January 27, 2022

The Power of the Court Tribunals in case of Compulsory Winding-up

Companies Act

The winding-up of a company is a method of putting an end to the existence of a company when it continues to be in loss and unable to pay the creditors. Before November 2016 the Indian Company Act, 2013 did not define the term winding-up until the amendments by Insolvency and Bankruptcy code,2016 inserted Section 2(94A) in the Act. The concept of winding-up is different from that of insolvency and dissolution as the former is a proceeding by which assets are realized, liabilities are paid off and residual/surplus assets are distributed among the shareholders.

In the case Pierce Leslie & Co Ltd v. Violet Ouchterlong it was states that “Winding up precedes dissolution”, a company does not stand to be dissolved immediately at the commencement of the process of winding up, its powers and status continues to exist. The entire process is categorised into two parts where the Companies Act 2013 under section 270 provides for only one kind of winding-up i.e. compulsory winding up under the Tribunal as certain provisions for voluntary winding-up was abolished.

When a company is subject to compulsory winding-up it may or may not be insolvent but is forced by law to carry out the process. Winding-up by court and under the supervision on the court are two different procedures. The Act under section 271 provides possible grounds where a company registered under the ordinance is ordered by the court tribunals to be wound up if:

a. By a special resolution the company has affected winding up by the Tribunal

b. The company has acted against the interests of sovereignty and integrity of India, security of state, public order, foreign relations etc.

c. The company was functioning under a fraudulent conduct of affairs or for unlawful purposes

d. Tribunal is of the opinion that it is just and equitable or;

e. There is a default in filling financial statements.

In the case Vijay Lakshmi Talkies v. Roa, when the mismanagement on the part of the directors lead to differences between the members of the company and reflected resolution it called for winding-up of the company as it was functioning for the profit-maximisation of the debenture holders. If a company is operating for an unlawful purpose or carrying out unlawful commerce then it makes a valid ground for compulsory winding up of the company.

The National Company Law Tribunal after hearing a winding-up petition filed by any person authorised under the Act be it a company, creditors, registrar, or any person authorised by the central government, under section 273 of the Act may:

a. Dismiss it with or without cost

b. Pass an interim order as it thinks fit

c. Appoint provisional liquidator until winding up order

d. Make a winding up order with or without costs; or

e. Any other as it thinks fit

It has to pass an order within 90 days from the date of petition. The Tribunal if it may think fit, can refuse to make an order if another suitable remedy is available. The company during the process of winding-up cannot carry out its business activities and is only liable for liquidation of assets. The Tribunal where the registered office of the company is situated has the original jurisdiction (section 280 of the Act) over the petition and it has to take in to consideration that the process is not opposed to public interest or the interest if the company as a separate legal entity. The Tribunal while exercising its discretion should keep in mind interests of all affected parties and not just the creditors.

In Misrilal Dharamchand (p) Ltd. V. B Patnaik Mines, the company was unable to pay its creditors despite of statutory notices because of recurring losses after several attempts to revive. The court ordered winding-up of the company under a condition that the order will come into effect only after six-months, when the company fails to pay the petitioner, the order will come into force. At the time of passing an order the Tribunal, under section 275, appoints a liquidator from the panel.

The company should be given reasonable opportunity to make representations before the appointment of a liquidator and the Tribunal can limit the powers of the liquidator at the initial or a subsequent stage. The tribunal should not refuse to make an order on the mere ground that the assets of the company have been mortgaged for an equivalent amount, or the company does not own any assets and should follow the process after due diligence.

Author Details: Arushi Gupta (O.P. Jindal Global University)

The views of the author are personal only. (if any)

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