In this article we will discuss about the Winding up by National Company Law Tribunals:- 1. Grounds for Compulsory Winding Up 2. Who may Petition 3. Procedure for Winding up 4. Voluntary Winding up 5. Members’ Voluntary Winding up 6. Creditors’ Voluntary Winding up 7. Consequences of Winding up Generally 8. Preferential Payments 9. Overriding Preferential Payments.
- Grounds for Compulsory Winding Up
- Who may Petition
- Procedure for Winding up
- Voluntary Winding up
- Members’ Voluntary Winding up
- Creditors’ Voluntary Winding up
- Consequences of Winding up Generally
- Preferential Payments
- Overriding Preferential Payments
1. Grounds for Compulsory Winding up:
Section 433 provides that a company may be wound up by the Tribunal:—
(a) if the company has, by special resolution, resolved to 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 7, and in the case of a private company, below 2;
(e) if the company is unable to pay its debts; and
(f) if the Tribunal is of 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 Tribunat is of the opinion that the company should be wound up under the circumstances specified in section 424 G (This section deals with winding up of a sick industrial company.) Provided that the Tribunal should make an order for winding up of a company under clause (h) on application made by the Central Government or a State Government The power of the Tribunal to wind up a company in all the above cases is discretionary as the word used in sec 433 is ‘may’.
2. Who may Petition:
Under sec 439, the following may petition,—
(1) the company;
(2) a creditor;
(3) a contributor)
(4 ) all or any of the above parties;
(5) the Registrar;
(6) any person authorised by the Central Government as per section 243, i. e, following upon a report of inspectors appointed to investigate the affairs of the company under section 235;
(7) in a case falling under clause (h) of section 433, by the Central Government of a State Government. Section 440 provides that where a company is being wound up voluntarily, a petition for its winding up by the Tribunal may be presented by (a) any person authorised to do so under section 439 or (b) the Official Liquidator. But the Tribunal shall not make a winding up order on a petition presented to it under this section unless it is satisfied that the voluntary winding up cannot be continued with due regard to the interests of the creditors or contributories or both.
3. Procedure for Winding up:
On hearing the petition, the Tribunal may dismiss it, adjourn it, make an interim order, or make a compulsory order for winding up the company Where the winding up order is made, the Tribunal will appoint the Official Liquidator satisfying the conditions given in Section 448 of the Companies (Amendment) Act, 2002.
The Tribunal will also settle the list of contributories, make calls and settle any question arising out of winding up The creditors will be asked to prove their claims, where necessary, and the liquidator will realise the assets and distribute the proceeds among the creditors, whereupon the Tribunal may pass an order that the company be dissolved.
4. Voluntary Winding up:
A company may be wound up voluntarily:
(i) When the period (if arty ) fixed for its duration has expired, or an event on the happening of which the company is to be wound up has happened and the company in general meeting has passed an ordinary resolution to wind up; or
(ii) If the company passes a special resolution to wind up voluntarily (sec. 484). According to sec 485, when the resolution has been passed, a notice must be given by the company within 14 days of the passing thereof by advertisement in the Official Gazette, and also in some newspapers circulating in the district where the registered office is situated.
5. Members’ Voluntary Winding up:
There are two kinds of voluntary winding up, namely, Members’ and Creditors’.
A company may be wound up as members’ voluntary winding up, if a declaration of the company’s solvency is made by its directors, or where there are more than 2 directors by the majority of directors, at Board meeting, that they are of opinion that the company has no debts, or that it will be able to pay its debts in full within 3 years from the commencement of winding up.
On the passing of the resolution for winding up, the company must, in general meeting, appoint one or more liquidators and fix his or their remuneration. Remuneration so fixed cannot be increased at all.
If in a members’ voluntary winding up, the liquidator is of opinion that the company will not be able to pay its debts in full within the period stated in the declaration, or if the period has expired without full payment of debts, he must forthwith call a meeting of the creditors.
After such a meeting, it will become a creditors’ winding up. According to sec. 496, in the event of the winding up continuing for more than one year, the liquidate must call a general meeting of the company at the end of the first year of the commencement of winding up and of each succeeding year, and must lay before the meeting an account of his acts and dealings and of the conduct of winding up.
When the affairs of the company are fully wound up, the liquidator must make up an account and call a final meeting of the company and lay these accounts before the meeting, and, within one week of this meeting, send to the Registrar and the Official Liquidator a copy each of the account and the return to each of them.
The Registrar will register the account and the return. The Official Liquidator will scrutinise the books and papers of the company and make a report to the Tribunal that its affairs have not been conducted in a manner prejudicial to the interests of its members or the public interest. Then the company will be deemed to be dissolved from the date of the submission of this report to the Tribunal.
6. Creditors’ Voluntary Winding up:
Where a declaration of solvency is not made and filed with the Registrar, it is presumed that the company is insolvent. In such a case, the company must call a meeting of its creditors for the day or the day next following the day fixed for company’s general meeting for passing the resolution for winding up.
Subject to the rights of the preferential creditors, the assets of a company on its winding up are applied in satisfaction of its liabilities pari passu, and any surplus is divided among the members according to their rights and interests in the company (sec. 511).
