LAW

CORPORATE LAW
Winding up, its need, grounds and effect on
shareholders, creditors and other stakeholders
 Q1: E-TEXT
Module ID 22: Winding up of the Companies, its need, grounds and effects
Module Overview: Winding up is a process whereby the existing company’s affairs brought
to an end. It is a very complex situation where the companies which came into existence in an
aspire to grow higher with the passage of each day, in fact each second, ‘turn-off’ their entire
business either voluntarily or by the Tribunal’s involvement. The statutory provisions of the
winding up and its procedure are dealt under Chapter XX Sections 270 to 378 of the
Companies Act, 2013 (substitute of the old Companies Act, 1956). This module has been
prepared with the intention of dealing with the concept of ‘Winding up’, its need or grounds
and effects. The module will deal both the modes of winding up of the companies as well as
the grounds or circumstances of winding up dealt in Sec. 271 and 304 of the Act. Moreover,
the module will emphasize on the effects of winding up order as given in Sec. 278 and 309 of
the Act. The module will also deal the effect of registration in winding up and the winding up
of unregistered companies.
Subject Name: Law
Paper Name: Corporate Law
Module ID: 22
Pre-requisites: Fundamental understanding of incorporation of a company and its
management.
Key Words: Winding up, Voluntary winding up, Winding up by the court, Compulsory
winding up, Liquidation

Objectives:
 To discuss in detail the various
modes of winding up of the
companies;

To discuss the grounds which

throw a company in the pit of
winding up situation; and

To discuss about the effects of

winding up of a company

I. Introduction to the concept

If incorporation is the process of bringing the company into existence, then

winding up is the process of bringing an end to the existence of that so called
artificial person viz. Company. A company cannot die a natural death. It has an
indefinite life span, but if such reasons have emerged which make it desirable to
bring an end to its corporate life, then necessary legal mechanisms has to be put
into operation to get it done.
This mechanism is the process of winding up. It is a process by which the
properties of the company are administered for the benefit of its members and
creditors. The person appointed for administering the assets and liabilities is
called ‘Liquidator’. In case of compulsory winding up, the liquidator is appointed
by the Tribunal under section 275 of the Act; or, in case of voluntary winding up,
the liquidator is appointed by the company itself under section 310 of the Act.
Winding up is also referred as ‘Liquidation’. On liquidation, the company’s name
is deleted from the list of companies by the Registrar of companies and the same
is published in the official gazette.

Prof. Gower’s definition of winding up:-

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

II. Modes of Winding Up

Section 270 of the Companies Act, 2013 provides for two modes of winding up,
i.e.
Ø Winding up by Tribunal (i.e. compulsory winding up); or
Ø Voluntary winding up.

Modes of
Winding up

Compulsory
Voluntary
Winding up (i.e.
Winding up
By Tribunal)

Members Creditors
Voluntary Voluntary
Winding Up Winding up

Difference between Compulsory winding up and Voluntary winding up

Compulsory winding up Voluntary winding up

1. Petition is filled before the Tribunal No petition is filled before the Court.
either by the company, or by any In this, the company passes the special
creditor(s), or by contributory, or by resolution in its meeting; or it passes a
 registrar, or any person authorised by general resolution in case of expiry of
the Central Government on that the period of its duration (Sec. 304).
behalf (Sec. 272).
2. In this case the Tribunal, at the time In this case the company appoint the
of passing the order of winding up, company liquidator from the panel
appoint an official liquidator or the prepared by the Central Government
liquidator from the panel maintained for the purpose of winding up (Sec.
by the Central Government (Sec. 310).
275).
3. The official liquidator can be The company liquidator can be
removed by the Tribunal on the removed by the company (if it is
grounds mentioned in Sec. 276. appointed by the company), or by the
creditors (if it is appointed by the
creditors) on the grounds mentioned in
Sec. 311.

4. The order of winding up of the In this case, the company shall from
company shall operate in favour of all the commencement of the winding up
the creditors and all contributories of cease to carry on its business except as
the company as if it had been made far as required for the beneficial
out on the joint petition of creditors winding up of its business. (Sec. 309).
and contributories. (Sec. 278)

The procedure for winding up order in compulsory winding up is as follows:

(1) Petition in Tribunal (2) Appointment of
liquidator

(4) Winding up order (3) Hearing of petition by the Tribunal

The procedure for winding up order in voluntary winding up is as follows:
(1) Resolution passed by the company (2) Declaration of
solvency

(4) Appointment of Liquidator (3) Notice to Registrar

(5) Final meeting (6)

Dissolution

(7) Publication in Official Gazette

Two types of Voluntary winding up:
1. Members voluntary winding up; and
2. Creditors voluntary winding up.

