would bring a company to an end. A limited company is a company that is registered under the Companies Ordinance. It is a separate legal entity (i.e. it can sue or be sued in legal proceedings). The liabilities of shareholders are limited to the value of the company's shares held by them (limited by shares). Another situation, which is not common in commercial organizations, is that the liabilities of shareholders are limited to the amount in which the shareholders have agreed to contribute to the company's assets if the company is being wound-up (limited by guarantee). An "unlimited company" or a sole trader is not a "company" in a strict sense. It is a business operated in the form of a sole proprietorship. In other words, the business is owned by an individual. A sole proprietor is solely and personally responsible for the liability of the business.

A partnership is a form of business owned by two or more persons (partners). The partners are personally jointly and severally liable (i.e. every partner should be liable) for the liability of the business. An overview of winding-up procedures: We can get a general picture on the winding-up procedures (except "voluntary Winding up) from the following steps: Firstly, issuing a written demand for debt repayment to the target company Secondly, presenting a winding-up petition to the Court and the company. Thirdly, Court hearing for the petition. Fourthly, granting of winding-up order by the Court. Fifthly, meeting of creditors and other relevant parties. Sixthly, appointment of liquidator.

Seventhly, realization and distribution of company's assets to the creditors. Eighthly, release of duties for liquidator. Lastly, dissolution of the company. Modes of Winding up of the company: A Company may be wound up in any of the following modes: 1. By the Tribunal i.e. compulsory winding up. 2. Voluntary winding up, which may be in two ways: (a) Member's voluntary winding up. (b) Creditor's voluntary winding up. 3. Winding up subject to supervision of Court. Winding up by the Tribunal: 1) 2) 3) If the company has, by special resolution, resolved that the company may be wound-up by the tribunal. If default is made in delivering the statutory report to the registrar or in holding the statutory meeting. If the company does not commence its business within a year from its incorporation, or suspends its

business for whole of a year. 4) 5) 6) 7) If the number of members are reduced then their required number. If the company is unable to pay its debts.6 If the tribunal is of the opinion that it is just and equitable that the company should be wound up. If the company is in default in filing up with the Registrar its balance sheet and profit and loss account for

five consecutive financial years. 8) If the company has acted against the interests of the sovereignty and integrity of India or security of any

state, friendly relation with foreign States, public order, decency and morality. Voluntary Winding Up: In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. A voluntary winding up may be done by the members as it may be done by the creditors. The circumstances in which a company may be wound up voluntarily are: 1. When the period fixed for the duration of the company in its articles has expired 2. When an event on the happening of which the company is to be dissolved as per its articles happens 3. The company resolves by a special resolution at a general meeting to be voluntarily wound up. A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof. Section 488 divides Voluntary Winding up in two parts a) Members Voluntary Winding up: A voluntary winding up in the case of which a declaration has been made and delivered in accordance with section 488 is referred to as a members voluntary winding up[Section 488(5)]. When the company is solvent and is liable to pay its liabilities in full, it need not consult the creditors or call their meeting. Its Directors or where there are more than two, the majority of its Directors may, at a meeting of board

make a decision of solvency which is verified by an affidavit stating that in their opinion company will be able to pay its debts in full within such period, not exceeding 3 years from the commencement of winding up, as may be specified in the deceleration. Such a deceleration within 5 weeks immediately preceding the date of passing of the resolution for winding up the company and be delivered to the Registrar for registration before the date. The deceleration must embody a statement of the companys assets and liabilities as at the practicable date before making the deceleration. The prescribed form for making deceleration of solvency is Form No. 149 of the Companies (Court) Rule 1959. Any Director making false deceleration shall be criminally liable, punishable with imprisonment extending up to 6 months or with fine extending up to Rs. 50,000 or with both. b) Creditors Voluntary Winding up: Where a deceleration of solvency of the company is no made and delivered to the Registrar in a voluntary winding up, it is a case of creditors voluntary winding up.[Section 488(5)]. Winding up subject to supervision of Court. When a company has a special or general resolution resolved to wind up voluntarily the Court may make an order that the voluntary winding up shall continue but subject to such supervision of the Court and with such liberty of the creditors, contributors or other to apply to the Court. And generally on such terms and conditions, as the Court thinks just [Section 522] The application of such intervention of the Court is made by the creditors, contributories or the voluntary liquidator. When there are irregularities or frauds in the voluntary winding up. The Court may have the regard to the wishes of creditors and contributors Persons may petition the Court for winding up: 1. The Company 2. Any creditor of the Company 3. Any contributory or shareholder. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of its fully paid shares. While every member of a company becomes a contributory, not every contributory is a member. Besides members, any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory. 4. The Registrar may petition for winding up in the following circumstances: (i) If default is made in delivering statutory report or holding the statutory report. (ii) If the company does not commence its business within one year from its incorporation or suspends its business for a whole year. (iii) If it appears to him either from the financial position of the company as disclosed in the balance sheet of the