7. Consequences of Winding up Generally:
As to Shareholders:
A shareholder is liable to pay the full amount of shares held by him. This liability continues after winding up, but he is then described as a “contributory”. By sec. 428, a contributory is every person liable to contribute to the assets of a company in the event of its being wound up, and includes a holder of fully paid-up shares, and also any person alleged to be contributory.
Contributories are either present or past, and it is the former who are liable to pay calls, and the latter can be called upon to pay only if the present contributories are unable to pay. The nature of a contributory’s liability after winding up is legal and not contractual. He cannot set off his debt against his liability for calls even if there is an express agreement to do so.
A person who disposes of partly paid shares can be called upon to contribute if the company is wound up within one year of the sale of the shares and only in respect of debts incurred by the company when he was a shareholder. The above applies to those whose shares are forfeited or surrendered but not to the heirs of those who die.
As to Creditors:
A company can never be adjudged insolvent, although it may have become insolvent in the sense that it is unable to pay its debts. Where a solvent company is to be wound up, all claims against the company are admissible, and when they are proved, payment is made.
In the case of an insolvent company, the insolvency principles apply. A secured creditor may either—
(i) Rely on the security and ignore the liquidation; or
(ii) Value his security and prove for the balance of his debt; or
(iii) Give up his security and prove for the whole amount.
Unsecured creditors of an insolvent company are paid in the order —
(i) Overriding preferential preferment’s under section 529-A,
(ii) Preferential payments under sec. 530; and
(iii) Other debts pari passu.
8. Preferential Payments:
Preferential payments are as follows:—
(a) All revenues, taxes, cesses and rates due and payable by the company within 12 months preceding the relevant date. ‘Relevant date’ means — (i) in the case of a compulsory winding up of a company, the date on which a provisional liquidator is appointed, or if he is not appointed, the date of the winding up order.
In case the company had commenced to be wound up voluntarily before that date, relevant date means the date of commencement of voluntary winding up.
(ii) In the case of a voluntary winding up of a company, the date of the passing of the resolution for the winding up of the company.
(b) All wages or salary (including wages for time or piece work and salary earned wholly or in part by way of commission) of any employee due for a period not exceeding four months within the twelve months next before commencement of winding up provided the amount payable to one claimant will not exceed one thousand rupees. [Vide Notification G.S.R. 30(E) dated 17-02-1997, the sum payable to any one claimant in relation to wages and salary shall not exceed Rs 20,000],
(c) All accrued holiday remuneration becoming payable to any employee on account of winding up.
Note. Persons who advance money for the purpose of making preferential payments under (b) and (c) above will be treated as preferential creditors, provided the money is actually, so used;
(d) Unless the company is being wound-up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, all contributions payable during the 12 months next before winding up, by the company as the employer of any person, under the Employees’ State Insurance Act, 1948 or any other law for the time being in force
(e) Unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company or unless it has taken out a workmen’s compensation insurance policy, all compensation due under the Workmen’s Compensation Act, 1923;
(f) All sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees, maintained by the company;
(g) The expenses of any investigation held under sec. 235 or 237, insofar as they are payable by the company.
9. Overriding Preferential Payments:
The Companies (Amendment) Act, 1985 has introduced Section 529A according to which certain dues are to be settled in the case of winding up of a company even before the payments to preferential creditors under section 530 are made.
Section 529A states that in the event of winding up of a company, workmen’s dues and debts due to secured creditors, to the extent such debts rank under Section 529(1XC), shall be paid in priority to all other debts. The workmen’s dues and debts to secured creditors shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.
It may be noted here that workmen’s dues, in relation to a company, means the aggregate of the following sums due from the company to its workmen:-
(i) All wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman and any compensation payable to any workman under any of the provisions of the Industrial Disputes Act, 1947;
(ii) All accrued holiday remuneration becoming payable to any workman on account of winding up;
(iii) Unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless it has taken out a workmen’s compensation insurance policy, all amounts due in respect of any compensation or liability for compensation under Workmen’s Compensation Act, 1923 in respect of death or disablement of any workman of the company;
(iv) All sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company. According to section 529(3Xa) “workmen”, in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947.
According to section 2(s) of the Industrial Disputes Act, 1947, “workman” means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied.
It includes any person who has been dismissed, discharged or retrenched in connection with, or as a consequence of an industrial dispute or whose dismissal, or discharge or retrenchment has led to that dispute.
But it does not include any such person:
(i) Who is subject the Air Force Act, 1950, or the Army Act, 1950, or the Navy Act, 1957; or
(ii) Who is employed in the police service or as an officer or other employee of a prison ; or
(iii) Who is employed mainly in a managerial or administrative capacity; or
(iv) Who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.
The Companies (Amendment) Act, 1985 has made a distinction between employees and workmen for the purposes of preferential payments. Workmen’s dues rank pari passu with the secured creditors and are to be paid in priority to the dues payable to an employee.
Persons who claim to be creditors must prove their debts within the time fixed by the Court, or by the voluntary liquidator.