November 30, 2020

The Various Grounds Of Winding-Up Of Company

Companies Act

The winding-up of a company is described as a process that brings the life of a company to an end and handles its assets for the benefit of its shareholders and creditors. In the words of Professor Gower, “The winding-up of a corporation is the mechanism by which its existence is terminated and its property is handled for the benefit of its owners and creditors. The Administrator, called the Liquidator, is appointed and assumes charge of the company, gathers its assets, pays its debts and eventually distributes any surplus to the members in compliance with their privileges.

As part of the process, the life of the company is terminated and its properties are handled for the benefit of the owners and creditors. The liquidator shall be named to carry out the assets and property of the company. Upon settlement of the debts, if any excess properties are left out, they will be allocated among the participants according to their interests. Winding up does not automatically mean that the company is bankrupt. A fully liquid business can be disbanded by the consent of the members of the General Assembly.

Winding Up A Registered Company

The winding-up process depends depending on whether the corporation is registered or not. A business established by registration under the 1956 Companies Act is known as a registered company. It also involves an actual company, which was founded and licensed under some of the earlier Companies Acts.

The winding-up of a company is defined as a process that brings the life of a company to an end and manages its assets for the benefit of its members and creditors. The administrator, who is named the liquidator, is designated and assumes charge of the business, gathers its properties, pays debts and eventually distributes any surplus to the members in compliance with their privileges.

At the end of the winding-up, the company will have no assets or liabilities. When the business of a company is completely dissolved, the company is dissolved. Upon separation, the name of the company shall be removed from the registry of corporations and its legal identity as a organization shall be extinguished.

The grounds for compulsory Winding Up are:

  • If the corporation has agreed, by a special order, that the corporation will be wound up by the Tribunal.
  • If default is rendered in presenting the prescribed report to the Registrar or conducting the prescribed meeting. A petition on this ground may be filed by the Registrar or a contributory before the expiry of 14 days after the last day on which the meeting ought to have been held. The Tribunal may instead of winding up, order the holding of statutory meeting or the delivery of statutory report.
  • If the company will not resume its business within one year of its incorporation, or whether it suspends its business for a full year. The winding-up on this ground is required only if there is no possibility of carrying on the company and the authority of the Tribunal in this case is discretionary.
  • If the number of members dropped below the constitutional cap, i.e. below seven in the case of a public corporation and two in the case of a private company.
  • If the company is not in a position to pay its debts.
  • The Tribunal can inquiry into the re-establishment and recovery of sick units. It is doubtful that it will be resurrected, so the court will allow it to wind up.
  • If the corporation has defaulted in filing with the Registrar its balance sheet and income and loss account or tax return for any five successive financial years.
  • Whether the company has behaved against the interests of the dignity and independence of India, the security of the State, the ties of goodwill with the foreign states, public order, or morals.

IBA Health v. Info-Drive System (CA No. 8230/2010)-Kapadia C.J. The review starts by recognizing that, in the winding-up case, the Company Court is not expected to address complicated legal and factual problems or to settle substantive conflicts between the parties. The Supreme Court ruled that the Company Court could not proceed with a winding-up motion if the respondent posed a “substantial” or “bona fide” issue as to the nature of the debt.

The observations made were:

  • A dispute would be substantial and genuine if it were bona fide and not spurious, speculative, illusory or illusory. At that stage, the Company Court is not expected to hold a full trial of the matter. It needs to determine if the premises seem to be significant. The basis for the fight, of course, must not consist of an inventive disguise designed to rob the borrower of a just and truthful right and must not be a pure wrangle.
  • It is settled rule that, where the creditor’s debt is in bona fide litigation on substantive grounds, the court will deny the appeal and leave the borrower first to lodge his claim in an case, so that there is no chance of misuse of the winding-up process. The Company Court still maintains its authority, but the claimant to the lawsuit will not be able to use the penalty of winding up the complaint as a method of pressuring the client to settle the Bona Fide contested debt.
  • The Company Court cannot be “maliciously” used as a “debt collecting service” so that an appeal may be brought before the relevant Court in favor of the loss of goodwill incurred by the unlawful so unreasonably commenced liquidation proceedings against a corporation and ultimately dismissed unless a suitable response is made on substantive grounds. This decision will insure that the winding-up motion is investigated.
  • The solvency of a corporation can not stand in the face of a winding-up motion because the corporation does not owe the borrower an outstanding debt.

Conclusion

According to Halsburry’s Laws of England, ‘Winding up is a procedure through which the dissolution of a company is accomplished and in the process in which its properties are recovered and carried out; and applied for the settlement in its debts; and when these are met, the residual balance shall be applied for the return to its representatives of the amounts which they have paid to the business in compliance with Articles.

There are differences between winding-up and dissolution. At the end of the winding-up, the company will have no assets or liabilities. When the business of a company is completely dissolved, the company is dissolved. Upon dissolution, the name of the company shall be deleted from the register of companies, and its legal personality as a corporation shall cease to exist.


Author Details: Lavish Sharma (Institute of Law, Nirma University)

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

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