WINDING UP PETITION BY THE CREDITORS.

A PROJECT ON

WINDING UP PETITION BY THE CREDITORS

SUBJECT: CORPORATE LAW-II

SUBMITTED TO: PROF. AJAY KUMAR SUBMITTED BY: DHIRAJ KUMAR ROLL -23

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA Page 1

WINDING UP PETITION BY THE CREDITORS.

ACKNOWLEDGEMENT
I take this opportunity to express our humble gratitude and personal regards to Dr.Ajay Kumar for inspiring me and guiding me during the course of this project work and also for his cooperation and guidance from time to time during the course of this project work on the topic

The Present Project Report is attempted to explain for the benefit of the general readers. Dealing with this topic in a material form has naturally involved a great deal of compression and omission of many matters of interest. We hope that my selection of material will give a fair outline of the general picture.

I EXPRESS MY

GRATITUDE TO THE FACULTY OF, CORPORATE LAW

- II

FOR THE CONCEPTS

GIVEN BY HIM IN THE SUBJECT WHICH HAS BEEN THE BASE FOR THIS SMALL PIECE OF WORK .

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 2

WINDING UP PETITION BY THE CREDITORS.

RESEARCH METHODOLOGY

AIMS AND OBJECTIVES: The aim of the project is to present a detailed study of the topic Winding Up Petition By The Creditors through decisions and suggestions and different writings and articles.

SCOPE AND LIMITATIONS: Though the topic Winding Up Petition By The Creditors is an immense project and pages can be written over the topic but because of certain restrictions and limitations I was not able to deal with the topic in great detail.

SOURCES OF DATA: The following secondary sources of data have been used in the project1. Articles/Journals 2. Books 3. Websites

METHOD OF WRITING AND MODE OF CITATION: The method of writing followed in the course of this research paper is primarily analytical. The researcher has followed Uniform method of citation throughout the course of this research paper.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 3

WINDING UP PETITION BY THE CREDITORS.

TABLE OF CONTENTS
TOPIC PAGE NO.

1. ACKNOWLEDGEMENT...............................................................2 2. RESEARCH METHODOLOGY....................................................3 3. INTRODUCTION............................................................................5 4. WINDING UP BY COURT..............................................................7 5. WHO CAN APPLY FOR WINDING UP OF COMPANY..9 6. PETITION BY CREDITORS.........................................................10 7. VOLUNTARY WINDING UP........................................................12 8. CREDITOR'S VOLUNTARY WINDING UP...............................17 9. CONCLUSION...............................................................................18 10.BIBLIOGRAPHY...........................................................................19

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 4

WINDING UP PETITION BY THE CREDITORS.

INTRODUCTION
Winding Up is a method of putting an end to life of a Company. In the words of Professor Gower stated that Winding Up of a Company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. 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 Rights1. Company cant be made insolvent under insolvency laws. A solvent Company can be wound up. Winding up precedes dissolute. The company is not dissolved at the commencement of winding up. Its corporate status and powers continue.2 Winding up precedes dissolution.3

Traditionally, winding up was initiated by a creditor because they believed that a company was not in a position to pay its current outstanding debts. The closest thing to bankruptcy for a limited company is compulsory liquidation or winding up. The process is normally initiated by one or more of a companys creditors who feel that the company should be closed and cease trading. The creditor will present a petition to wind up the company at the court (a Winding Up Petition). The company may then be ordered by the court to be liquidated or wound up.

Once a winding up petition is ordered, a liquidator will be appointed who will be responsible for closing the business. They will make any employees redundant. The liquidator will also try to sell any of the companys assets to generate cash which is used to repay outstanding debts to the company creditors. They will also be responsible for reporting on the companys directors and investigating whether they have been guilty of wrongful trading (allowing the company to continue to trade when they knew that it was insolvent).

