wp of company

8/8/2019 WP of Company

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Winding UP of Company

Meaning & Kinds: Winding-up in literal sense, means to bring to a conclusion or an

end by putting in order. It is defined as the process by which the life of a company isended and its property is administered for the benefit of its members and creditors[2].

Winding-up is different from insolvency and dissolution.

Winding up of a Company:-Winding up of a company referred to the process whereby

all the affairs of the company are wound up, all its assets are realized, its liabilities paid

off and the balance if any is distributed to its shareholders in proportion to their holdingin the company. When the company has been wound up, it is dissolved by order of the

Court i.e. its existence ceases.

Prof.L.C.B.Cower-"Winding up of a company is the process whereby its life is ended andits 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 debtsand

finally distributes any surplus among the members in accordance with their rights".

Winding Up and Dissolution:-The terms "Winding up" and "Dissolution" are sometimes

erroneously used to mean the same thing. However, they are quite different in theirmeanings. Winding up is a process whereby all assets of the company are realized and

used to pay off the liabilities and members. Dissolution of the company takes place after

the entire process of winding up is over. Dissolution puts an end to the life of the

company. A dissolution order passed by the Court is like the Death Certificate of thecompany.

Modes of Winding Up:-

A Company may be wound up in any of the following modes:1. By the Court i.e. compulsory winding.

2. Voluntary winding up, which may be

a) Member's voluntary winding up;b) Creditor's voluntary winding up;

3. Winding up subject to supervision of the Court.

1. By the Court i.e. compulsory winding.:-

Who can apply [S. 439]

An application to the court for the winding up of a company is made by a petition1 A

petition may be presented by any one of the following:1.Petition by Company :- The company may itself present a petition for winding up.

Petition by the conipahi will be particularly necessary when the only ground for winding

up is that the coi,.passecl a specj resolution to that effect. There mtst be a valid resoltition
http://www.articlesbase.com/law-articles/voluntary-winding-up-of-a-company-as-per-section4841-of-companies-act1956-242936.htmlhttp://www.articlesbase.com/law-articles/voluntary-winding-up-of-a-company-as-per-section4841-of-companies-act1956-242936.htmlhttp://www.articlesbase.com/law-articles/voluntary-winding-up-of-a-company-as-per-section4841-of-companies-act1956-242936.html


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to enable the company to take this step; Thus, Where a judge passed an order for winding

up on the ground that the majority of the shareholders at a meeting were in favour of

winding up, it was held that that was not, in the absence of a valid special resolution, asufficient ground for compulsory winding up.42 Again, the petition must be presented by

the company itself..

, inPatiala Bnaspati Co, Re:, An application for winding up of a company was made by

the managing director of the company. Rejecting the petition the coirt the petition bythe company must have behind it the decision of the general meeting. The managing

director or directors cannot constitute the company for the purpose. Where a winding

up petition was filed on behalf,of the company by a person who was not authorised by theboard of directors, the petition was held to be incompetent.

2. Creditors Petition [S. 439(2)] :- A creditor may apply for winding up. The word

creditor includes a secured creditor, debenture-holder46 and a trustee for debenture-

holders. Accordingly a secured creditor is as much entitled as of right to file a petition as

an unsecured creditor. Winding up is equally good whether it is obtained by a securedcreditor or an unsecured creditor. It is not even necessary for a secured creditor to apply

that he should give up his security.

Bukhtiarpur Bihar Light Rly Co v .s Union of India , AIR 1954 Cal 499. The CalcuttaHigh Court has observed that a creditor would not ordinarily be heard to urge that

winding up order should be made because the substratum of the company was gone, not

for the reason that he was technically and as a matter of taw barred from taking thatground at all, but for the reason that it was not proper ground for the creditor to urge

except in very special circumstances. Sometimes a creditors petition is opposed by

other creditors. In such cases the court may ascertain the wishes of the majority of the

creditors. But their opinion does not bind the court. The question will ultimately dependupon the state of the company. If the company is commercially insolvent and the object

of trading at a profit cannot be attained, winding up order would follow as a matter of

course .

3. ContributorysPerition :- On the commencement of the winding up of a company, its

shareholders are called contributories. Any contributory or contributories may present apetition for winding up.58 Where the ground of winding up is the reduction in

membership below the statutory minimum, any contributory or contributories may apply.

But when the application is founded on any other ground, it will be requisite that the

shares in respect of which the petitioner is contributory were originally allotted to him orhe has been the registered holder for at least si months during the eighteen months

immediately before the commencement of the. winding up, or the shares have devolved

on him through the death of a fojmer holderA question in this connection used to concern the courts in the past. Suppose,

there is a contributory holding fully paid-up shares so that his liability is nil. Similarly,


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suppose, the company has no or insufficient assets so that the contributories will get no

return of capital in the winding up. In such circumstances, a contributorys petition would

be rejected. The rule was that if he presents a petition, he must allege and prove, at leastto the extent of aprinia facie case, that there are assets of such amount as that in the

winding up he will have a tangible interest. The rule was followed by some High Courts

in India also. But now there is a clear provision in the Act which declares tliat acontributory shall be entitled to present a petition for winding up, notwithstanding that.he

may be the holder of fully paid-up shares or that the company may have no assets at all,

or may have no surplus assets left for distribution among the shareholders after thesatisfaction of its liabilities. Hence, at present, want of assets may be an element in

determining whether the petition is bona fide,but, except, to that extent, it will not be a

relevant consideration for determining whether winding up should be ordered or not.

