clarification on legal rights for winding up compensation

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Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. In words of Professor Gower, “Winding up of a company is the process whereby its life is ended and its Property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”

WINDING UP A REGISTERED COMPANY AND AN UNREGISTERED COMPANY
Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. An administrator, called the liquidator, is appointed and he takes control of the company, collects its assets, pays debts and finally distributes any surplus among the members in accordance with their rights. At the end of winding up, the company will have no assets or liabilities. When the affairs of a company are completely wound up, the dissolution of the company takes place. On dissolution, the company's name is struck off the register of the companies and its legal personality as a corporation comes to an end.

The procedure for winding up differs depending upon whether the company is registered or unregistered. A company formed by registration under the Companies Act, 1956 is known as a registered company. It also includes an existing company, which had been formed and registered under any of the earlier Companies Acts.

In Pierce Leslie & Co. Ltd v. Violet Ouchterlony, 1969 SCR (3) 203 the Hon’ble supreme court held that winding up precedes the dissolution. There 'is no statutory provision vesting the properties of a dissolved company in a trustee or having the effect of abrogating; the law of escheat. The shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution of a company, its properties, if any, vest in the government.

WINDING UP A REGISTERED COMPANY
The Companies Act provides for two modes of winding up a registered company.

Grounds for Compulsory Winding Up or Winding up by the Tribunal:
1. If the company has, by a Special Resolution, resolved that the company be wound up by the Tribunal.

2. If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting. A petition on this ground may be filed by the Registrar or a contributory before the expiry of 14 days after the last day on which the meeting ought to have been held. The Tribunal may instead of winding up, order the holding of statutory meeting or the delivery of statutory report.

3. If the company fails to commence its business within one year of its incorporation, or suspends its business for a whole year. The winding up on this ground is ordered only if there is no intention to carry on the business and the Tribunal's power in this situation is discretionary.

4. If the number of members is reduced below the statutory minimum i.e. below seven in case of a public company and two in the case of a private company.

5. If the company is unable to pay its debts.

6. If the tribunal is of the opinion that it is just and equitable that the company should be wound up.

7. Tribunal may inquire into the revival and rehabilitation of sick units. It its revival is unlikely, the tribunal can order its winding up.

8. 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.

9. 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.

IBA Health v. Info-Drive Systems (CA No. 8230/2010) - Kapadia C.J. begins his analysis by noting that the Company Court is not required in a winding-up proceeding to examine complex issues of law and fact, or resolve serious disputes between parties. The Supreme Court held that a Company Court cannot proceed with a winding-up petition if the respondent raises a “substantial” or “bona fide” dispute as to the existence of the debt.

The following observations are pertinent:
· A dispute would be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. The Company Court, at that stage, is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial. The grounds of dispute, of course, must not consist of some ingenious mask invented to deprive a creditor of a just and honest entitlement and must not be a mere wrangle.

· It is settled law that if the creditor's debt is bona fide disputed on substantial grounds, the court should dismiss the petition and leave the creditor first to establish his claim in an action, lest there is danger of abuse of winding up procedure. The Company Court always retains the discretion, but a party to a dispute should not be allowed to use the threat of winding up petition as a means of forcing the company to pay a bona fide disputed debt.

· The solvency of a company cannot stand in the way of a winding-up petition if the company does indeed owe an unpaid debt to the creditor.

· The Company Court cannot be “maliciously” used as a “debt collecting agency”, and that “an action may lie in appropriate Court in respect of the injury to reputation caused by maliciously and unreasonably commencing liquidation proceedings against a company and later dismissed when a proper defence is made out on substantial grounds.” This judgment may ensure that a winding-up petition is scrutinised more carefully before it is admitted.

The petition for winding up to the Tribunal may be made by :-
1. The company, in case of passing a special resolution for winding up.

2. A creditor, in case of a company's inability to pay debts.

3. A contributory or contributories, in case of a failure to hold a statutory meeting or to file a statutory report or in case of reduction of members below the statutory minimum.

4. The Registrar, on any ground provided prior approval of the Central Government has been obtained.

5. A person authorised by the Central Government, in case of investigation into the business of the company where it appears from the report of the inspector that the affairs of the company have been conducted with intent to defraud its creditors, members or any other person.

6. The Central or State Government, if the company has acted against the sovereignty, integrity or security of India or against public order, decency, morality, etc.

In Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami, (1965) 35 Company Cases 456 (SC), this Court held that "It is well-settled that a winding up petition is not a legitimate means of seeking to enforce payment of the 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 under circumstances may be stigmatized as a scandalous abuse of the process of the court."

The above mentioned decision was later followed by this Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. 1971) 3 SCC 632. it was further stated that if the court is satisfied, that sufficient reasons exist in the petition for winding up, then it will pass a winding up order. Once the winding up order is passed, following consequences follow:

1. Court will send notice to an official liquidator, to take change of the company. He shall carry out the process of winding up, ( sec. 444)
2. The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the winding up petition or not.
3. The official liquidator is appointed by central Government ( sec. 448).
4. The company shall relevant particulars, relating to, assets, cash in hand, bank balance, liabilities, particulars of creditors etc, to the official liquidator. ( sec. 454).
5. The official liquidator shall within six months, from the date of winding up order, submit a preliminary report to the court regarding :

· Particulars of Capital
· Cash and negotiable securities
· Liabilities
· Movable and immovable properties
· Unpaid calls, and

6. An opinion, whether further inquiry is required or not ( 455)
In Vijay Industries v. NATL Technologies Ltd, (2009) 3 SCC 527, it was laid down that if the debt is bona fide disputed, there cannot be "neglect to pay" within the meaning of Section 433(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated and non-payment of the amount of such a bona fide disputed debt cannot be termed as "neglect to pay" so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. The official liquidator, usually a public accountant, must, of course, be a person wholly independent and outside the influence neither of the company, nor in any way connected with its business. In the course of the winding-up operation a liquidator usually consults with the shareholders and the creditors of the company, with the purpose of facilitating his task or proposing a compromise of arrangement between the parties.