1 2

THE PRINCIPLE OF MODERN CRIMINAL LAW,647(3 rd Edn, 1969) Company remains a tax payer until dissolved by order of the court. Gannon Dunkerley & Co. V. Asst. Commr. Urban Land Tax, (1992) 73 Comp Cas 168 Mad. Where the contention was that there was no use winding up the company because all the assets of the company had already been sold, the court orderd winding up. Syndicate Bank V. Printersall (P) Ltd. (1991) 71 Comp Cas 215 Kant 3 BACHAWAT J in Pierce Leslie & Co V. Wapshar, (1969) 2 SCA 378, 389

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 5

WINDING UP PETITION BY THE CREDITORS. Traditionally, winding up was initiated by a creditor because they believed that a company was not able to pay its debts. As such, they wanted to protect both themselves and other potential creditors from trading with the business which in the future may not be able to afford to pay them. The company itself would be protected from misunderstandings by the court. The court will review the creditor grievance and any defence put forward by the company and then grant or reject the winding up petition.

S.425 talk about different kind of winding up petition. Threre are 3 kinds of winding up:a) Compulsory Winding Up under order of Court b) Voluntary Winding Up i. ii. By Member By Creditors

c) Voluntary Winding Up under supervision of Court

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 6

WINDING UP PETITION BY THE CREDITORS.

WINDING UP BY COURT
A company may be wound up by at an order of the court. Winding up by the court is also known as compulsory winding up. Section 433 deals about that by following processes which is used in winding up by court:1. Company can decide to wind up by Special Resolution4. Court is not bound to it, so it is discretionary in nature. But in the case when activity of company is opposed to public interest and Opposed to Companys Interest then in that case court have to take decision regarding this. 2. If there is default in Holding Statutory Meeting i.e. Failure to hold Statutory meeting and file statutory report then court have authority to give order to be wound up5. In this condition Petition to be filed by Registrar or Contributory or by any other person, within 14 days of having to hold meeting6. Here power of Court is discretionary, may direct to hold statutory meeting and file statutory report7. 3. Court will give order regarding winding up when company failed to commence business within one year or failed to carry on business for one year8. Here also it is Discretion of court to give order regarding winding up. Because it should be given when it appears that company does not have intention to carry on business. But if it appears that the situation is temporary then no direction is given by the court9. 4. If it appears that there is reduction in membership like in Public Company (below 7) and in Private Company (below 2)10. 5. Inability to Pay Debts is also a reason when court gives order regarding winding up 11. Inability to pay debts means if amount exceeding one lakh rupee notice to be served on Company and for 3 weeks Company has failed to pay it12. Winding up may be stopped if
4 5

S. 433(a) S. 433(b) 6 S. 439(7) 7 S. 443(3). This does not apply to private companies since they are not required to to hold such a meeting. S R Subramaniam V Drivers & Conductors Bus Service, (1978) 48 Comp Cas 672 Mad 8 S.433(c) 9 Murlidhar V. Bengal Steamship Co. AIR 1920 Cal 722 10 S.433(d) 11 S.433(e) 12 Babu Ram V. Krishna Bhardwaj Cold Storage & General Mills Co (P) Ltd.(1962) 2 Comp LJ 215 All

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 7

WINDING UP PETITION BY THE CREDITORS. Company pay the decree amount. Other condition is commercial insolvency that is, Company is unable to pay the debts. If then opinion of Court that it is Just and Equitable then he can give order for winding up13. When Main object for which company formed failed then in that conditnion also court can give order for winding up.

There are other conditions also when court can give order for winding up, like i. ii. When Company cant carry on business except at losses Oppression of Minority i.e. when principle shareholders have adopted an aggressive, oppressive or squeezing policy towards minority iii. Fraudulent Purpose i.e. when company has been conceived and brought forth in fraud or illegal purpose iv. Against of public interest

13

S.433(f)

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 8

WINDING UP PETITION BY THE CREDITORS.

