Consequences/ Effects of Winding up of a Company

CONSEQUENCES/EFFECTS OF WINDING UP A COMPANY

WINDING UP:

This is the second letter of putting an end to the life of a company. In other words, 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 and pays its debts and finally distributes any surplus among the members in accordance with their rights.

In the case of Official Liquidator v. Commr (1992) the contention was that there was no use winding up the company because all the Assets of the company had already been sold but the court ordered the winding up of the company.

In the case of BACHAWAT J in Pierce Leslie & co Ltd v. Violet Ouchterlong Wapshare (1969) the court held that the order of winding up does not change the character of the company as an industrial concern for the purposes of this state Financial Corporation Act 1951.

▪︎ Section 270 provides only one kind of winding up that is compulsory winding up under the order of the Tribunal.

GROUNDS OF WINDING UP BY TRIBUNAL:

A company may be wound up at an order of the Tribunal and this is also called compulsorywinding up, the cases in which a company may be wound up are given in section 271.

Section 271 a of the Tribunal in its discretion to order the winding up of a company in the following cases:

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1. If the company has resolved by special resolution that it be wound up by the Tribunal
2. If the company has acted against the interest of the sovereignty and integrity of India the security of the state friendly relations with foreign States public order decency or morality.
3. If the Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent or unlawful purpose for persons concerned in its formation and management of its affairs have been guilty of fraud for misconduct in those connections and that is proper that the company would be wound up.
4. If the company has made a default in filing with the registrar its financial statements for annual returns for the immediately preceding five consecutive financial years
5. If the Tribunal is of opinion that it is just and equitable that the company should be wound up.

CONSEQUENCES OF WINDING UP ORDER:

According to section 277 the major consequence of winding up of a company is intimation To company liquidator, provisional liquidator and registrar. When the Tribunal makes an order for appointment of provisional liquidator or an order for winding up of a company then within 7 days it has to intimate this fact to the company liquidator, provisional liquidator and registrar. Then the registrar has to make an endorsement in his records relating to the company to that effect and notify the fact in the official Gazette. Firstly, in the case of a listed company the stock exchange where securities of the company were being dealt with has also to be informed. Secondly, winding up an order of a company is Deemed to be a notice of this charge to the officers and employees of the company except when the business is continued. Thirdly, the order operates in favour of all the creditors and all the contributors of the company. Lastly, no suit or legal proceeding can be commenced against the company except with the leave of the Tribunal and subject to such terms as a Tribunal may impose. Similarly pending suits cannot be for the proceeding except with similar leave.

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In the case of National Transport v. General Co Ltd (1990) court held that directors exercising the power of issuing further capital was held to be a nullity so that the allottees of such shares could not be regarded as contributors. In the case of Mehtab Chand Golcha v. The

Official Liquidator Court held that the business continued by order without any appeal and liability to compensate employees may remain because this is not discharge due to unavoidable circumstances within the meaning of section 25FFF of the industrial disputes act 1947.

In the case of SV Kandeakar v. VM Deshpande the supreme court held that the income tax officer can commence assessment proceedings without leave of the court. But in the case of R Chidambaranthan v. Gannon Dunkerly & co (1973) the Madras High Court refused to leave a worker to file a suit in the labour court as that would waste the time of the liquidator.

▪︎Within 3 weeks on the date of the order the company liquidator has to make an application to to the Tribunal for the constitution of a winding up committee to assist and monitor the progress of liquidation proceedings.

To constitute the winding up proceeding the committee has to comprise of the

following:

1. Official liquidator attached to the criminal
2. Nominee of secured creditors and
3. A professional nominated by the Tribunal.

According to section 277(4) the liquidator has to monitor and assist the liquidation proceedings in the following areas of liquidation functions:

1. Taking over the company’s assets.
2. Examination of the statement of affairs
3. Liquidators must recover the property cash or any other Assets of the company including benefits derived from them.
4. Reviewing audit reports and accounts of the company is necessary.
5. Sale of Assets of the company
6. Finalisation of the list of creditors and contributors
7. Compromise adornment and settlement of claims
8. Payment of dividend
9. Or any other functions as a Tribunal may direct from time to time.

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▪︎The company liquidator has to placed before the Tribunal report along with the minutes of meetings of the committee on monthly basis duly signed by members till the final report for dissolution of the company is submitted before the Tribunal and the company liquidator has to prepare the draught of final report for consideration and approval of the winding up committee. The final reports of approval have to be submitted before the Tribunal for the passing of a dissolution order.

Author: sarthak udaipuria,
ICFAI LAW SCHOOL HYDERABAD, 4TH YEAR

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