Difference between Members voluntary winding up and

Creditors voluntary Winding up
Members voluntary winding up Creditors voluntary winding up
1. Such winding up takes place only Such winding up takes place in case
when the company is in a position to when the company is not in a position to
pay its debts. pay its debts.
2. Declaration of solvency is made by the No such declaration is made.
directors.
3. Only meeting of members is called. Meeting of the members and creditors is
called.
4. The liquidator is appointed and The liquidator in fact is appointed by the
remuneration is fixed by the company creditors and remuneration is fixed by the
itself. committee of inspection.
5. No committee of inspection is Committee of inspection is appointed.
appointed.
6. The liquidator can exercise some The liquidator exercise powers with the
powers with the sanction of a special sanction of the Tribunal.
resolution of the company.
 7. Meeting of members is called on Meeting of members and creditors is
completion of proceedings of winding called when the proceeding for winding
up. up has been completed.

III. Grounds for winding up by the Tribunal

Inability to
pay debts

Just & Special

Equitable Resolution

Grounds
Default in
Filling National
Financial Interest
Statements

Fraudulent
and Failure of
unlawful Scheme
affairs

Section 271 of the Companies Act, 2013 provides various grounds on the basis of
which a petition can be filled in the Tribunal for the winding up of the company:

(a) Inability to pay debts: Sub-section (2) of section 271 provides that the
inability to pay debts primarily arise under three circumstances:
Ø Where the company fails to clear the debt of the creditor within three
weeks immediately preceding the date of demand for payment being
made;
 Ø Where execution or other process issued on a decree or order of any
court in favour of the company is returned unsatisfied in whole or
part; and
Ø Where it is proved to the satisfaction of the court that the company is
unable to pay its debts.

A petition for winding up on the ground of inability to pay debts must contain
all the relevant information about the debt. The petition must disclose the
assets of the company and whether they are sufficient to meet the liabilities
including contingent and prospective liabilities. Further, the petition must
also disclose the position of fixed assets as well as valuation of plant and
machinery of the company.

Where a debt is bona fide disputed by the company and the court is satisfied
with the company's defence a winding up order will not be made. In K. Appa
rao v. Sarkar Chemicals (P) Ltd., the Andhra Pradesh High Court held that
where a company has a prima facie sustainable defence or a bona fide dispute
of its obligations to discharge the alleged debts or liabilities, the court may
not entertain proceedings for the winding up, much less order winding up.

Once there is an admission on part of the respondent company of liability of

dues payable, then a petition under Section 273 cannot be dismissed on
technical grounds. Company courts can exercise their discretionary powers of
dismissing the petition even before issuing a show cause notice regarding
admission.

Despite of repeated demands if a company neglects to pay its debts, it will be

considered as an inability of the company to pay its debts and an order of
winding up can be passed by the court. By non-payment of the undisputed
debt within the period of statutory demand, the company is deemed unable to
pay its debts and where the company is unable to pay its debts, winding up
ought generally to follow in public interest.

(b) Special Resolution: The Company may by special resolution resolve that it be
wound up by the Tribunal. The resolution may be passed for any cause
 whatsoever. However, the Tribunal must see that the winding up is not
opposed to public interest or the interest of the company as a whole.
Case law: New Kerala Chits & Traders (P.) Ltd. vs. Official Liquidator
[1981], it has been observed in this matter that the Tribunal has discretion in
the matter and is under no obligation to order winding-up merely because the
company has so resolved.

(c) Against National interest: If the company has acted against the interest of
sovereignty and integrity of India, the security of the State, friendly relations
with foreign States, public order, decency or morality.

(d) Failure of Scheme: If the scheme of revival and rehabilitation is not approved
by the creditors, then the company administrator shall submit a report to the
Tribunal within 15 days and the Tribunal shall order for the winding up of the
sick company. The Tribunal, on passing the order of winding up, shall
conduct the proceedings for winding up in accordance with the provisions of
Chapter XX [Sec. 271(1) (d)].

(e) Fraudulent and unlawful affairs: If on an application made by the Registrar

or any other person authorised by the Central Government by notification
under this Act, the Tribunal is of the opinion that the affairs of the company
have been conducted in a fraudulent manner or the company was formed for
fraudulent and unlawful purposes or the persons concerned in the formation
or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and that it is proper that the company be
wound-up; then in such a situation, the Tribunal may, on a petition filed by
any authorised person, pass an order for the winding up of the company [Sec.
271(1) (e)].

(f) Default in filling financial statements: If the company has made a default in
filling with the Registrar its financial statements or annual return for
immediately preceding five consecutive financial years [Sec. 271(1) (f)].

