Winding up of companies

4. Exercise and control of liquidators powers (section 460):

(1) The liquidator shall, in the administration of the assets of the company and the distribution thereof among creditors, have regard to any directions which may be given by resolution of the creditors or contributories at any general meeting or by the committee of inspection. Any directions by the creditors or contributories at any general meeting shall override any directions given by the committee of inspection.

5. Meeting of creditors and contributories: The liquidator may summon general meetings of the creditors or contributories whenever he thinks fit for the purpose of ascertaining their wishes. He shall summon such meetings at such times as the creditors or contributories may by resolution direct, or whenever requested in writing to do so by not less than 1/10th in value of the creditors or contributories, as the case may be.

6. Directions from the Court: The liquidator may apply to the Court for directions in relation to any particular matter arising in winding up. He shall also use his own discretion in the administration of the assets of the company and in the distribution thereof among the creditors.

7. Proper books (section 461): The liquidator shall keep proper books for making entries or recording minutes of the proceedings at meetings and such other matters as may be prescribed. Any creditor or contributory may, subject to the control of the Court, inspect any such books personally or by his agent.

8. Audit of accounts (section 462): The liquidator shall, at such times as may be prescribed but at least twice each year during his tenure of office present to the Court an account of his receipts and payments as liquidator. The account shall be in the prescribed form, shall be made in duplicate, and shall be duly verified. The Court shall cause the account to be audited. For the purpose of the audit the liquidator shall furnish the Court with such vouchers, information and the books as the Court may require. One copy of the audited accounts shall be filed and kept by the Court. The other copy of the account shall be delivered to the Registrar for filing. Each copy shall be open to the inspection of any creditor, contributory or person interested.

The liquidator shall cause the audited account or its summary to be printed. He shall send a printed copy of the account or its summary by post to every creditor and to every contributory. The Court may dispense with compliance with this provision. 

9. Appointment of committee of inspection (section 464): The Court may at the time of making an order for the winding up of a company, or at any time thereafter, direct that there shall be appointed a committee of inspection to act with the liquidator.

10. Pending liquidation [section 551]: The liquidator shall, within 2 months of the expiry of each year from the commencement of winding up, file a statement duly audited by a qualified auditor of the company with respect to the proceedings in, and position of the liquidation. The statement shall be filed—

(a) in the case of a winding up by or subject to the supervision of the Court in Court ; and

(b) In the case of a voluntary winding up, with the Registrar.

When the statement is filed in Court, a copy shall simultaneously be filed with the Registrar and shall be kept by him along with the other records of the company.

Powers of liquidator

1. Powers exercisable with the sanction of the Court [section 457 (1)]: The liquidator in a winding by the Court shall have power, with the sanction of the Court,—

(1) To institute or defend suits and other legal proceedings, civil or criminal, in the name and on behalf of the company.

(2) To carry on the business of the company so far as may be necessary for the beneficial winding up of the company.

(3) To sell the immovable and movable property and its actionable claims with power to transfer the whole or sell the same in parcels.

(4) To raise money on the security of the company’s assets: The assets include all contributions which the liquidator is entitled to get from the members, past or present as well as all assets which have been misappropriated as against creditors [Stringers Case. (1869) 4 Ch. App. 45].

(5) To do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.

2. Powers exercisable without the sanction of the Court [section 457 (2)]: The liquidator in a winding up by the Court shall have power, without the sanction of the Court:

(1) to do all acts and to execute documents and deeds on behalf of the company under its seal;

(2) to inspect the records and returns of the company or the files of the Registrar without payment of any fee;

(3) to prove, rank and claim in the insolvency of any contributory for any balance against his estate and to receive dividends;

(4) to draw, accept, make and endorse any bill of exchange, hundi or promissory note on behalf of the company in the course of its business;

(5) to take out, in his official name, letters of administration to any deceased contributory, and to do any other act necessary for obtaining payment of any money due from a contributory or his estate;

(6) to appoint an agent to do any business which he is unable to do himself.

3. Powers exercisable in case of onerous contracts (section 535): The term ‘onerous’ means a right to property e.g., a lease, in which the obligations attaching to it exceed the advantage to be derived from it. The liquidator may with the leave of the Court disclaim onerous contracts, and properties. This shall be done within 12 months after the commencement of the winding up, unless the Court extends time.