4. Registrars Petition [S. 439(5)] The, Registrar of Companies is also entitled to presenta petition for winding up on any of the grounds of winding up by the court, except the

first, namely, that the company has passed a special resolution. But he shall not present a

petition on the ground of the companys inability to pay its debts unless it appears tohim either from the financial condition of the company as disclosed in its balance-sheetor from the report of a special auditor appointed under Section 233-A or an inspector

appointed under Section 235 or 237, that the company is unable to pay its debts, In all

cases, however, the Registrar has to obtain sanction of the Central Government to thepresentation of a petition and the latter shall not grant the sanction unless the company

has been afforded an opportunity to make its representation, if any.

5. Central Governments Petition -

The Central Government is also authorised by the Act, in certain cases, to present apetition for winding up. Section 243 enables the Government to petition for windin1up

where it appears from the report of inspectors appointed to investigte1 affairs of acompany iiider Section 235 that the business of the company has been conducted forfraudulent or unlawful purposes as explained in sub-clauses (i) and (ii) of clause (b) of

Section 237. The Government may authorize any person to act on its behalf for the

purpose.

Grounds of Winding up:- A company may be wound up at an order of the Court. This isalso called compulsory winding up. The cases in which a company may be wound up by

the court are given in Section 433. They are as follows:

1. $pecial resolution :- If the company has, by special resolution, resolved that it be

wound up by the court. The court is, however, not bound to order winding upsimply because the company. has so resolved. The power is discretionary and may

not be exercised where winding up would be opposed to public or companys

interests


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2. Defau1t in holding statutory meeting

If a company has made a default in delivering the statutory report to the Registrar

or in holding the statutory meeting, it may be ordered to be wound up.The petitionfor W.P. on .this ground can be presented either by theRegistrar or by a

contributory. If it is brought by any other person e.., .a creditor, it must be filed

before the expiration of fourteen days+after the last day on which the statutorymeeting ought to have been held. The power of the couttj& discretionary andinstead of making a winding up order the court may direct that the statutory report

shall be delivered or that the meeting shall be held.

3. Failure to commence business :- If a company does not commence its business

within a year from its incorporation or has suspended business for a whole year, itmay be ordered to be wound up Here again the power is discretionary and will be

exercised only when there is a fair indication that there is no intention to carry on

business. If the suspension is satisfactorily accounted for and appears to be due to

temporary - causes, the order may be refused.

Murlidhar versus Bengal steamship case:- To carry on its business, a companyemployed a steamer and two flats. The flats were acquired by the Government

during the First World War and the company. ias not able to replace them

immediately in view of the rise in prices. This resulted in suspension of businessfor more than a year. In a petition to wind up the company, it was held that the

suspension of business for a whole year is sufficiently accounted for and does not

furnish an indication that there is no intention to carry on the business.Where, however, there was failure to resume business for five years and the

prospects also seemed gloomy, winding up was ordered.

4. Reduction in membership :-If the number of members is reduced, in the case of a

public company, below seven, and in the case of a private company, below two,

the company may be ordered to be wound up.

5. Inability to pay Debts:- A company may be ordered to be wound up if it is unableto pay debts.

Statutory Notice:- Firstly, if a creditor to whom the company owes a sum

exceeding I lachrupees has served on the company, a demand for payment andthe company has for three weeks neglected to pay or otherwise satisfy him. Theexpression neglects to pay the sum demanded in Section 434(1)(a) is not

equivalent to the word omitted. Neglect to pay a debt ondemand is omission to

pay without reasonable cause. Failure to pay in spite of several communicationsincluding service of statutory notice was held to be evidence of heglect and

inability.The debt must be presently payable and the title of the petitioner demtnding itshould be complete. The debt must be really due. Where a company guaranteed

another mans debt and the liability under it had become established which the

company failed to pay, winding up was ordered.Winding up shall be refused if


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there is a bona fide and reasonable dispute as to a substantial part of the debt on

which the petition is based, because when a debtor-company believes even

wrongly that it is justified in law to refuse to pay, such a refusal cannot beregarded as neglect to pay. Where the object of a petitiori to wind up a company

is to bring pressure upon the company in order to make it pay the petitioner

cheaply and expeditiously when the company desires to dispute the debt in thecivil court, the petition is an abuse of the process of the court and is liable to be

dismissed. The true rule, which has existed for many years is that the court would

not allow a winding up petition to be used for the purpose of deciding a disprne-as to a debt which is raised bona fide on substantial grounds. Thus where a cricket

match, being insured, had to be abandoned on account of rains, the insurance

company appointed a surveyor to determine whether this type of loss was covered

by the terms of the policy, it could not be said that the company had neglected topay. MAJITHIA J of Punjab and Haryana High Court laid down the working

principles in terms of the following propositions: The principles on which th

company court acts are: (1) that the defence of the company is in good faith and

one of substance; (2) the defence is likely to succeed in point of law; and (3) thecompany producesprima facieproof of the facts on which the defence depends.

However,, where the dispute is not real, but is put forward by the company as acloak to hide its inability topay ,its debts, the application for winding up would

be allowed.

