Compulsory Winding up of Company by Tribunal and Grounds for Winding up


Introduction

This post will cover below things:
  • What is winding up
  • Modes of winding up
  • Grounds for Winding up by Tribunal
  • Consequences of Winding up order
  • Conclusion

Winding up by Tribunal and voluntary winding up by Members and Creditors are discussed in two different posts.

This post will confine to winding up by Tribunal

What is winding up ?

It's in short a legal process which will put an end to corporate personality.

It's a process whereby the existing company's affair are brought to an end. It is complex situation (And sad also) where the company which came into existence with aspiration to grow higher with passage of each day but turn off their entire business either voluntarily or by the tribunal's involvement.

It's process by which the properties of the companies are administered (and finally sold) for the benefits of it's members and creditors.

The person who is appointed for administering the assets and liabilities is called as liquidator.In case of compulsory winding up Tribunal appoint liquidator under Section 275 and in case of voluntary winding up by Creditor or member under section 310.

Modes of winding up

There are two different types of winding up.
  • Compulsory winding up
  • Voluntary winding up
    • By Members
    • By Creditors
Voluntary winding up can be initiated for any reason or when company is unable to pay debt.

Compulsory winding up needs certain grounds.

Grounds for compulsory winding up

Section 271 of Companies Act provides for different grounds for winding up of company.

Inability to pay debts

Inability to pay was earlier a ground for wounding up of company by Tribunal. However with passage of Insolvency and Bankruptcy Code, this is no more a ground for winding up by tribunal. Insolvency proceedings are initiated against defaulting companies and it results either into resolution plan wherein company able to debt or there could be liquidation of company.

Winding up by Special Resolution

Provisions in this regard are provided in Section 271(a).

The company by special resolution resolve that it be wound up by the Tribunal. The resolution may be passed for any reason whatsoever. However Tribunal must see that winding up is not against the public interest or the Company as whole.

Against National Interest

If the company has acted against the interest of sovereignty and integrity of India, the security of the state, friendly relationship with foreign state, public order , decency or morality.

The words used are very subjective. Public order, decency and morality !!

Here is question. Companies donates money as electoral bonds to Political Parties. These days only one party is getting most of the fund from Corporate. It's kind of meddling in election. Party with more money is in strong position, and may later work for the interest of few. Isn't this a threat to democracy ? Isn't this against national interest ? Comment.

Well this is 271 (b) for you.

Default in filing financial statements.

If the company has made default in filing with Registrar it's financial statements or annual return for immediately preceding five consecutive financial years. [Section 271(d)]

Fraudulent and unlawful affair

Two folks can file an application for winding up of company
  1. Government or it's authorized person
  2. Registrar
If above people are of the opinion that the affairs of the company  have been conducted in fraudulent manner or the company was formed for fraudulent purpose or the person concerned in the formation or management of it's affairs have been guilty of fraud, misfeasance or misconduct.

Do you remember a company which promised Mobile phone in 251 Rs. One company promised a phone in 251 Rs, Crores of phones were booked. This looked  a complete scam from the beginning, but nobody initiated for closure and people were looted.

Next time such thing happen, remind the Registrar or Government to file an application for winding up company under Section 271 (C).

Just and Equitable

This is one interesting ground to wound up the company by tribunal.

Section 271(e) states

if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
But what is just ? What is equitable ? They are really subjective terms. Just for one may not be just for other. Giving tax exemption to rich people in time of distress and economic slowdown may be just for few rich people, but it may not be just for common people.

In such cases previous rulings of Court are important.  What are the situations when tribunal finds in just and equitable to close the companies ?

Here are some situations:

Deadlock : When there is deadlock in management of company, then it is just to wind up. Deadlock means stuck at point, for example in conflict between management and labour union, nobody is ready to give up their demands/claims, then in such cases it is just to wind up the company.

Loss of sub stratus/Loss of Balance :  When company just forget it's main objective for which it was established, then this is just ground for winding up. In German Date Coffee Company Re 1882, Company was formed for manufacturing coffee from dates on patents issued by authority. Patents were never issued and company embarked on other patents. Since it was not working on it's main objective, court ruled it's winding up

Losses : When company cannot carry forward it's business except bearing the burden of losses, then it's just and equitable to wind up the company. The Bombay High Court observed in Shah Steamship Navigation Co . Re [ (1901) 10 Bombay LR 107 ] the court will not be justified in making a winding up order merely on the ground that Company has made losses, and is likely to make losses.

Oppression of Minority : Where majority shareholder have adopted aggressive, oppressive or squeezing policy towards the minority shareholders, then it would be just to wind up the company. In Tivoli Free, Re, [(1972) VR 445], it was observed that ' Where more than seventy percent of Company's funds were being used for objects not at all related with memorandum and 93% shareholders did not want to associate with new objective, the company was ordered to wound up.

Fraudulent purpose : If the company has been conceived and brought forth in fraud or for illegal purpose, then it is just and equitable to wind up the company. In Universal Mutual Aid and Poor Houses Association Vs A.D Thoppa Naidu, the Madras High Court observed 'Where main object of the company is the conduct of lottery, the mere fact that some of it's objects were philanthropic will not prevent company from being winding up'


These are some of the important points related to the grounds of just and equitable winding up


Consequences of Winding up order

Of Course the consequence of winding is bad. People will loose job, shareholder may loose money. There are additional consequences provided in act

The order of winding up is deemed to be notice of discharge to the officer, employees and workmen. Sometime it may be possible that business may be continued for beneficial winding up of the company. [Section 277(3)]

All actions and suits against the company are stayed, unless Tribunal gives permission to continue or commence the proceedings. If there are proceedings against the company in any Court, such court has to transfer the case to Tribunal in which winding process is going on. (Section 279)

All the powers of Board of Directors, managers will cease and they will be transferred to liquidator.

Any transaction in property or shares will be void after commencement of winding up process. [Section 338]

Any attachment, distress or execution put in force without leave of Tribunal against the estate of company will be void, except such attachment or execution is for recovery of tax. [Section 335(1)(a)) and 335(2)]

Any floating Charge created within 12 months immediately preceding the date of commencement of winding up will be void.[Section 332]

Once the winding up begins, company's business comes to an end. However company can continue business for beneficial purpose. In Wills Vs Association of Universities of British Common Wealth, it was observed that 'beneficial winding up' doesn't include ONLY financial benefit

So these are some of the consequences of winding up process.


Conclusion

What to conclude about conclusion of Company?

To summarize, Tribunal have got power to go for winding up of Company. Section 271 provides the grounds on which company can be wound up by Tribunal. There is voluntary winding up by members and creditors also.



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