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Home > Articles > Corporate Law > Winding up of companies

Winding up of companies

Melam Ram Pavan Kum ar on 18 January 2011

MEANING OF WINDING UP

Winding up or liquidation of a company represents the last stage in its life. It means a

proceeding by which a company is dissolved. The assets of the company are disposed of, the

debts are paid off out of the realised assets (or from contributions from its members), and

the surplus, if any, is then distributed among the members in proportion to their holdings in

the company. The two terms ‘winding up’ and ‘liquidation’ are used interchangeably.

According to Prof. Gower, winding up of a company is a process whereby its life is ended and

its property administered for the benefit of its creditors and members. An administrator, called

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.

MODES OF WINDING UP

There are three modes of winding up of a company, viz.,

1. Winding up by the Court (Section 433 to 483).

2. Voluntary winding up (Section 484 to 521). This may be -

(1) members’ voluntary winding up, or

(2) creditors’ voluntary winding up.

3. Winding up subject to supervision of Court.

WINDING UP BY THE COURT (Sections 433 to 483)

Winding up of a company under the order of a Court is also known as compulsory winding up.

GROUNDS FOR COMPULSORY WINDING UP (Section 433)

A company may be wound up by the Court in the following cases:

1. Special resolution of the company [Sec. 433 (a)]. Winding up order under this head is

not common because normally the members of a company prefer to wind up the company

voluntarily for in such a case they shall have a voice in its winding up. Moreover, a voluntary

winding up is far cheaper and speedier than a winding up by the Court.

2. Default in delivering the statutory report to the Registrar or in holding statutory

meeting [Sec. 433 (b)]. A petition on this ground can be made either by the Registrar or by

a contributory. In the latter case the petition for winding up can filled only after the expiry of

14 days from the day on which the statutory meeting ought to have been held [Section 439

(7)].

The Court may, instead of making a winding up order, direct that the statutory report be

delivered or that a statutory meeting be held. The Court may order the costs to be paid by

any persons who are responsible for the default [section 443 (3)].

3. Failure to commence, or suspension of, business [Section 433 (c)]. The Court

exercises power in this case only if the company has no intention of carrying on its business

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exercises power in this case only if the company has no intention of carrying on its business

or if it is not possible for it to carry on its business.

If a company has not begun to carry on business within a year from its incorporation or

suspend its business for a whole year, the Court will not wind It up if—

(a) there are reasonable prospects of the company starting business within a reasonable

time, and

(b) there are good reasons for the delay, i.e., the suspension of business is satisfactorily

accounted for and appears to be due to temporary causes.

4. Reduction in membership [section 433 (d)]: If, at any time, the number of members of

a company is reduced in the case a public company, below 7 or in the case of a private

company, below 2, the company may be ordered to be wound up by the Court. If the

company carries on business for more than 6 months while the number is so reduced every

member who is cognizant of the fact that it is carrying on business with members fewer than

the statutory minimum, will be severally liable for the payment of the whole of the debts of

the company contracted after those 6 months (section 45).

5. Inability to pay its debts [Section 433 (e)]: A company may be wound up by the Court

if it is unable to pay its debts. The test is whether the company has reached a stage where

it is commercially insolvent— that is to say, that its existing and probable assets would be

insufficient to meet the existing liabilities.

“Commercially insolvent” means that the company is unable to pay debts or liabilities as they

arise in the ordinary course of business.

When is a company unable to pay its debts? According to section 434, a company shall

be deemed to be unable to pay its debts in the following cases:

(1) Demand for payment neglected: If a creditor to whom the company is indebted for a

sum exceeding Rs. 500 has served on the company at its registered office, a demand for

payment and the company has for 3 weeks thereafter neglected to pay or otherwise satisfy

him, the company is unable to pay its debts. The demand may be signed by any agent or

legal adviser duly authorised or in the case of a firm, by such agent or legal adviser or by any

member of the firm.

(2) Decreed debt unsatisfied: If execution or other process issued on a decree or order of

any Court in favour of a creditor of the company is returned unsatisfied in whole or in part

the company is deemed to be unable to pay its debt.