WHO CAN APPLY FOR WINDING UP OF COMPANY

Section 439 talk about that who can apply for winding up of company. An application to the court for the winding up of a company can be made by a petition 14. A petition may be made by any one of the following 1. Petition by Company: for it Company has to pass special resolution in the general meeting of the company 2. Creditors Petition [s. 439(2)]:- Creditor includes secured creditor, debenture holder and trustee for debenture holders. Here, secured and unsecured creditors enjoy same status. Initiation of civil proceedings is not consider as a bar to Winding Up. Stay of suit can be ordered. 3. Contributorys Petition:- On Winding Up, shareholders, known as contributory 4. Registrars Petition [S439(5)]:- on all grounds except special resolution. For it they have to obtain prior permission of Central Government and Central Government to sanction only after Company afforded an opportunity to represent. 5. Central Government Petition:- after investigation of the affairs of Company under Section 235 if found that the business of Company conducted for fraudulent or unlawful purposes.

14

A petition can be filed through a special power of attorney and not through a general power. Shantilal khushaldas & bros (p) ltd v. c s shah, (1993) 77 comp cas 253 bom

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 9

WINDING UP PETITION BY THE CREDITORS.

PETITION BY CREDITORS
S.439(2) talk about winding up petiotion filed by the creditors. Creditor includes secured creditor, debenture holder and trustee for debenture holders. Here, secured and unsecured creditors enjoy same status15. It is not even necessary for a secured creditor to apply that he should give up his security. But where petition is brought by a contingent or prospective creditors, it shall not be admitted unless the leave of the court is satisfied that there is prima facie case for winding up the company and reasonable security for cost has been given.16

The Calcutta High Court has observed that a creditor would not ordinarily be heard to urge that winding up order should be made because the substratum of the company was gone, not for the reason that he was technically and as a matter of law barred from taking that ground at all, but for the reason that it was not proper ground for the creditor to urge except in very special circumstances.17 Sometimes a creditors petition is opposed by other creditors. In such case the court may ascertain the wishes of the majority of the creditors. But their opinion does not bind the court. The question will ultimately depend upon the state of the company. If the company is commercially insolvent and the object of trading at a profit cannot be attained, winding up order would follow as a matter of force. (ex debito justiate)18 .

A creditor who is pursuing his ordinary remedy or civil suit for the enforcement of his claim can also make the same claim as a ground for winding up. The court may order the stay of his suit but cannot disqualify on that ground.19 The pendency of an application filed by the creditor before the debt recovery did not affect the jurisdiction of the court to admit the creditors petition for winding up.

15 16

Karnataka Vegetable Oil & Refineries Ltd V Madras Industrial Investment Corpn. AIR 1955 Mad 582 S.439(8) 17 Bengal flying club, re 1966 (2) Comp.LJ 213 18 Ibid. 19 Central Bank of India v. Sukhani Mining Industries, 1997) 47 Com case 1 pat.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 10

WINDING UP PETITION BY THE CREDITORS. A foreign creditor can also apply for winding up. A company did not pay its foreign commission agent. He asked for winding up. The companys defense that RBI permission was necessary did not appeal to the court. It was a part of companys duty to make necessary arrangements. 20 A foreign arbitration award can be a good ground for winding up when it has been declared by the competent jurisdiction to be enforceable in India under section 49 of Arbitration and Conciliation Act, 1996.21

A guarantor is a prospective creditor and has a right to apply for winding up. An individual note holder holding beneficially through a depository was held to be a creditor for the purpose of filing a petition.22 Where the claim of the creditor is enforceable at the time of the petition it does not matter if it ceases to be enforceable by the time of the order. An unpaid worker is not a creditor for this purpose. The Union of Worker also has no locus standi to file a petition since alternative remedy is there under the industrial laws. 23

An unregistered firm being not competent to file a suit was not allowed to file a petition unless the partners also joined it. A petition by erstwhile director of the company for recovery of their dues was held to be not maintainable.24 Where the petition is to be filed through an agent he must be specifically authorized for the purpose of petition. A general authorization for suits and proceedings against the company is not going to be sufficient.

