Winding Up of a Company – by the Court

Author : V S Warrier
Section 425 of the Companies Act, 1956, deals with the winding up of companies. Winding up of company is a legal procedure to dissolve the company and put an end to its life. “Winding-up” in literal sense, means to bring to a conclusion or an end by putting in order. 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.
The Act provides for three kinds of winding up:

1.      Winding up by the court.
2.      Voluntary winding up,
a.      Members’ Voluntary winding up
b.      Creditors’ Voluntary winding up
3.      Winding up subject to supervision of the court.

Circumstances under which a Company may be wound up by the Court
Under Section 433 of the Companies Act, 1956, following are the circumstances under which a Company may be wound up by the Court.
(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;
(e) if the company is unable to pay its debts;
(f) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up;
(g) if the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial years;
(h) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
(i) if the Tribunal is of the opinion that the company should be wound up under the circumstances specified in section 424G:Provided that, the Tribunal shall make an order for winding up of a company under clause (h) on application made by the Central Government or a State Government
Unable to pay debts by the companies is one of the reasons for which a company may be wound up under Sec. 433 (e) of the Companies Act, 1956. Order under Section 433 (e) of the Act is discretionary. It was held by the Honourable Supreme Court that, a company can be wound up under the provisions of Section 433 (e) of the Act, if the company is unable to pay its debts1. That means; there must be a debt, and the company is unable to pay the same.
[1]Pradeshiya Industrial and Investment Corporation of UP V. North India Petro Chemical Limited (1994) 79 Comp. cas.835

Section 434 (1) of the Act provides that a company shall be deemed to be unable to pay its debts;
(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one Lakh rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
(b) if execution or other process issued on a decree or order of  any Court or Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the company.
The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorized on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm.
However, an order of winding up under Sec. 433 (e) is a discretionary one and the machinery for winding up should be allowed to be utilized as a means for realizing debts due from the company and if that debt is bona fide disputed and the defense is a substantial one, the court will not wind up the company. It can be understood by analysing following decided cases;
The Supreme Court held that a winding up petition is not a legitimate means of seeking to enforce payment of a debt, which is bona fide disputed by the company. A petition presented ostensibly for a winding up order, but really to exercise pressure will be dismissed and in the circumstances may be stigmatized as a scandalous abuse of process of the court.

2. Amalgamated Commercial Traders (P) Ltd., V. A.C.K. Krishnaswami (1965) 35 comp. case. 456
Further Supreme Court held that the debit is bona fide disputed and the defense is a substantial one the court will not wind up the company.  Where the debit is undisputed the court will not act upon a defense that the company has the ability to pay the debt but the company chooses not to pay that particular debt. Where, however, there is no doubt that 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 a winding up order without requiring the creditor to quantify the debt precisely. The principles on which the court acts are first that the defense of the company is in good faith and one of substance, secondly the defense is likely to succeed in point of law, and thirdly, the company adduces prima facie proof of the facts on which the defense depends

3. Madhusudan Gordhard & Co. V. Madhu Woollen Industries (P) Ltd. (1972) 42 Comp. case 125
When a sum is due it cannot be said to be ‘debt’. The expression ‘sum due’ as referred to in Sec. 434 (1) (a) must mean what has fructified and cannot merely be a contingent liability or deferred payment. If the liability has not fructified within 21 days from the date of service of statutory notice it cannot be said to be a ‘debt’ which company is unable to pay in order that the court could find a justification for winding up the company. Therefore the justification for applying for winding up the company will have to be seen whether the debt has become payable on the date when the statutory notice was issued or any time after receipt within twenty one days from the date of demand.

4. Priyaraj Electronics Ltd., V. Motorola India (P) Ltd. (2009) 93 CLA (Snr.) 1 (P&H)
The machinery for winding up of a company cannot be allowed to be utilized merely as a means for realizing debts due from a company and if the debt is bona fide dispute and the defense is a substantial one, the court will not wind up the company.

5. Windson International V. HM Electricals (P) Ltd. (2009) 93 CLA (Snr.) 2 (Ori)
From the above discussions, it is clear that, an order of winding up under Sec. 433 (e) is a discretionary one and the machinery for winding up should be allowed to be utilized as a means for realizing debts due from the company and if that debt is bona fide disputed and the defense is a substantial one, the court will not wind up the company.

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