Winding up of a company is a process of putting an end to the life of a company. It is a proceeding by means of which a company is dissolved and in the course of such a dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is left, it is distributed among the members in accordance with their rights.
Modes of Winding Up
There are three modes of winding up of a company. These are:
(a) Compulsory winding up by the court.
(b) Voluntary winding up, which is itself of two kinds:
i. Members’ voluntary winding up.
ii. Creditors’ voluntary winding up.
(c) Winding up under the supervision of the court.
Winding up by court:
A company may be wound up by an order of the court. This is called compulsory winding up. Section 433 lays down the following grounds for the winding up of a company by the court.
1. Special resolution of the company:
If the company has by a special resolution resolved that it may be wound up by the court. The power of the court in such a case is discretionary. The court may refuse to order winding up where it is opposed to public or company’s interest.
2. Default in holding statutory meeting:
If a company makes a default in delivering the statutory report to the registrar or in holding the statutory meeting, the court may order winding up of the company either on the petition of the register or on the petition of the contributory. The petition for winding up must not be filed before the expiration of 14 days after the last day on which the statutory meeting ought to have been held. However, the court may instead of making a winding up order, direct the statutory report shall be delivered or that meeting shall be held.
3. Failure to commence or suspension of business:
Where a company does not commence its business within a year from its incorporation, or suspends its business for a whole year, the court may order for its winding up. The power of the court is discretionary and will be exercised only where there is a fair indication that the company has no intension to carry on the business. Where the suspension of the business is temporary or can be satisfactorily accounted for, the court will refuse to make an order. A company will not be wound up if it abandons one of its several businesses, unless that business is the main object of the company.
4. Reduction of members below minimum:
Where the number of members is reduced below 7 in the case of public company and below 2 in case of a private company, the court may order the winding up of the company. This provision is for the protection of existing members against unlimited liability.
5. Inability to pay debts:
The court may order for the winding up of a company if it is unable to pay its debts. The basis of an order for winding up under this clause is that the company has ceased to be commercially solvent i.e. it is unable to met its current demands, although the assets when realized may exceed its liabilities. According to section 434 of the act a company shall be deemed to be unable to pay its debts in the following cases:
a. If a creditor to whom the company owes a sum of Rs.500 or more has served on the company a notice for payment and the company has for three weeks neglected to pay or otherwise satisfy him. But where the company bonafide disputes the debt and the court is satisfied with the defense of the company, the court will not order for its winding up.
b. If execution or other process issued on a decree or order of any court in favor of a creditor is returned unsatisfied in whole or in part.
c. If it is proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court will take into account the contingent and the prospective liabilities of the company. What has to be proved under this clause is not whether the company’s assets exceed it s liabilities, but whether it is unable to meet its current demands. If a company is unable to meet its current liabilities, it is commercially insolvent and liable to be bound up.
6. Just and equitable:
The last ground on which the court can order the winding up of a company is when the court is of the opinion that it is just and equitable that the company should be wound up. This clause gives the court a very wide power to order winding up wherever the court considers it just and equitable to do. The court will consider such grounds to wind up a company for just and equitable reasons as are not covered by the preceding fie clauses.
The following are the instances where the courts have exercised their discretion under this clause:
i) Where there is a deadlock in the management.
ii) Where it is impossible to carry on the business of the company except at a loss.
iii) Where the company has ceased to carry on its authorized business and is engaged in an illegal business.
iv) Where the object for which the company is formed is impossible of further pursuit.
v) Where the minority is being disregarded or oppressed.
vi) Where there is lack of confidence in directors.
vii) Where a company has been conceived and brought forth in fraud.