A power of attorney which was not bearing any date or place of execution was held to be invalid.25 Where a petition was filed by a power of attorney holder for more than 11 years after the disappearance of the person who granted the power, the petition was held to be incompetent unless the attorney proved that his guarantor was still alive.26

20 21

Euro Metal Ltd. v. Alumunium Cables and Conduvtors Pvt. Ltd. (1983) 53 Comp. case 744 Cal Marina World Shipping Corpn, v. Jindal Export Pvt. 2004) 122 Comp. case 399 Del. 22 Essar Steel ltd. v G Emerging marlet Fund (2003)116 Comp. case 248 Guj 23 Mumbai labour Union v. Indo French Industries Ltd. (2002) 110 Comp. case 408 Bom 24 Gopal Krishna Sharma v Sahibi General Finance and Investment Ltd. (2005) 125 Comp. case 96 Raj 25 Vimal C Sodhani v. Parag fans and cooling Systems Ltd. (2006) 133 Comp case 286 MP 26 Parvati Das Gupta v Official Liquidator (2006) 130 Comp case 427 Cal.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 11

WINDING UP PETITION BY THE CREDITORS.

VOLUNTARY WINDING UP

Under S440 a company can file petition for voluntary winding up. Petition for Winding Up by Court may be presented where Company is already under a) Voluntary liquidation b) Under supervision of Court

Petition for voluntary winding to be presented by a. Company b. Contributory c. Registrar d. Creditor e. Central Government f. Official Liquidator

S.443 talk about Powers of Court regarding winding up procedure as after hearing of winding up petition filed under voluntary winding up court have power to give following directions:a. Dismiss with or without costs b. Adjourn the hearing c. Make interim order d. Make order for Winding Up e. Conditional order of Winding Up

Commencement of winding up (U/S.441) start from different date depending upon following situation a. Not from date of order b. But from date of presentation of petition c. If prior resolution has been passed by Company, from date of passing resolution d. More than one petition, then from date of first petition

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 12

WINDING UP PETITION BY THE CREDITORS. Under S.443 court have power regarding recission of order, according to it anytime the Court may change its order on changed facts. Court on application can stay any other proceeding in any other Court that is Civil, Criminal or Revenue in nature.27

Court may appoint Provisional Liquidator after presentation of application but before passing of Winding Up order.28 When Official Liquidator is appointed Court have to inform Company before doing so. Object of appointment is protection and preservation of Companys assets. Later on Provisional Liquidator can become Official Liquidator

Court have to send indication of Winding Up order to Official Liquidator and Registrar. Company have to file copy of certified order with Registrar within 30 days of passing of orders. Registrar have to record this and then notify in official gazette. Winding Up order means discharge of all officers and employees of Company except if business is to be continued. Order operates in favour of all creditors and contributories of Company after it Official Liquidator becomes Liquidator of Company.

After passing of order no legal proceeding can be initited or subject to terms as the Court may impose29. Pending suits to be proceeded with only by leave of Court. Object of this is to prevent assets of Company from being frittered away in vexatious litigations

Winding Up Court have jurisdiction to decide following thing:a. Any suit or proceeding by or against the Company. b. Any claim made by or against the Company c. Any application made for compromise or arrangement with creditors d. Any question of priorities or any question whatsoever whether of law or fact which may relate to or arise in the course of Winding Up

27 28

S.442 S.450 29 S.446

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 13

WINDING UP PETITION BY THE CREDITORS. Report by Official Liquidator Within 6 months of appointment, Official Liquidator have to submit Preliminary Report to Court showing i. ii. iii. Amount of issued and paid up capital / assets and liabilities If Company has failed then mention reasons for that Whether further inquiry required

Custody of Companys property (S456) Official Liquidator to take into custody all of Companys property, effects and actionable claims.