It is also necessary that the creditor should have delivered a demand under his

hand at the registered office of the company. Statutory notice is a highly formaland important document and it would appear to follow that the provision of the

Act as to its service upon the company must be strictly observed. Thus, where

the amount due was incorrectly stated in the notice, the petition failed. Noticeshould be served at the companys registered office. Where the registered office

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 a goodservice for the purposes of a winding up petition. Notice sent to the administrative

office of the company instead of the registered office was held to be not effective

service. Once the requirements of a creditors petition are fulfilled and there is anon-compliance with the statutory notice, winding up may be ordered and the

company will not be heard to say that the petitioner is acting malafides, or that he

has an alternative remedy or that the company is solvent or that the majority of

the creditors are opposed to winding up41 or that the petition was presented onlyto save the period of limitation.

.(b) Decreed Debt

Secondly, a company shall be deemed to be unable to pay its debts if execution or

other process issued on a decree or order of any Court in favour of creditor of the

company is returned unsatisfied in whole or in part In the case of a consentdecree and the failure of the company to pay according to the decree, the creditor

becomes entitled to an orderex debito justitiae. The question of company having


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an defence and the question of examining the solvency of the company are ruled

out.(c) Commercial Insolvency

Lastly, if it is proved to the satisfaction of the court that the ompany is unable to

pay itsdebts. In reference to the concept of unable to pay debts it has been

observed that though it is not necessary that there should be a statutory demand orany demand at all, he court would not be easily satisfied that a company is unable

to pay its debts from the mere non-payment of a debt which never demanded of it.

Coimbatore Transport Ltdv G. G. in Council, a company was ordered to be

wound up as it was unable to pay its taxes in spite of demands, nor was it able to

furnish security. Where the assets of a company were taken over by the State andin reply to the creditors claims and petitions, the company was only telling them

that it was trying to retrieve those assets and there was nothing to shOw any

benefit to the creditors in the continuity of the company, the court orderedwinding up

6. Just and equitable :-last ground on which the court can order the winding up of acompany is when the court is of opinion that it is just and equitable that the

company should be wound up. This gives the court a very wide discretionary

power to order winding up whenever it appears to be desirable. The court maygive due weight to the interest of the company, its employees, creditor and

shareholders and general public interest should also be considered. It is not

desirable nor possible to categorise facts that render it just and equitable to windup a company. The tendency to create categories or headings fs wrong; the

general words of the sub-section should remain general and not be reduced to the

sum of particular instances. But the circumstances in which the courts have in

the past dissolved companies on this ground can be resolved into generalcategories. And they are as follows:

(I) Deadlock :- Firstly, when there is dead1ock in the management of a company,

it is just and equitable to order winding up.

Yenidje Tobacco Co Ltd, Re:

WandR, who traded separately as cigarette manufa6turers, agreed to amalgamate

their business and formed a private limited company of which they were theshareholders and the only directors. They had equal voting rights and, therefore,

the articles provided that any dispute would be resolved by arbitration, but one of

them dissented from the award. Both then became so hostile that neither of them

would speak to the other except through the secretary. Thus there was a completedeadlock and consequently the company was ordered to be woui3d up although its

business was flourishing.

(2)Loss of Substratum :- Secondly, it is just and equitable to wind up a companywhen its main

object has failed to materialize or it has lost its substratum.German Date Coffee Co, Re:-company was formed for the purpose ofmanufacturing coffee from dates under a patent which was to be granted by the


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Government of Germany and also for working other patents of lar kind. The

German patent was never granted and. the company upon other patents.1I But, on

the petition of a shareholder, it was held that the substratum of the company hadfailed, and it was impossible to carry out the objects for which it was formed; and,

therefore, it was just and equitable that the company should be wound up.

(3) losses :-

Thirdly, it is considered just and equitable to wind up a companywhen it cannot carry on businss except at losses. It will be needless, indeed, for acompany to carry on business when there is no hope of achieving the object of

trading at a profit. But a mere apprehension on the part of some shareholders that

the assets of the company will be frittered away and that loss instead of gain willresult has been held to be no ground

(4) Oppression of Minority :- Fourthly, it is just and equitable to wind up a

company where the principal shareholders have adopted an aggressive oroppressive or squeezing policy towards the minority. The decision of the Madras

High Court inR. Sabapathi R v Sabapathi Press Ltd,6is an illustration in point.

The Court observed: Where the directors of a company were able to exercise a

dominating influence on the management of the company and the managingdirector was able to outvote the minority of the shareholders and retain the profits

of the business between members of the family and there were several complaints

that the shareholders did not receive a copy of the balance-sheet, nor was theauditors report read at the general meeting, dividends were not regularly paid and

the rate was diminishing, that constituted sufficient ground for winding up.

PROCEDURE OF WINDING UP

After hearing a petition for winding up the Court may dismiss it or adjourned it.

pass an interim order or make an order for wind up. This order may take effect

either immediately or after a lapse of certain period. say six months.Commencement of winding up is not from the date of the order, but is deemed to

be from the time of presentation of the petition itself. But, where the winding up

order is response to a Special Resolution of the Company, the commencement

of winding up is deemed to be from the date of passing of resolution.

Application: As mentioned earlier, an application for winding up shall be in the form of

Petition , with required variations and shall be submitted in duplicate. The Registrar of

the Court shall note on the petition the date of its presentation.

Notice:- The registrar of the court immediately on its admission of the petition sende the

notice together with the copy of petition to the company where the petition moved byCreditors or members.

Verification: The petition should be signed by a proper person, but in case it is

not properly signed it is a mere irregularity and can be cured at any tune. It


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should also be certified by an affidavit of petitioner, and if there are more than

one petitioner, by tin affidavit of at least one of the petitioner

Advertisement: Once the petition is filed, it in posted the judge its chambers for

admission and fixing of date, for directions as to the advertisement to be pubIiah,

the persons, if any, on whom the petition copy is to be the judge may, if hethinks fit, direct that notice begiven to the company before advertising the petition .

