Winding Up of a Company - A different Legal Perspective

Introduction:

Meaning & Kinds: “Winding-up” in literal sense, means to bring to a conclusion or an end by putting in order.[1] It is defined as the process by which the life of a company is ended and its property is administered for the benefit of its members and creditors[2]. Winding-up is different from insolvency and dissolution[3]. The Act provides for three kinds of winding up:

1. The winding-up by the Tribunal. [(Sec 433) of Companies Act, 1956]

· If the company has, by special resolution, resolved that the company may be wound-up by the tribunal;

· If default is made in delivering the statutory report to the registrar or in holding the statutory meeting;

· If the company does not commence its business within a year from its incorporation, or suspends its business for whole of a year;

· If the number of members are reduced then their required number;

· If the company is unable to pay its debts (specified in Sec 434)

· If the tribunal is of the opinion that it is just and equitable that the company should be wound –up;

· If the company is in default in filing up with the Registrar its balance sheet and profit and loss account for five consecutive financial years[4];

· If the company has acted against the interests of the sovereignty and integrity of India or security of any state, friendly relation with foreign States, public order, decency and morality;

· If the tribunal is under the opinion that the company should be wound up under the circumstances specified under the Sec. 424G.

2. Voluntary winding-up, which itself is of two kinds, namely,

· Members voluntary winding-up,

· Creditors voluntary winding-up.

A company may be wound up voluntarily at any time after passing a special resolution. But where the articles provide for a period on expiry, which the company is to be wound up and that period has expired, or for a contingency on the happening of which the company is to be dissolved and that contingency has happened, winding up may be commenced with an ordinary resolution [Sec 484]. Within 14 days the resolution should be advertised in the Official Gazette and in a newspaper circulating in the district of the registered office of the company [Sec 485]. Winding up commences from the date of resolution [Sec 486]. The corporate status and power of the company shall continue till the company is completely dissolved, but it shall stop its business, except so far as may be necessary for beneficial winding up [Sec 488]. If a declaration of solvency is made in accordance with the provisions of the Act, it will be members’ winding up. If the directors are not able to pay the debts within the specified period, the liquidator shall call a meeting of the creditors and it then becomes the creditor’s winding up [sec.495&Sec.498].

Is winding up possible during the pendency of a civil suit?

Section 433 of the Act provides for the circumstances in which a company may be wound up by court. [5] Here arises a question that if there are parallel proceedings for the same subject matter i.e., for the recovery of debt, where one is a civil suit and the other is for winding up of the company, should they be allowed to subsist together?

The act nowhere prohibits that the proceedings under the act shall or could not lie, where civil suits are pending or they subsequently be filed. There is no provision in the Act to oust the jurisdiction of the court and decide the winding up proceedings. There would have been a provision to that effect in the Act if the legislature had intended to that effect. Since the winding up proceeding is not merely for the benefit of the petitioner but of all its shareholders, creditors or contributories [6]. The pendency of a civil suit is not a bar to the admission of winding up petition based on same debt.[7] The proceeding for winding up will not be invalidated if a suit is filed by the petitioner by way of abundant caution to save the claim getting barred by limitation[8].

The winding up proceedings can be continued in a company court once it has come to the conclusion that it has not been a case of bona fide and tenable defence is made out [9]. While dismissing the petition for winding up the following principals have to be relied upon by the Court:

1) The defence of the company is in good faith and one of substance.

2) The defence is likely to succeed in point of law.

3) The company adduces prima facie proof of the facts on which the defence depends.

4) Where the debt is undisputed, the Court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular amount and.

5) Where, the company owes the creditor a debt entitling him to a winding up order. But the exact amount of the debt is disputed; the Court will make the winding up order without requiring the creditor to quantify the debt precisely [10].

The following points have to be considered while dealing with winding-up:

1) A petition presented ostensibly for a winding-up order; but really to exercise pressure will be dismissed, and under the circumstances, may be stigmatized as a scandalous abuse of the process of the Court The modern practice has been to dismiss such petitions. If the debt is not disputed on some substantial ground, the Court may decide it on the petition and make the order. [11]

2) The company may be wound up even if it has large assets. The crux is to see if it is unable to meet its current demands i.e., if the current liabilities are more than the current assets. If the company is financially sound and in a position to pay its liability, it cannot be ordered to be wound up under Section 433(e) of the Companies Act. But the company should establish that it is capable of discharging its existing liabilities. There is presumption of inability [12].

3) Although a winding up petition is an appropriate remedy and a mode of execution against a company unable to pay its debt, it is not an alternative to the ordinary procedure for realization of the debts due from the company. Since, the creditor had already resorted to the civil suit; the court in its discretion can dismiss the petition [13].

4) It has been observed that the pendency of a civil suit as such is not merely a ground to oppose a winding up petition [14].

Conclusion

After analyzing and observing various legal propositions and situations, it is found that the right to apply for winding up is the creature of statute and not of contract, and the winding up orders passed by the court are not judgments in rem. In the absence of any prohibited provisions in the Act winding up proceedings u/s 433(e), 434,439 can be allowed even if a civil suit is already pending against the debtor company. But it should be marked that the winding up proceeding are greatly affected by the facts and circumstances of a particular case. The machinery of winding-up cannot be used as a pressure tactics, where a suit has already been instituted for recovery of debt, under such circumstances, the proceeding are in the nature of parallel proceedings in respect of the same cause of action. As a result, such course should not be considered by the court more so to avoid conflict of jurisdiction of findings by two parallel courts of competent jurisdiction. Thus at last it can be said that a genuine case has to be made out rejecting the malafide contention, in the interest of good faith and justice.