Powers of Liquidator (S457) A lquidator have following power with sanction of court:i. ii. iii. iv. v. Institute and defend legal proceedings To carry on business of Company Sell immovable and moveable property and actionable claims To raise security Other things necessary

But following power can be exercised without sanction of Court however subject to certain control of court:i. ii. iii. iv. v. vi. To do all acts of Company Inspect records and returns of Company and files of Registrar without payment of fee To prove and claim dues To draw, endorse and accept Negotiable Instruments on behalf of Company To execute letters of administration on behalf of deceased To appoint agent on his behalf

Official Liquidator have power to call meetings of creditors and contributories and consider their decisions. Any Person aggrieved by act or decision of Official Liquidator may apply to Court. Official Liquidator have to present to the Court twice a year an account. Moneys received by Official Liquidator to be paid into the public account of India in Reserve Bank of India. Court
CHANAKYA NATINAL LAW UNIVERSITY, PATNA Page 14

WINDING UP PETITION BY THE CREDITORS. have to get all accounts audited. Official Liquidator have to send a copy of accounts to every creditor and contributory. Where liquidation is of Central Government then report have to be sent to Central Government. Central Government have authority to take cognizance of misconduct on part of Official Liquidators.

Committee of Inspection (S464) Court appoint Committee of Inspection to act with Official Liquidator. Official Liquidators within 2 months call creditors to decide about membership and then within 14 days meeting of contributories. In case of conflict, Official Liquidators have to apply to Court for final decision. This committee consist of 12 members. It have authority to inspect accounts of Official Liquidator. Member must resign by notice in writing to Official Liquidator. Meeting it may be called by Official Liquidator or by themselves.

General Power of Court 1. Power to stay Winding Up (S466):- On application of Official Liquidator, creditor or Contributory. There must be Sufficient reason for it. 2. Settlement of list of contributories (S467):- That is, the list of assets and liabilities. 3. Adjustment of rights of contributories (S475) and then distribute surplus among persons entitled to it 4. Power to arrest absconding contributory (S479) 5. Saving of existing powers (S480):- General powers of Court for recovery also applicable here 6. The right of set off (S469):- Any other dues to be set off. Court have limited right of set off in following cases:i. Unlimited Company only against money due to him from Company or independent dealing, that is, of debt of contributory ii. iii. Limited Company those whose liability is unlimited same right as unlimited company Any other Company set off against money due on call

7. Delivery of property (S468):- Court to call for information from person or persons. Private enquiry can be held.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 15

WINDING UP PETITION BY THE CREDITORS. 8. Power to order deposit in the Reserve Bank (S471):- All moneys received to be deposited in public account of Reserve Bank. 9. Power to exclude creditors (S474):- Can exclude those creditors who are entitled to benefits 10. Public Examination (S478):- In case of report of fraud by Official Liquidator to Court it is made on specific allegation not only on simple accusation. Pre-requisite conditions for it is, i. ii. iii. iv. Official Liquidator has made further report Such report contains a finding of fraud Finding of fraud against the person whose examination is sought Individual is one who has taken part in promotion of Company and is officer of Company

Dissolution of Company (S481):- If Winding Up cant take place, Court to direct dissolution. Within 30 days Official Liquidator have to file report with Registrar in this regard.

Enforcement of Orders and Appeals Enforcement of Orders (u/S482) can be made through out the country through Courts having appropriate Jurisdiction. Appeals from Orders (u/S483) can be filed in same Court which passed or delivered them.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 16

WINDING UP PETITION BY THE CREDITORS.

CREDITOR'S VOLUNTARY WINDING UP30

It is possible in the case of insolvent companies. It requires the holding of meetings of creditors besides those of the members right from the beginning of the process of voluntary winding up. It is the creditors who get the right to appoint liquidator and hence, the winding up proceedings are dominated by the creditors. The provisions applicable to creditors' voluntary winding up are as follows:1. The Board of Directors shall convene a meeting of creditors on the same day or the next day after the meeting at which winding up resolution is to be proposed. Notice of meeting shall be sent by post to the creditors simultaneously while sending notice to members.31 It shall also be advertised in the Official Gazette and also in two newspapers circulating in the place of registered office.32 2. A statement of position of the company and a list of creditors along with list of their claims shall be placed before the meeting of creditors33. 3. A copy of resolution passed at creditors' meeting shall be filed with Registrar within 30 days of its passing34. 4. It shall be done at respective meetings of members and creditors. In case of difference, the nominee of creditors shall be the liquidator35. 5. A five-member Committee of Inspection is appointed by creditors to supervise the work of liquidator36. 6. Fixation of remuneration of liquidator by creditors or committee of inspection37. 7. Cessation of board's powers on appointment of liquidator38.