In answer to a notice to show cause an to why a petition for winding up be not admitted,

the Company may w cause and contend that the filing of the petition amounts to an abuseof the process of the Court, There is however no prescribed form for notice, nor is there a

right in a Company to be issued a notice before site petition is admitted or before the

Court fixes the date for hearing.

Withdrawal :- Once the winding up petition is flied, it can not be withdraw without

leave of the Court , and if the petition has been advertised ,the application for leave towithdraw shall not be heard at any time before the date fixed in the advertisement for

hearing of petition.

Hearing:- on hearing a winding up petition the court may(a) dismiss it with or withoutcosts. Or adjourned the hearing or make interim order (d) made an order for winding up

the Company an with or without. Or make an order that it thinks fit

Provisional Liquidator( Appointment of Liquidator): After the presentation of the

winding up petition and before the making of a winding up order. the Court may appointa provisional Liquidator to take charge of the Company. But before finalizing such order,

the Court must give a notice to the Company and also give it a reasonable opportunity to

make its representation, unless in the special circumstances the Court decides to dispense

with the provision If a winding up order is made, the Provisional Liquidator becomes theOfficial Liquidator. Unfortunately, the Act itself does not provide any set criteria for the

appointment of a Provisional Liquidator. though The Court can appoint a Provisional

Liquidator when the company is obviously insolvent .when the petition is presented bynominee oldie Central Government on ground that it ii expedient in the public Interest

that the Company should be wound up, the public Interest must be given full weight,

though that fact by itself Is not conclusive enough for the appointment the ProvisionalLiquidator,

Stay of Proceedings before Order [S. 442] Even before any order is made by the court,

the company, any creditor or contributory may ask the court that proceedings against the

company pending before the Supreme Court or any High Court should be stayed or thosepending before any other court should be restrained, the court may pass an order as it

thinks fit. The power of the court is extensive and covers all kinds of proceedings,

whether of civil, criminal or revenue nature. But it will be used only in circumstances ofreal need.


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Statement of Affairs [S. 454] :- Within twenty-one days of the date of the winding up

order or where a provisional liquidator is appointed, from the date of that appointment, a

statement as to the affairs of the company has to be stibmitted to the Official LiquidatorThe statement has to be submitted and verified by the director, manager, secretary or

other chief officer of the company or such persons as the Official Liquidator, subject to

the direction of the court, may require. The statement should show the followingparticulars:

1. the assets of the company, showing separately cash in hand andat bank and negotiable

securities;2. its debts and liabilities;

3.names and addresses of the companys creditors indicating the amount of secure or

unsecured debts;

4. the debts due to the company and the names and addresses of the persons from whomthey are due and the amount likely to be realized;

5. such other information as may be required.

Report by OfficicIl Liquidator [S. 455] As soon as practicable after receiving thisstatement, but within six months of the order, the Official Liquidator is required :to

submit apreliminary report to the court showing1. thmount of issued and paid-up capital and the estimated amount of assets and

liabilities;

2. if the company has failed, the causes of the failure;

Committee of inspection [S. 464] :- The court may order the appointment of a COI withthe liquidator. The liquidator has then, within two months, to summon a meeting of the

creditors for determining the membership of the committee. Within fourteen days of the

creditors meeting he shall call a meeting of the contributory to consider the creditors

suggestions with respect to the membership of the committee. In case there is a conflictof opinion, the liquidator should apply to the court for a final decision.

The committee shall not consist of more than twelve members. It shall have the right to

inspect the liquidators accounts. The quorum for a meeting of the committee 1/3 rd of tietotal number of its members, or two, whichever is higher. The committee may meet at

such times as it may from time to time appoint. The liquidator or any member of the

committee ma call a meeting as and when he thinks necessary

Settlement of List of Contributory:- The court has the power to cause the assets of thecompany to be collected and applied in discharge of its liabilities. For this purpose, the

court has the power to make a list of such shareholders (called contributories) as ar

liable to contribute to the assets of the company. If this requires rectification of theregister of members, the court may do so in all cases where rectification is required in

pursuance of the Act. The court may, after ascertaining the sufficiency of the companys

assets, proceed to make calls on all or any of the contributories requiring them, within thelimits of their liability, to pay any money which the court considers necessary to satisfy


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the debts and liabilities of the company, and the expenses of winding up and for the

adjustment of the rights of the contributories. The courts order, subject to any right of

appeal, is conclusive evidence of the money due from the contributory.

Public 1xamination [S. 478] :- Where the Official Liquidator has made a report to the

court stating that in his opinion a fraud has been committed by any person in thepromotion or formation of the company, or by any officer of the company since its

formation, the court may direct that the person or officer may appear before the court andbe publicly examined.88 Examination- shall relate to the promotion or formation of the

company, or to the conduct of its business or the persons conduct and dealings as an

officer. The necessary conditions for exercising the power to order public examinationare

1. that the Official Liquidator has made a further report;

2. that such report contains a finding of fraud;3. the finding of fraud must be against the person whose examination is sought;

4. the individual must be one who has taken part in the promotion or formation of the

company or who has been an officer of the company.Thus even where the report of an Official Liquidator contains allegations of fraud, suchas over-borrowing by the company on forged documents, the court will not order the

examination of an officer unless the report attributes to him some specific acts of fraud.9

If the allegations are of specific nature, it will not be necessary for the liquidator to offer

any proof. A public examination would not have been necessary if proofs were alreadyavailable.