STATEMENT OF AFFAIRS (section 454)

Contents of statement: Within 21 days of the relevant date (i.e. the date of the appointment of a provisional liquidator, or where no such appointment is made, the date of winding up order), the company shall submit a statement to the Official Liquidator as to the affairs of the company. The Court may in its discretion direct that the company need not submit this statement. The statement shall be in the prescribed form, verified by affidavit and contain the following particulars:

1. The assets of the company, showing separately cash in hand and at bank and negotiable securities;

2. Its debts and liabilities.

3. Names, residences and occupations of its creditors, stating separately the amount of secured and unsecured debts.

4. In the case of secured debts, particulars of the securities held by the creditors, their value and dates on which they were given.

5. The debts due to the company and names and the addresses of persons from whom they are due and the amount likely to be realised.

6. Such further information as may be required by the Official Liquidator.

The Official Liquidator or the Court may extend the period of 21 days for the submission of the statement to a maximum period of 3 months.

Who is to submit the statement? The statement shall be submitted and verified by one or more of the persons who are at the relevant date directors and by the person who is at that date the manager, secretary or other chief officer of the company. The Official Liquidator may also require any of the following persons to submit and verify the statement. The persons required to submit and verify the statement may be—

(a) present or past officers of the company;

(b) persons who have taken part in the formation of the company at any time within 1 year before the relevant date;

(c) present employees or employees within 1 year before the relevant date, and who are capable of giving the information required;

(d) employees and officers of another company which is or was within 1 year before the relevant date, an officer of the company to which the statement relates.

COMMITTEE OF INSPECTION (sections 464 and 465)

Appointment and composition of committee (section 464): The Court may, at the time of making an order for the winding up of a company or at any time thereafter, direct that there shall be appointed a committee of inspection to act with the liquidator. The liquidator shall then within 2 months from the date of such direction convene a meeting of the creditors of the company for the purpose of determining the membership of the committee.

Within 14 days of the creditors’ meeting, the liquidator shall call a meeting of the contributories to consider the decision of the creditors with respect to the membership of the committee. The contributories may accept the decision of the creditors with or without modification or reject it. If the contributories do not accept the decision of the creditors, the liquidator shall apply to the Court for directions as to what shall be the composition of the committee and who shall be its members.

Constitution and proceedings of the committee (section 465): The committee of inspection shall not have more than 12 members. The members shall be creditors and contributories of the company in such proportions as may be agreed on by the meetings of creditors and contributories. In case of difference of opinion between creditors and contributories, the proportion shall be determined by the Court.

The committee of inspection shall have the right to inspect the accounts of the liquidator at all reasonable times. It shall meet at appointed times. The liquidator or any member of the committee may also call its meeting as and when he thinks necessary. The quorum of its meeting shall be 1/3rd of the total number of the members or 2 whichever is higher. It may act by a majority of its members present at a meeting, but it shall not act unless a quorum is present.

GENERAL POWERS OF THE COURT

To facilitate the winding up of a company by the Court, the Companies Act, 1956 gives the following powers to the Court. These powers are in addition to the powers conferred on the Court by section 433 on hearing the petition.

1. Stay of winding up proceedings (section  466): The Court may at any time after making a winding up order on the application either of the Official Liquidator or of any creditor or contributory, stay the winding up proceedings. The Court may before making an order, require the Official Liquidator to furnish to the Court, a report with respect to any facts or matters which are in his opinion relevant to the application.

2. (1) Settlement of list of contributories (section 467): The Court may settle the list of contributories who are liable to contribute to the assets of the company, with the power to rectify the register of members.

(2) Payment of debts due by contributory (section 469): The Court may also order any contributory to pay money due by him to the company, apart from any call.

(3) Power to make calls (section 470): The Court may also make calls on all or any of the contributories for payment of any money which it considers necessary to satisfy the debts and liabilities of the company for the expenses of winding up and for adjustment of the rights of the contributories.

(4) Adjustment of rights of contributories (section 475): The Court shall adjust the rights of contributories among themselves and distribute any surplus among persons entitled thereto.

3. Delivery of property (section 468): The Court may at any time after making a winding up order, direct delivery to the liquidator of any money, property or books and papers in the custody or control of any contributory, trustee, receiver, banker, agent, officer or other employee of the company to which the company is prima facie entitled.

4. Exclusion of creditors (section 474): The Court may fix a time within which creditors shall prove their debts or claims. It may exclude creditors not proving within the time from the benefit of any distribution made before those debts and claims are proved.