30 31

S.499 S.500(1), A creditor can attend in person or through proxy. It has been held that message of proxy received through facts and signed by the creditors or by someone authorized by him would be a proper proxy form and the creditor would have the right to attend the creditors meeting through such a proxy. IRC V. The Debtor, (1996) 1 BCLC 538 Ch D 32 S. 500(2) 33 S.500(3) 34 S.500(1)&(2) 35 S. 500(2) 36 S.503(1) 37 S.504(1)&(2) 38 S.505; But the committee of inspection or the creditors may sanction the boards power to continue.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 17

WINDING UP PETITION BY THE CREDITORS.

CONCLUSION
In concluding remarks we can say that traditionally, winding up was initiated by a creditor because they believed that a company was not in a position to pay its current outstanding debts. The process is normally initiated by one or more of a companys creditors who feel that the company should be closed and cease trading. The creditor will present a petition to wind up the company at the court (a Winding up Petition). The company may then be ordered by the court to be liquidated or wound up. Once a winding up petition is ordered, a liquidator will be appointed who will be responsible for closing the business. They will make any employees redundant. The liquidator will also try to sell any of the companys assets to generate cash which is used to repay outstanding debts to the company creditors. S.439(2) talk about winding up petiotion filed by the creditors. Creditor includes secured creditor, debenture holder and trustee for debenture holders. Here, secured and unsecured creditors enjoy same status. Sometimes a creditors petition is opposed by other creditors. In such case the court may ascertain the wishes of the majority of the creditors. But their opinion does not bind the court. The question will ultimately depend upon the state of the company. If the company is commercially insolvent and the object of trading at a profit cannot be attained, winding up order would follow as a matter of force. (ex debito justiate).

A foreign creditor can also apply for winding up. A foreign arbitration award can be a good ground for winding up when it has been declared by the competent jurisdiction to be enforceable in India under section 49 of Arbitration and Conciliation Act, 1996.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 18

WINDING UP PETITION BY THE CREDITORS.

BIBLIOGRAPHY
BOOKS
Robert Pennington, Penningtons Company Law, 8th edn. 2001. Butterworths, London Gower and Davies, The Principles of Modern Company Law, 7th Edn. 2003, Sweet & Maxwell, London. K.M.Ghosh & Dr. K.R. Chandratre, Company Law, 13the dn. 2007, Bharat Law House, New Delhi. Justice Y.V. Chandrachud & Dr. S.M. Dugar, Ramaiya- Guide to the Companies Act, 4th edn. 2006, Wadhwa & Co., Nagpur. Johari, Commentaries on Companies Act, 2006 edn., Wadhwa & Co., Nagpur. Brian R. Cheffins, Company Law- Theory, Structure and Operation, Rep.2004, Clarendon Press, Oxford. Lucian Arye & Bebchuk, Corporate Law & Economic Analysis, 1st pub. 1990, Rep. 1991, Cambridge University Press, Australia.

ARTICLES
S.G.Ghokale, Prevention Of Oppression And Mismanagement: An Analysis Of Provisions, (2006) 3 Comp LJ 15. Sridip S. Nambiar, Law Relating to Prevention of Oppression and Mismanagement, U.R. Bhat, Beyond Normative Corporate Governance, The Economic Times, ecember 11, 2006, pg. 5.

CHANAKYA NATINAL LAW UNIVERSITY, PATNA

Page 19