Liquidator , its Position , power , Duties and Functions

Liquidator - A Liquidator is a person appointed to take charge of the assets of theCompany, once it goes into WP. He maybe any person chosen by themembers/creditors (depending on what kind of winding up proceeding it is).


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Official Liquidator - He is a Liquidator who is permanently attached to

High court and is officer of court appointed by central Government. An Official

Liquidator, is appointed a Liquidator of the Company in all cases of winding up byCourt.

Provisional Liquidator( Appointment of Liquidator): After the presentation of thewinding up petition and before the making of a winding up order. the Court may appoint

a provisional Liquidator to take charge of the Company. But before finalizing such order,the Court must give a notice to the Company and also give it a reasonable opportunity to

make its representation, unless in the special circumstances the Court decides to dispense

with the provision If a winding up order is made, the Provisional Liquidator becomes theOfficial Liquidator. Unfortunately, the Act itself does not provide any set criteria for the

appointment of a Provisional Liquidator. though The Court can appoint a Provisional

Liquidator when the company is obviously insolvent .when the petition is presented by

nominee oldie Central Government on ground that it ii expedient in the public Interestthat the Company should be wound up, the public Interest must be given full weight,

though that fact by itself Is not conclusive enough for the appointment the ProvisionalLiquidator,

Appointment of Liquidator in Voluntary Winding Up:- A liquidator is appointed andhis remuneration fixed by the company in general meeting of the shareholders. The

remuneration so fixed is not to be increased in any circumstances whatsoever, with or

without the sanction of the The liquidator is not to take charge unless his remunerationis so fixed.12 Within ten days of the appointment, the company should give a notice to

the Registrar.13 The liquidator within 30 days of his appointment, has to publish in the

Official Gazette, and deliver to the Registrar for registration, a notice of his appointmentin the prescribed form.14 If a vacancy occurs, the coppany may in general meeting fill

the vacancy and again, within ten days, a notice of the change must be given to theRegistrar. Thp liquidator has also to inform the Registrar of his appointment within thirtydays and publish the fact in the Official Gazette.

On the appointment of the liquidator all the powers of the board of directors shall c6me

to an end except when the company or the liquidator sanction them to continue.

The basic difference between an official Liquidator and a Liquidator is that the former isan officer of Court who takes charge in cases of winding up by Court, whereas the latter

is an ordinary person (i.e., one who is not an officer as above) who is appointed by either

the members/creditors, when the Company goes in for CWP. A Liquidator is appointed in

all cases of winding up whether due to commercial insolvency or other wise, but an

Assignee is appointed only in cases of winding up due to insolvency of the Company.

Notice of appointment ofLiquidator - The notice of appointment which everyLiquidator is required to publish in the official gazette tinder section 516, shall he in


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Form N. 151 and the notice of the appointment to be delivered to the Registrar of

companies shall he in Form No. 152.

Security by Liquidator appointed by Court. Unless otherwise ordered, everyLiquidator appointed by the Court ma voluntary winding up, other than the official

Liquidator shall, before entering upon his duties as a Liquidator, furnish security in suchsum and in such manner as Court direct.

Removal of Liquidator[S. 515] :- However, in the exercise of his powers, the liquidatorshall be subject to the control of the court.45 Any creditor or contributory may apply to

the court with respect to any exercise or proposed exercise of the liquidators powers. If

the court finds that, from any cause whatever, no liquidator is functioning the court may

appoint the official liquidator or any other person as the liquidator of the company. Thecourt also has the power, on cause shown, to remove a liquidator and appoint some other

person in his place.

InDr Hardit Singh. vRegistrar of Companies, the. Delhi High Court ordered the removal

of a voluntary liquidator on the grounds that he had not deposited certain amounts asrequired by Section 553 of the Act, that he had been uncooperative and defiant regarding

the recovery of the companys claims and that the process of liquidation was a Elusiveaffair between the ex-managing director and the liquidator.

A liquidator is not removable only on the ground that he was a shareholder

or director or because the creditors or members in majority demand it.

The words on cause shown have not quite the effect of if the court shall think fit.

JESSEL MR said in Sir John Moore Gold Mining Co, Re, they point to some unfitness

of the personit may be from personal character, or from his connection with other

parties, or from circumstances in which he is mixed upsome unfitness in a wide sense

of the term. But, as pointed out by the Court of Appeal in Adam Eyton Ltd, Re, thisdefinition was not intended to be exhaustive, and if the court is satisfied on the evidence

that it is desirable in the interest of all those interested in the assets that a particularperson shall not manage the assets, the court has power to remove him, without there

being shown any personal misconduct or unfitness.