5. Order as to costs (section 476): in case of deficiency of assets to satisfy the liabilities, the Court may give priority to the payment, out of the assets, of costs, charges and expenses of the winding up proceedings.

6. Summoning of persons suspected of having property of the company (section 477): The Court may at any time after the appointment of a provisional liquidator or the making of a winding up order, summon before it any officer of the company or person known or suspected to have in his possession any property or books or papers of the company. It may also summon any person who is known or suspected to be indebted to the company. The Court may also summon any person whom the Court considers capable of giving information concerning the promotion, formation, trade, dealings, property, books or papers, or affairs of the company. 

7. Public examination (Section 478): If in the opinion of the Official Liquidator a fraud has been committed by any person in the promotion or formation of the company, or by any officer of the company in relation to the company he shall make a report to the Court. In such a case the Court may direct that that person or officer shall attend before the Court 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 company’s 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 up, the primary liability is that of the latest transferor in case of default by the A List contributories [Humby’s Case, (1872) 426 L.T. 936].

Ex-contractu and ex-lege liability: Under section 429, the liability of a member to be included in the list of contributories is not ex-contractu, i.e., it does not arise as a result of the contract of membership. His liability is ex-lege which means that it arises by reason of the fact that his name appears in the register of members even though the allotment to him was void or that he had sold his shares to a purchaser who has not got his name registered in the register. In the absence of rectification of the register, his liability is absolute under section 429.

Before a company goes into liquidation, the liability of a member to contribute is measured by the contractual obligation arising from membership. But after liquidation section 429 imposes a new liability on the shareholders in respect of unpaid calls made before or after the winding up. Such calls can be recovered even if they are barred by limitation before the order of winding up was made.

VOLUNTARY WINDING UP (Section 484 to 520)

Voluntary winding up means winding up by the members or creditors of a company without interference by the Court. The object of a voluntary winding up is that the company, i.e. the members as well as the creditors, are left free to settle their affairs without going to the Court. They may however apply to the Court for any directions, if and when necessary.

Circumstances in which a company may be wound up voluntarily (Section 484): A company may be wound up voluntarily —

(1) By passing an ordinary resolution: When the period, if any fixed for the duration of a company by the Articles has expired, the company in general meeting may pass an ordinary resolution for its voluntary winding up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company is to be dissolved, has occurred.

(2) By passing a special resolution: A company may at any time pass a special resolution that it be wound up voluntarily. No reasons need be given where the members pass a special resolution for the voluntary winding up of the company. Even the Articles cannot prevent the exercise of this statutory right.

Commencement of voluntary winding up (section 486): A voluntary winding up shall be deemed to commence at the time when the resolution (ordinary or special, as the case may be) for its voluntary winding up is passed.

Advertisement of resolution (Section 485): Within 14 days of the passing of the resolution for voluntary winding up of the company, the company shall give notice of the resolution by advertisement in the Official Gazette, and also in some newspaper circulating in the district of the registered office of the company.

TYPES OF VOLUNTARY WINDING UP

A voluntary winding up may be a:

1. members’ voluntary winding up, or

2. creditors’ voluntary winding up.

1. MEMBERS’ VOLUNTARY WINDING UP

Declaration of solvency (Section 488): In a voluntary winding up of a company if a declaration of its solvency is made in accordance with the provisions of section 488, it is a members’ voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts full within 3 years from the commencement of the winding up. The declaration shall be verified by an affidavit.

The declaration shall have effect only when it is —

(a) made within five weeks immediately before the date of the resolution, and delivered to the Registrar for registration before that date; and

(b) accompanied by a copy of the report of the auditors of the company on (i) the profit and loss account of the company from the date of the last profit and loss account to the latest practicable date immediately before the declaration of solvency, (ii) the balance sheet of the company, and (iii) a statement of the company’s assets and liabilities as on the last mentioned date.

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. Board’s 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 whole-time 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 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 company’s 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. Liquidator’s 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. Board’s 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 consideration for sale of property (Section 507): The provisions of section 494 (discussed in previous chapter) shall apply in the case of a creditors’ voluntary winding up. However the powers of the liquidator under section 494 shall not be exercised except with the sanction either of the Court or of the committee of inspection.

9. Duty of liquidator to call meeting at the end of each year (Section 508): The liquidator shall call a general meeting of the company and a meeting of the creditors every year, within 3 months from the close of every year. This will be so if the winding up continues for more than 1 year. He shall lay before the meeting an account of his acts and dealings and of the conduct of winding up during the preceding year and position of the winding up.