When the creditors are all paid, or the capital of the company (if limited) is exhausted, the liquidator is to lay before the Court a complete account, show in the manner in which the operations have been conducted and the property of the company disposed of. The Court, upon exhibition of the said account, pronounces the dissolution of the company.

STAY ORDER
Where, the court has passed a winding up order, it may stay the proceedings of winding up, on an application filed by official liquidator, or creditor or any contributory. The general scheme of the Companies Act is that the Court should have complete control of all proceedings in winding up.

VOLUNTARY WINDING UP OF A REGISTERED COMPANY
When a company is wound up by the members or the creditors without the intervention of Tribunal, it is called as voluntary winding up. It may take place by:-

1. By passing an ordinary resolution in the general meeting if :-

· the period fixed for the duration of the company by the articles has expired;

· some event on the happening of which company is to be dissolved, has happened.

2. By passing a special resolution to wind up voluntarily for any reason whatsoever.
Within 14 days of passing the resolution, whether ordinary or special, it must be advertised in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company. It was held in Neptune Assurance Co. Ltd. vs Union Of India, 1973 SCR (2) 940, that in the Companies Act the expression "voluntary winding up", means a winding up by a special resolution of a company to that effect. Similarly, the expression "winding up by the court" means winding up by an order of the Court in accordance with S. 433 of the Companies Act. The Companies Act (Section 484) provides for two methods for voluntary winding up:-

1. Members' voluntary winding up
It is possible in the case of solvent companies which are capable of paying their liabilities in full. There are two conditions for such winding up:-

a) A declaration of solvency must be made by a majority of directors, or all of them if they are two in number. It will state that the company will be able to pay its debts in full in a specified period not exceeding three years from commencement of winding up. It shall be made five weeks preceding the date of resolution for winding up and filed with the Registrar. It shall be accompanied by a copy of the report of auditors on Profit & Loss Account and Balance Sheet, and also a statement of assets and liabilities upto the latest practicable date; and

b) Shareholders must pass an ordinary or special resolution for winding up of the company.

The provisions applicable to members' voluntary winding up are as follows:-

1) Appointment of liquidator and fixation of his remuneration by the General Meeting.

2) Cessation of Board's power on appointment of liquidator except so far as may have been sanctioned by the General Meeting, or the liquidator.

3) Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator by the general meeting subject to an arrangement with the creditors.

4) Sending the notice of appointment of liquidator to the Registrar.

5) Power of liquidator to accept shares or like interest as a consideration for the sale of business of the company provided special resolution has been passed to this effect.

6) Duty of liquidator to call creditors' meeting in case of insolvency of the company and place a statement of assets and liabilities before them.

7) Liquidator's duty to convene a General Meeting at the end of each year.

8) Liquidator's duty to make an account of winding up and lay the same before the final meeting.

The liquidator shall take the following steps, when affairs of the company are fully wound up : (497)

1) Call a general meeting of the members of the company, a lay before it, complete picture of accounts, wining up procedure and how the propertiesof company are disposed of.

2) The meeting shall be called by advertisement, specifying the time, place and object of the meeting.

3) The liquidator shall send to, the Registrar and official Liquidator copy of account, within one week of the meeting.

4) If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it's members, or public, then the company shall be deemed to be dissolved from the date of report to the court.

5) However, if official liquidator comes to a finding, that affair have been carried in a manner prejudicial to interest of member or public, then court may direct the liquidator to investigate furthers.

When can't a company commence a Members' Voluntary Winding Up

Not every company can be wound up in a members' voluntary winding up. The first exception is insolvent companies. The company must be solvent at the time and the directors must have executed a Declaration of Solvency stating so and setting out the assets and liabilities.

The Act sets out 3 more exceptions:

a) if an application has been filed for the winding up of the company on the basis that the company is insolvent (whether it is or not); and

b) the company has already been wound up by the Court. Once the Court has made that order, the directors and members lose the power to make any other appointment.

c) A third exception is where the company is the corporate trustee of a number of trusts, and one or more of these trusts are continuing.

The directors do not appoint the liquidators and the company is not wound up because of the meeting of directors. The directors will generally nominate liquidators to be appointed by the members, but the actual appointment of liquidators and the winding up occur by resolution of the members. The directors and members may also bypass the meeting process and pass resolutions without the need for the meeting, as long as all directors or members agree to the resolution being passed. They may do this by executing a certificate of resolutions which is passed when the last person executes the certificate.

The directors must have made proper inquiries and actually believe that the company is solvent (that it will be able to pay all of its creditors within 12 months after the commencement of the winding up). Only then can they resolve that the company is solvent and the Declaration of Solvency can be executed. Once the directors have executed that Declaration of Solvency and have resolved to call a meeting of members to consider the appointment of liquidators, the declaration of solvency will be filed with ASIC and notices calling a meeting of the members will be issued to all members.

Advocate Siddhant Sharma LawRato