The liquidator or any contributory or creditor may apply to the court to determine any

question arising in the winding up of the company or to exercise all or any of the powerswhich the court may exercise if the company were being wound by the court. In the

exercise of this power the court stayed a

Powers /Duty and Functions of Liquidator:- the Company, whereas an Official

Liquidator is not an agent of the Company but is an officer of the Court. But when itoomes to their powers or functions there is no difference between them, i.e., the mode of

appointment makes no difference to the duties which a Liquidator performs of the powers

which he yields. of Directors and hence exercises which the Board had, for example,


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1. control over the assets of the Company - though he cannot deal with them

arbitrarily;

2. enter into contracts on behalf of the Company, if he decides to continue with the

Company business;

3. take legal action on behalf of the Company;

4. make calls for any unpaid amount on the shares;

5. press foe repayment of any debts owned to the Company;

6. ask for the return of Company property in possession of any director or member;

7. sign cheques etc. on behalf of the Company;

8. make a list of contrubutoirs, and creditors of the Company, decide on the extent of

their claims and settle them; and

9. such other powers necessary for the beneficial conduct of winding up. Most of

these powers are given under sec. 457 of the Act, and they can be exercised with

or without sanction of the Court depending on the nature of the power;

Functions :-

1. to take into their custody the property of the Company;

2. to maintain proper accounts and have them regularly audited;

3. so make reasonable enquiries into any debts or claims made by amember/creditor before allowing them;

4. to ascertain the debts or claims owned to the Company and take steps to realize

them;

5. if he decides to continue with the business of the Company then to conduct it in

a reasonable and prudent manner to serve the best interests of the parties

concerned;

6. to make a report to the Court within 6 months of the order in cases of winding upby Court;

7. to ascertain whether any fraud has been committed by any officer of theCompany and to make such a report to the Court;


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8. in cane of members voluntary winding up if the debts have not been paid off

within prescribed period he is required to call a meeting of the creditors and lay

before them a statement of assets and liabilities of the Company; and

9. if she winding up continues for more than a year he is required to call a general

meeting at the end of first year and of each succeeding year, to inform themeeting of the progress made and of the assets and liabilities of. the Company;

10. in case where a Committee of Inspection is to be appointed, he is required to calla meeting of the committee within 2 months convene a meeting of the creditors

to decide about the committee of Inspection and within 14 days give them

report about the result of meeting .

Duty of Liquidator:- In a winding up by the court, the liquidator is an officer of the court,and not an agent of the parties concerned. In a voluntary winding up, he is not an officer

of the courf. He owes his appointment to the company in general meeting. In any case,

the duties of liquidators of both kind are more or less of the same nature. In the conductof winding up they have to perform basically the same functions.

1. They have to take into their custody property of the company

2. to keep book recording proceedings at meetings:

3. to have their accounts audited; to call meetings of committees of inspection;

4. to call meetings of membrs and creditors.

5. He was to keep the moneys received by him as such in a special account in any

Scheduled Bank to be entitled the Liquidation A/C of.... The court may,however, permit him to open any other account and to operate the same as

directed for beneficial winding up.

6. He should not hold the money for more than 10 days in his hands because he has

then to pay interest @12% and incidental expenses and also take the risk of losingoffice. The bank in which such an account is opened becomes liable if through

negligence any loss takes place to the liquidation account.

VOLUNTARY WINDING UP :- INTRODUCTION - It is not necessary that a

creditor or member or the Registrar should go in for the winding up. As seen in Sec. 433.

the Company itself may voluntarily go in for winding up. When the Company wants to


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wind itself up it can to do only after the passing of a resolution. These resolution can be

ordinary as well As Special Resolution.

Ordinary Resolution :- At, ordinary resolution means one passed by a simple majority ofthe person present and voting. A Company stay pass and ordinary resolution for winding

up in two situations-

(a) if the Company was formed for a fixed time period, say for 5 years, then at the

efflux(end) of the period, and

(b) if the Articles of the Company specify an event, on the happening-of which theCompany would go in for dissolution, risen the Company stay pass an ordinary resolution

for dissolution on the happening of this event.

Special Resolution:- a Company may pass, special resolution for winding up, ,of

the.com. in all other situation, tin covered above, It in neither necessary to assign any

reason for passing such a resolution nor is one normally given. The only requirement fora valid resolution is that it should comply with the requirements Generally speaking,

the Court dons not interfere if the resolution of the Company is valid.

1. The Decision to liquidate :- Liquidation may take place for reasons other than

insolvency, for example,(a) upon completion of a project for which the Company was formed;

(b) upon elapse of the hose period for which the Company was formed;

(c) in order to resolve a dispute between share holder;(d) upon sale of business etc. In all these cases, if the directors can swear a

declaration of solvency (discussed below), the liquidation may proceed as a

members voluntary winding up.In cases where the Company is declared insolvent, the decision to wind up is

usually taken out of the hands of the Directors, as the decision to liquidate is not

made till there is no other alternative left. Much insolvency could be avoided bysound management and paying proper attention to early warning signals. In cases

where the decision to liquidate is not left so as to become inevitable, Directors

may have to consider the possibility to liquidate in the following circumstances:

(a) Company though yet solvent is suffering constant losses:(b) Where the Company is faced with sudden and unavoidable crisis which may

in all probability have adverse repercussions. for example, lost of key personnel,

or technological change making the product obsolete, etc.;

(c) lack of adequate finance;(d) inability to meet its liability as and when they arise;

(c) where liabilities exceed assets, etc.


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Declaration of Solvency:- In case of solvent companies, before members voluntary

liquidation- takes place, a declaration of solvency must be completed, sworn and as per

company law rules,, which provides that,

(i) such a declaration has to be made by a majority of the Directors at a Board meetingand verified by an affidavit declaring that they have made a full inquiry into the affairs of

the Company and have formed an opinion that the Company has no debts or that it willbe able to pay its debts in full within 3 years from commencement of winding up;(2) the declaration to be-effective must be made within 5 weeks immediately before the

date of the resolution and delivered to the Registrar for registration before that date;

(3) the declaration should be accompanied by a copy of the auditors report on profit and

loss accounts and balance sheet of the Company prepare, upto the date of the declarationand should also carry a statement of Companys assets and liabilities upto that date; or a

punishment of imprisonment of 6 months and or fine of Rs,5000/- attaches to the

Directors making this declaration without having any reasonable basis to do no.

