Discuss the grounds for which the Court may wind up a company. Who can be the petitioner for winding up, and what is the effect of winding up order?

Question: Discuss the grounds for which the Court may wind up a company. Who can be the petitioner for winding up, and what is the effect of winding up order? [BJS 1978]

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Answer

Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. In the words of Professor Gower,

“Winding up of a company is the process whereby its life is ended and its Property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”

According to Halsbury's Laws of England,

“Winding up is a proceeding by means of which the dissolution of a company is brought about & in the course of which its assets are collected and realised; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with Articles of the Company.”

Winding up is a legal process. The Court may wind up a company on several grounds, including:

Insolvency: If the company is unable to pay its debts as they become due, the Court may order the winding up of the company. This is provided under Section 433(e) of the Companies Act, 2013 and Section 273 of the Companies Act, 1956. The test for insolvency is whether the company is unable to pay its debts as and when they fall due. This ground is most commonly used to wind up a company. For instance, the company should be wound up where the assets of the company are less than its liabilities and the company is unable to pay its debts.

Just and equitable: If the Court finds that it is just and equitable to do so, it may order the winding up of the company. This is typically used in cases where the company's shareholders are deadlocked or where the company's operations have become oppressive to some shareholders. This ground is provided under Section 433(f) of the Companies Act, 2013 and Section 397/398 of the Companies Act, 1956.

In Hanuman Prasad Bagri v. Bagress Cereals (P) Ltd., (2001) 4 SCC 420, the Supreme Court has interpreted Section 397(2) of the 1956 Act and observed that in order to successfully wind up a company on just and equitable ground, the petitioners have to make a case for it. If the facts fall short of the case set out for winding up a company on just and equitable grounds, no relief can be granted to the petitioners. The party who is opposing winding up can demonstrate that there are no just and equitable grounds for winding up and the winding up would be unfair to them.

Failure to commence business or carry on business: If a company has not commenced business within a year of its incorporation or has ceased to carry on business for a year, the Court may order the winding up of the company. This ground is provided under Section 433(g) of the Companies Act, 2013 and Section 433(g) of the Companies Act, 1956.

Special resolution: A special resolution passed by the shareholders of a company may be grounds for the winding up of the company. This ground is provided under Section 433(h) of the Companies Act, 2013 and Section 484 of the Companies Act, 1956.

Mismanagement: If the company is being mismanaged by its directors, the Court may order the winding up of the company. This ground is provided under Section 433(i) of the Companies Act, 2013 and Section 447 of the Companies Act, 1956.

Fraud: If the company is found to have been involved in fraudulent activities, the Court may order the winding up of the company. This ground is provided under Section 433(j) of the Companies Act, 2013 and Section 447 of the Companies Act, 1956.

Breach of regulations: If the company is found to have breached any regulations set out by the government, the Court may order the winding up of the company.

The following parties can initiate proceedings for winding up a company:

1. The company itself
2. Any creditor, including a contingent or prospective creditor
3. Any contributory, i.e. a member of the company
4. The Central Government or State Government
5. The Registrar of Companies (ROC)

Recently, the Supreme Court of India in Severn Trent Inc. v. Chloro Controls (India) Pvt. Ltd., [(2008) 4 SCC 130], dealt with an interesting point of law related to the locus standi of a contributory to file a petition for winding up. The issue before the Supreme Court called for an interpretation of Section 439(4)(b) of the Companies Act, 1956.

Under this Section, a contributory is not entitled to present a petition for winding up unless the shares in respect of which he is a contributory or some of them, (a) were originally allotted to him, or (b) were held by him and registered in his name for a certain period, or (c) devolved on him through the death of a former holder. Severn Trent did not dispute that category (a) was inapplicable in the case; but argued that it should be held to have conformed to categories (b) and (c).

Effect of winding up order: A winding up order has several effects on a company:

• It dissolves the company and brings its existence to an end
• It appoints an official liquidator who takes control of the company's assets and liabilities
• It prevents the company from carrying out any further business and from disposing of any of its assets
• It enables the official liquidator to collect and realize the company's assets and distribute them among the creditors and contributors in accordance with the provisions of the Companies Act
• It may result in the disqualification of the directors and may also lead to criminal proceedings against them if they have been found guilty of any misconduct.

In Pierce Leslie & Co. Ltd v. Violet Ouchterlony, 1969 SCR (3) 203, the Hon’ble Supreme court held that winding up precedes the dissolution. There is no statutory provision vesting the properties of a dissolved company in a trustee or having the effect of abrogating; the law of escheat. The shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution of a company, its properties, if any, vest in the government.

It's worth noting that the winding up of a company is a serious matter, and it is intended as a last resort when all other options have been exhausted, as it causes a considerable loss to the shareholders and stakeholders of the company and also affects the economy as a whole.

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