10. Final meeting and dissolution (Section 509): 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 a meeting of the creditors for the purpose of laying the account before the meeting and giving explanation therefor. Thereafter the procedure shall be the same as laid down in section 497.

Members’ and creditors’ voluntary winding up compared

1. Declaration of solvency: In case of a members’ voluntary winding up, there is declaration of solvency. In case of a creditors’ voluntary winding up, there is no such declaration.

2. Control of winding up: In a members’ voluntary winding up, the members control the winding up of the company and the creditors do not participate directly as the company makes a declaration of solvency. In a creditors’ voluntary winding up, the creditors control the winding up of the company as the company is deemed to be insolvent.

3. Meetings: In a members’ voluntary winding up, there is no meeting of creditors. In a creditors’ voluntary winding up, whenever there is a meeting of contributories, there is a corresponding meeting of creditors.

4. Appointment of liquidator: In a members’ voluntary winding up, the liquidator is appointed by the company and his remuneration is fixed by the company. In a creditors’ voluntary winding up, he is appointed by the creditors and his remuneration is fixed by the committee of inspection or, if there is no such committee, by the creditors.

5. Committee of inspection: There is no committee of inspection in a members’ voluntary winding up; in a creditors’ voluntary winding up the creditors may appoint a committee of inspection.

6. Powers of liquidator: In a members’ voluntary winding up, the liquidator can exercise certain powers with the sanction of a special resolution of the company; in a creditors’ voluntary winding up, he can do so with the sanction of the Court or the committee of inspection or of a meeting of the creditors.

WINDING UP SUBJECT TO SUPERVISION OF COURT (Section 522 to 527):

Power of Court to order winding up subject to supervision by Court (section 522): Winding up subject to the supervision of the Court presupposes a voluntary winding up of a company. At any time after a company has passed a resolution for voluntary winding up, the Court may make an order that the voluntary winding up shall continue, but subject to the supervision of the Court. The Court may give such liberty to creditors, contributories or others to apply to it as it thinks just.

Right to present winding up petition (section 440): Where a company is being wound up voluntarily subject to the supervision of the Court, a petition for is winding up by the Court may be presented by—

(a) any person authorised to do so under section 439 (which deals with provisions as to applications for winding up) : or

(b) the Official Liquidator.

The Court shall not make a winding up order on the petition presented to it unless it is satisfied that the voluntary winding up or winding up subject to the supervision of the Court cannot be continued with due regard to the interests of the creditors or contributories or both.

Effect of petition for winding up (section 523): A petition for the continuance of a voluntary winding up subject to the supervision of the Court shall be deemed to be a petition for winding up by the Court.

Power of Court to appoint or remove liquidators (Section 524): Where an order is made for a winding up subject to supervision of the Court, the Court may, by that or any subsequent order, appoint an additional liquidator or liquidators. The Court may remove any such liquidator and fill any vacancy occasioned by the removal, or by death or resignation.

The Court may appoint the Official Liquidator as a liquidator. It may also appoint or remove a liquidator on an application made by the Registrar.

CONSEQUENCES OF WINDING UP

1. Consequences as to shareholders/members

In a company limited by shares, a shareholder is liable to pay the full amount up to the face value of the shares held by him. His liability continues even after the company goes Into liquidation, but he is then described as a contributory. Açontributory may be present or past. The liability of present and past contributories has already been discussed in this Chapter.

In a company limited by guarantee, the members are liable to contribute up to the amount guaranteed by them.

2. Consequences as to creditors

(1) Where the company is solvent (Section 528): Where a company is being wound up all debts payable on a contingency and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company. A just estimate of the value of such debts or claims shall be made. Where a solvent company is wound up all claims of creditors, when proved, are fully met.

(2) Where the company is insolvent (Section 529): Where a company is insolvent and is wound up, the same rules shall prevail as in the case of insolvency with regard to:

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; and

(c) the respective rights of secured and unsecured creditors.

The security of every secured creditor shall, however, be deemed to be subject to a, pari passu charge in favour of the workmen to the extent of the workmen’s portion therein. Where a secured creditor instead of relinquishing his security and proving debt, opts to realise his security—

(a) the liquidator shall be entitled to represent the workmen and enforce the workmen’s charge;

(b) any amount realised by the liquidator by way of enforcement of the workmen’s charge shall be applied rateably for the discharge of workmen’s dues; and

(c) the debt due to the secured creditor or the amount of the workmen’s portion in his security, shall rank pari passu with the workmen’s dues for the purposes of section 529-A (which deals with overriding preferential payments).