Notice to creditors :- In case of insolvent companies, following the decision to liquidate,

the Directors are required to send a notice to the creditors. The normal rules relating tonotice are to be followed. A statement of the affairs of the Company areto be put before

the creditors and thereafter, the winding up proceeds as if it is a creditors voluntarywinding up.

MEMBERS VOLUNTARY WINDING UP :- After making the declaration of

solvency, the Company must hold a general meeting and pass the requisite resolution

for winding up. A notice of the resolution must be given in the Official Gazette and

also in some newspapers circulating in the district where the registered office of theCompany is situated within 14 days of the passing of the resolution l. Non compliance

with this requirement entails a fine ofRa.5O per day of default, If at that meeting a

Liquidator has also been appointed, then he is also deemed to bean officer of theCompany and is liable to be fined. Failure so advertise in the newspapers is a curable

irregularity. The winding up is deemed to commence from the time of passing of the

resolution. It is important to note that commencement is with reference to time and notthe date. After commencement of the winding up, the Company ceases to carry Out its

business, except to the extent necessary for the beneficial winding up of the Company.

The Company however continues to retain its corporate status and power till it is finallydissolved.

Appointment of Liquidator:


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Reconstruction in winding up; Sec. 494 provides that, where the Company in liquidation

propos to sell its business or property to another Company, the Liquidator may, with the

Sanction of a special resolution of the Company, received as consideration for thetransfer, shares or other like interest in the transferee Company for distribution among

members of the transferor Company. or ester into any other arrangement whereby the

members of the Company participate in the profits of the transferee Company or receiveany other benefit there from either in lieu of receiving cash, shares, policies or other like

interests or is addition to them [Sec494(l)1 The resolution so authorizing the Liquidator,

may be passed any time before or concurrently with a resolution for voluntary winding upor for appointing Liquidators and will not be invalid by lesson only that it was so passed.

Such a sate/arrangement shall be binding on the members of the Company, hut if any

member, who has not voted in favour of the solution expresses his dissent from it in

writing addressed to the Liquidator and leaves a copy of the same at the Companysregistered office within 7 days after the passing of the resolution, he may require the

Liquidator either to abstain from carrying the resolution into effect, or to purchase his

interest at a price to be determined by agreement or by arbitration. If, however, the

Liquidator elects to purchase the members interest, he shall pay the purchase moneybefore the Company is dissolved. Sec. 494 is applicable to purely voluntary winding up

and where it is not so, it is sot necessary to pass a special resolution. In the latter case, thedissenting shareholder also does not have a right. Sale under this section in also binding

on the creditor The assets that can be disposed of are those which exist at the time of

liquidation and not the assets which come to the Company by subsequent calls. So also,

no disposition of assets will be valid if it imposes a condition precedent on anyshareholder to pay premium on the shares of the transferee Company, though the

agreement many provide for partly paid up shares in lieu of fully paid up shares.

Duty to call creditors meeting: Sec. 495 provides that a Company has not been able to,

or, in the opinion of the Liquidator will not be able to, pay its debts in full within theperiod stated in the declaration of solvency, he should immediately summon a meeting

of the creditors and lay before them a statement of the assets and liabilitien of the

Company, and, thereafter the winding up shall proceed in the manner of a creditorsvoluntary winding up. Where the liquidation Continues for more than a year the

Liquidator has to call a general meeting of the Company at the end of first year and at

the end of each subsequent year, within 3 months from the end of each year or suchlonger period as the Central Government may allow .

Final Meeting and Dissolutions - It provides that an soon as the affairs of the

Company are fully wound up, the Liquidator shall, (a) make up an account of the winding

up, showing how the winding up has been conducted and the Company property disposedof, and (b) call a general meeting of the Company for the purpose of laying the account

before it and explaining it. The words as soon as the affairs of the-Company ate fully

wound up do notimport a condition precedent to dissolution and it cannot be contendedthat if outstanding claims remain, the affairs cannot be said to have been wound up. The

meeting is to be called by advertisement specifying the time and place and object of the


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meeting and published at least a month Before the meeting in the Official Gazette

along with some other newspapers circulating in the district where the registered

office is situated Failure to call the meeting is punishable with a fine which may

extend to Rs.500/-.

After holding the meeting, the Liquidator is required to send a copy of the

account to both the Registrar and the Official Liquidator, and, also make a returnto each of them of the holding of the meeting and the date of holding it .

On receipt of the account and return, the Registrar is required to immediately

register them. So also, the Official Liquidator is required to make a scrutiny of the

books and papers of the Company, and for this purpose may ask for the

cooperation of both the Liquidator and the past and present officials of the

Company: If after scrutinizing the books, he comes to the conclusion that the

affairs of the Company have not been conducted in a manner prejudicial to the

interests of either its members or the public, then from the date of the submission

of the report to the Court, the Company shall be deemed to be dissolved [Sec.497 (6)]. This date thus determines the term/us a quofor the dissolution of a

Company. But if the Official Liquidator makes a report that the affairs 0f the

Company have been conducted in a manner prejudicial to either the members or

the public or both.