company or from the report of a special auditor or an inspector that the company is unable to pay its debts. (iv) Where the Registrar is authorized by the Central Government to petition for winding up the company. (v) Where the number of members of the company fall below the statutory minimum. (vi) Where it is just and equitable that the company be wound up. 5. Any person authorized by the Central Government. Under section 243. If any report of an inspector appointed to investigate the affairs of the company discloses: -

(i) That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose (ii) That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report so to do, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so. 6. The Official Liquidator Official of the court attached to a Court where a company is already being voluntarily wound up and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributors or both. Liquidator can be released from the relevant duties in a winding-up proceedings: The liquidator can apply to the Court for the release of the duties once the followings have been accomplished: 1. All the assets of the company have been realized (i.e. all assets have been sold and converted to cash); 2. Investigations related to the winding-up proceedings are completed; and 3. A final dividend (if any) has been paid to the creditors to settle the debts The liquidator will send notices, together with a summary of the relevant receipts and payments in the liquidation, to the creditors and contributories of the company of the intention to apply to the Court for release from the duties as liquidator. At this point, any creditor or contributory has 21 days from the date of the notice to raise objection to the intended release of the liquidator. After obtaining the order for release from the court, the liquidator will file a "Certificate of Release of Liquidator" with the Registrar of Companies. The company shall be dissolved two years after the filing of the "Certificate of Release of Liquidator". Winding up of unregistered companies Any partnership, association or company, consisting of more than 7 persons at the time of winding up of petition is presented before the Court, will be deemed to be an unregistered company and may be wound up by the order of the Court. An unregistered company may be wound up by the court in the following circumstances: 1. 2. 3. Where the company has ceased to carry on its business. Where the company is unable to pay its debts. Where just and equitable, in the opinion of the Court.

It may be noted that since an unregistered company is not a company as defined in the Companies Act, 1956, it cannot be wound up under Part VII of the Companies Act, 1956, which deals with winding up of companies. Thus, an unregistered company is wound up as per the provision of Part X of the Companies Act 1956. Conclusion: After analyzing, it is found that the right to apply for winding up is the creature of statute and not of contract. But it should be noted 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. It is the stage, where by the company takes its last breath. Liquidation being the responsibility of the official liquidator is a risky process and needs expertise. Going by the experience, the official liquidator and their office attached to the High Courts had

their own difficulty and limitations in effectively completing the liquidation process. The New companies Bill contains a provision for appointing experts as liquidators and It is to be seen as to how the liquidation is done in future. It is very complicated area in Indian Company Law needing many reforms.

Leading Cases on Windingup 1. DUBAI Dry Docks Co. Ltd v. Hede Navigation Ltd. (1988) 64 Com Cases 1, In this case the company admitted its liability to pay repair charges and only wanted rescheduling of installments, the court ordered that the petition be advertise but after giving time to the company to establish its Bonafides. 2. CHEMICAL ENTERPRISES v. Kalpanalok Ltd. (1984) 55 Com Cases 522 P&H It was held by the court that where the creditor has not given his own notice, he cannot ask for the advertisement on the basis of another creditors notice if that other creditor has already been paid off by the company. 3. VYSYA Bank Ltd. v. RAHDHIT STEEL AND ALLOYS P. LTD (1993) 76 COM CASES 244 BOM It was held by the court that where the registered office of the company was not functioning and a different address was being given for correspondence, a service at that address and not at the registered office was held to be not sufficient to found a petition. The Petition was accordingly dismissed. 4. NAGESWAR RAO v. RAJAHEMUNDRY ELECTRIC SUPPLY CORPORATION LTD. (1957) The Court taking into account all the facts and circumstances of the case, the Court will have to see whether there is anything in the management and conduct of the company which shows to the Court that it should no longer be allowed to continue. 5. MOOL CHAND RASTOOGI v. ALLODIAL CHEMICAL MFG LTD., 1988 BCLC 63 COM CASES 22 (All)

A winding up order becomes effective forthwith and the properties and assets of the company are custodia legis. A compromise arrived at between the same parties in another court without disclosing to that Court that the company was ordered to be wound up is effective and unenforceable and winding of order cannot be recalled.

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