All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they are entitled to make.

Secured and unsecured creditors: The creditors may be secured or unsecured. A secured creditor has 3 alternatives before him:

(i) He may rely on his security and ignore the liquidation.

(ii) He may value his security and prove for the deficit.

(iii) He may surrender his security and prove for the whole debt.

If a secured creditor instead of relinquishing his security and proving his debt proceeds to realise his security, he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for preservation of the security before its realisation by the secured creditor.

Preferential payments (section 530): In a winding up, some unsecured debts are paid, subject to the provisions of section 529-A, in priority to other unsecured debts. These payments are known as ‘preferential payments’ and are as follows:

(a) All revenues, taxes, cess and rates due to the Central Government or a State Government or to a local authority at the relevant date. The amount should have become due and payable within the 12 months preceding the relevant date.

‘Relevant date’ means—

(i) in the case of a compulsory winding up of a company, the date on which a provisional liquidator is appointed, or if he is not appointed, the date of the winding up order. In case the company had commenced to be wound up voluntarily before that date, relevant date means date of commencement of voluntary winding up.

(ii) in the case of a voluntary winding up of a company, the date of the passing of the resolution for the winding up of the company.

(b) All wages or salary of any employee, in respect of services rendered to the company and due for a period not exceeding 4 months within the 12 months before winding up. The amount shall not, in case of any one claimant, exceed such sum as may be notified by the Central Government in the Official Gazette.

(c) All accrued holiday remuneration becoming payable to any employee on account of winding up.

(d) All amounts due in respect of contributions payable during the 12 months before the winding up order under the Employees’ State insurance Act, 1948. This, however, does not apply when the company is being wound up voluntarily for the purpose of reconstruction or amalgamation with another company.

(e) All amounts due in respect of any compensation or liability under the Workmen’s Compensation Act, 1923 in respect of death or disablement of any employee of the company.

(f) All sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company.

(g) The expenses of any investigation held in pursuance of section 235 or 237, in so far as they are payable by the company.

Advances made by a third person to pay wages or salary to any employee, or in the case of his death to any other person in his right on account of holiday remuneration, shall, in a winding up, have the same priority as the persons to whom these payments are made out of money advanced have priority.

Primrose (Builders) Ltd., Re (1950) Ch. 561. A bank allowed overdrafts to a company for the purpose of paying the wages of the company on the understanding that an amount equal to the loan would shortly be paid in order to reduce the overdraft. Held, the bank was entitled to preferential payment in respect of the overdrafts.

3. Consequences as to servants and officers

A winding up order shall be deemed to be a notice of discharge to the officers and employees of the company, except when the business of the company is continued. Such a discharge shall relieve them of all obligations under their contract of service. A voluntary winding up shall also operate as a notice of discharge to the company’s servants.

4. Consequences as to proceedings against the company

When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding against the company shall be commenced except by leave of the Court. Similarly if a suit is pending against the company at the date of the winding up order, it shall not be proceeded with against the company, except by leave of the Court. In a voluntary winding up also, the Court may restrain proceedings against the company if it thinks fit.

5. Consequences as to costs

If assets are insufficient to satisfy liabilities, the Court may order for payment of the costs, charges and expenses of the winding up out of the assets of the company. The payment shall be made in such order of priority inter se as the Court thinks just. Similarly all costs, charges and expenses properly incurred in a voluntary winding up, including the remuneration of the liquidator, shall be paid out of the assets of the company in priority to all other claims. The payment shall, however, be subject to the rights of secured creditors.

DEFUNCT COMPANY

A company is said to be ‘defunct’ when it is not carrying on business or when it is not in operation. Section 560 deals with defunct companies. If a company has ceased to carry on business, the Registrar may strike it off the Register as a defunct company in accordance with section 560.

Procedure to be followed by the Registrar

1. Letter by Registrar to inquire if company is in operation: Where the Registrar has reasonable cause to believe that a company is not carrying on business or is not in operation, he shall send to the company by post a letter inquiring whether the company is carrying on business or is in operation.

2. Registered letter if no reply received within one month: If the Registrar does not 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 company’s 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.