CREDITORS VOLUNTARY WINDING UP :- the test for distinguishing between

members voluntary winding up and creditor voluntary winding up is whether a

declaration of solvency has been made, If it has been made it is a members

voluntary winding up, if it is not made then it is a creditors winding up, even if

they be solvent and in such situation tht provisions under Ss. 500-509 becomes

applicable. The procedure to be followed in such cases is:

1. Creditors Meeting: In this form of winding up, the Company must call a

meeting of the creditors either on the same day on which it has called a general

meeting of its members or the very next day. Notices of this meeting must be

sent to the creditors

simultaneously with notices of the meeting of members and should also be

advertised at least once in the Official Gazette and once in two newspapers

circulating in the district where the registered office/principal place of business is

situated. to voluntarily wind up, omission to convene creditors meeting is only anirregularity and can be coned, and not an illegality which vitiates the resolution for

winding up the Company.The Beard of Directors are to lay in she creditors meeting, a complete and

comprehensive statement relating to the Companys affairs, along with a list of thecreditors of the Company and the amount of their claim against the Company. One of the

Directors is appointed u/Sec. 500(3) to preside over this meeting and he shall be duty


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bound to do so. Failure to comply with this provision will render both the Company and

the Directors liable to a fine extending upto Rs. I 000/- but merely because a fine has

been imposed will not make the proceedings of the meeting invalid. Rules relating toholding of creditors meeting are the same as in case of meeting held under a compulsory

winding up order. Thus, all resolutions must he passed by a majority in value and

number, and if they are passed by a majority to value only they are invalid. All validresolutions passed at the meeting must be notified to the Registrar within 10 days of their

passage, sad any default in the regard is punishable with a fine ofRs.50/-per day of

default. In case a Liquidator has also been appointed, he would be deemed lobe an officerof the Company for this purpose and would also be held liable.

Committee ofInspection: The creditors have been given an additional right under Sec.

503, to appoint a Committee of Inspection, consisting of not more than 5 members. But

once the creditors appoint such a committee, then, the members also get a right to appointnot more that 5 members to the committee. If the creditors object to any one or all of the

members the nominees appointed by members to act as such the matter becomes subject

to the direction of the Court, and the Court may, in such Situations also appoint someother persons to act as members.The following rules shall apply to the Committee:

t) The Liquidator or any member of the Committee may call a meeting of the Committee;

u) The Committee shall meet at such times as may be appointed from time to time;

iii) One third of the number of members subject to a minimum of two shall form the

quorum.iv) The Committee may act by majority.

v) Continuing members shall continue the formalities of the Committee not with standing

vacancy provided there are at least two members.

Appointment of Liquidator:

Remuneration:- The remuneration of the Liquidator (s) is to be fixed either by thecreditors or the committee; and thus remuneration cannot be increased under any

circumstance. On appointment of Liquidator, all the functions of the board cease, except

so far as sanctioned by the committee or the creditors in their general meeting.

Statement of affairs: The statement should contain

(i) assets of the Company, showing separately the cash in hand, at bank and negotiable

securities:

(ii) the debts and liabilities of the Company;iii) names and addresses of the Companys creditors, indicating the amount of tecured or

unsecured debts;

(iv) the debts due to the Company and the names and addresses of the debtors and theamounts likely to be realized from them; and

(v) such other information as may be required.


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Powers of Liquidator:-

Meeting and Dissolution: In case the winding up continues for more tan a year, the

Liquidator it required to call a meeting of the creditors., at the end of the first year andend of the each subsequent year, and lay before them a comprehensive statement in the

prescribed format, containing detailed particulars in respect to the proceedings and theposition of the winding up. A copy of the statement along with an affidavit- verification

is to he filed with the Registrar also.As soon as the affairs of the Company are finally wound up, the Liquidator must make an

account of the winding up, showing how it has been conducted and the property of the

Company disposed of, and call a general meeting of the Company and the creditors asslay these matters before them.

The final meeting must be called by means of advertisement in the Official Gazette,published at least a month in advance of the meeting, and also in some newapaper

circulating in the relevant district. Failure to call a meeting in punishable with a fine

which may extend to Rs. 500 The quorum for the meeting is two.

A copy of the accounts and return of holding the meeting is to be sent to both the

Registrar and the Official Liquidator, within one week of the meeting (if the meetinga are

held on different days then within a week of the later meeting). Failure to comply withthis provision will make him liable to a fine of Rs. 500/. per day of default. Oat receiving

the statement and the return the Registrar shall immediately register them.

Just as in case of members voluntary winding up, the Official Liquidator wouldscrutinize the books of accounts etc., and if he is of the opinion that the affairs of the

Company have not beets carried out ma manner prejudicial to its member, or public, he

shall give a report stating that fact, and, the Company shall stand dissolved from the date

of submission of such report. In case the report is adverse, he may be required by theCourt to submit a second report, and the Court either dissolves , the Company on receipt

of a second report or make any other suitable order. But winding up shall not be deemed

to have been concluded unless compliance had been made with rule 284In case of the Company wound-up voluntarily, or under the supervision of the Court, at

the date of dissolution of the Company, unless at such date any funds orassess of the

Company remain unclaimed or undistributed in the hands or under the control of theLiquidator, or any person who has acted at the Liquidator, in which case the winding up

shall not be deemed to be concluded until such funds or assets have euther been

distributed or paid into the Companies Liquidation Account in the Reserve Bank of India.


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wp of company

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