(g) Just and Equitable: When the Tribunal is of the opinion that it is just and
equitable that the company should be wound up; then the Tribunal may order
the winding up of a company. The circumstances in which the courts have in
the past dissolved companies on this ground are as follows:

Ø Deadlock: When there is a deadlock in the management of a

company, it is just and equitable to order winding up.
Ø Loss of Substratum: When the company has failed to materialise the
main objects of the company. The important illustration here is the
case of German Date Coffee Co, Re [(1882) 20 Ch D 169], where a
company was formed for the purpose of manufacturing coffee from
dates under a patent which was to be granted by the Government of
Germany and also for working other patents of similar kind. The
German patent was never granted and the company embarked upon
other patents. But, on the petition of a shareholder, it was held that
“the substratum of the company had failed, 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.
Ø Losses: When a company cannot carry forward its business except
bearing the burden of losses, then it is just and equitable for the
company to be wound up. The Bombay High Court observed in the
case of Shah Steamship Navigation Co, Re [(1901) 10 Bom LR 107]
that ‘the Court will not be justified in making a winding up order
merely on the ground that the company has made losses; and is likely
to make further losses.’
Ø Oppression of Minority: It is just and equitable to wind up a
company where the principle shareholders have adopted an
aggressive or oppressive or squeezing policy towards the minority. It
has been observed in Tivoli Free, Re, [(1972) VR 445] that ‘where
more than seventy per cent of a company’s funds were being used for
objects wholly removed from anything within the memorandum and
ninety-three per cent of the shareholders wished to dissociate
themselves from the new objects, the company was ordered to be
wound up.
Ø Fraudulent Purpose: If the company has been conceived and brought
forth in fraud or for illegal purposes, then it is just and equitable to
wind up the company. In Universal Mutual Aid and Poor Houses
 Assn vs. A.D. Thoppa Naidu [AIR 1933 Mad 16] the Madras High
Court observed, ‘where the main object of a company is the conduct
of a lottery, the mere fact that some of its objects were philanthropic
will not prevent the company from being ordered to be wound up as
being one formed for an illegal purpose.’

“Public interest” is also another important ground, on the basis of which the
court can order the winding up of the company. On the same ground, an order of
winding up passed by the Tribunal can be revoked also.
IV. Consequences of Winding up order
(a) The Tribunal must, as soon as the winding up order is made, cause
intimation thereof to be sent to the Official Liquidator and the Registrar
within a period not exceeding seven days from the date of passing of the
order. [Sec. 277]
(b) The petitioner and the company must also file with the Registrar a certified
copy of the order. If default is made, then every person responsible for
default shall be liable to punishment with fine up to Rs. 1000 for every day.
(c) The order of winding up is deemed to be notice of discharge to the officers
employees and workmen of the company except when the business of the
company is continued for the beneficial winding up of the company [Sec.
277(3)].
(d) All actions and suits against the company are stayed, unless the Tribunal
gives leave to continue or commence proceedings. Further, any suit or
proceeding pending in any other Court shall be transferred to the Tribunal in
which the winding up of the company is proceeding [Sec. 279].
(e) The order operates in the interests of all the creditors and all the
contributories, no matter who in fact asked for it [Sec. 278].
(f) The Official Liquidator, by virtue of his office, becomes the Liquidator of
the company and takes possession and control of the assets of the company
[Sec. 275].
(g) All the powers of the Board of directors cease and the same are then
exercisable by the Liquidator.
(h) On the commencement of winding up, the limitation remains suspended in
favour of the company till one year after the winding up order is made [Sec.
358].
 (i) Any disposition of the property of the company, and any transfer of shares in
the company or alteration in the status of members made after the
commencement of the winding-up shall be void [Sec. 334].
(j) Any attachment, distress or execution put in force, without leave of the
Tribunal, against the estate or effects of the company after the
commencement of the winding up shall be void [Sec. 335(1) (a)]; but not for
the recovery of any tax or impost or any dues payable to Government [Sec.
335(2)].
(k) Any sale held, without leave of the Tribunal, of any of the properties or
effects of the company after the commencement of winding up shall be void
[sec. 335(1) (b)].
(l) Any floating charge created within 12 months immediately preceding the
commencement of winding up is void unless it is proved that the company
after the creation of the charge was solvent. [Sec. 332].
V. Consequences of Voluntary winding up
(a) Effect on status of company [Sec. 309]: The company shall cease to carry on
its business except if it is required to secure a beneficial winding up.
In Wills v. Association of Universities of British Common Wealth [1964], it
was observed that ‘beneficial winding up’ is not confined to financial benefit
only. It may be for reconstruction and the business may have to be carried on
so as to facilitate the smooth taking over.
(b) Board’s power to cease [Sec. 313]: On the appointment of the Liquidator, all
the powers of the Board of directors cease and went into the hands of the
Liquidator.
(c) Avoidance of transfers [Sec. 334]: All transfer of shares and alterations in the
status of members, made after the commencement of winding up, are void
unless sanctioned by the Liquidator or the transfer is made to the Liquidator.
(d) Discharge of employees [Sec. 334]: A resolution to wind up voluntarily
operates as notie of discharge to the employees of the company.

Summary:
The module has dealt with the process of winding up, modes of winding up and the grounds
on which a company can proceed for winding up. The effects and implications of winding up
for a company are also summarized.