(3) Commercial insolvency: A company is deemed to be unable to pay its debts, if it is

proved to the satisfaction of the Court that the company is unable to pay its debts. In

determining whether a company is unable to pay its debts, the Court shall take into account

the contingent and prospective liabilities of the company also.

6. Just and equitable [Section 433 (f)]. The words ‘just and equitable’ are of the widest

significance and do not limit the jurisdiction of the Court to any particular case.

The principle of just and equitable clause baffles a precise definition. It must rest with the

judicial discretion of the Court depending upon the facts and circumstances of each case

[Hind Overseas (Pvt.) Ltd. v. R.P. Jhunjhunwalla, (1976) 46 Comp. Cas. 91 (S.C.)].

What is ‘just and equitable’ clause? It depends upon the facts of each case. The Court

may order winding up under the ‘just and equitable’ clause in the following cases:

(1) When the substratum of a company is gone: The substratum of a company can be

said to have disappeared only when the object for which it was incorporated has

substantially failed, or when it is impossible to carry on the business of the company except

at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.

The substratum of a company disappears:

(i) When the very basis for the survival of the company is gone:

Pirie v. Stewart. (1904) 6 F. 847. A shipping company lost its only ship, the remaining asset

being a paltry[1] sum of £363. A majority in number and value of shareholders petitioned for

its compulsory winding up but a minority shareholder opposed this and desired to carry on the

business as charterer. Held, it was ‘just and equitable’ that the company should be wound up.

(ii) When the main object of the company has substantially failed or become

Impracticable: Where a company’s main object fails, its substratum is gone and it may be

wound up even though it is carrying on its business in pursuit of a subsidiary object.

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wound up even though it is carrying on its business in pursuit of a subsidiary object.

German Date Coffee Co., Re (1882) 20 Ch. D. 169. In this case, the objects clause of the

German Date Coffee Co. stated that it was formed for the working of a German patent which

would be granted for making a partial substitute for coffee from dates and for the acquisition

of inventions incidental thereto and also other inventions for similar purposes. The German

patent was never granted but the company did acquire and work a Swedish patent and

carried on business at Hamburg where a substitute coffee was made from dates, but not

under the protection of a patent. Held, on a petition by 2 shareholders, that the main object

could not be achieved and, therefore, it was ‘just and equitable’ that the company should be

wound up.

(iii) When the company is carrying on its business at a loss and there is no reasonable

hope that the object of trading at a profit can be attained. However, where the majority

shareholders are against it, the Court will not order a company to be wound up merely

because it is making a loss.

(iv) When the existing and probable assets of the company are insufficient to meet its

existing liabilities. Where a company is totally unable to pay off creditors and there is ever-

increasing burden of interest and deteriorating state of management and control of business

owing to sharp differences between shareholders, the Court will order winding up.

(2) When the management is carried on in such a way that the minority is disregarded or

oppressed. Oppression of minority shareholders will be a ‘just and equitable’ ground where

those who control the company abuse their power to such an extent as to seriously prejudice

the interest of minority shareholders.

(3) Where there is a deadlock in the management of the company: When shareholding is

more or less equal and there is a case of complete deadlock in the company on account of

lack of probity[2] in the management of the company and there is no hope or possibility of

smooth and efficient continuance of the company as a commercial concern, there may arise a

case for winding up on the just and equitable ground.

Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. 426. A and B were the only shareholders and

directors of a company with equal rights of management and voting power. After a time they

became bitterly hostile to each other and disagreed about the appointment of important

servants of the company. All communications between them were made through the

secretary as they were not on speaking terms with each other. The company made large

profits in spite of the disagreement. Held, there was a complete deadlock in the management

and the company was ordered to be wound up.

(4) Where public interest is likely to be prejudiced. Having regard to the provisions of

section 397 and 398 (dealing with prevention of oppression and mismanagement) where the

concept of prejudice to public interest is introduced, would appear that the Court winding up

a company will have to take into consideration not only the interest of shareholders and

creditors but also public interest in the shape of need of the community, interest of the

employees, etc.

(5) When the company was formed to carry out fraudulent or illegal business or when the

business of the company becomes illegal.

(6) When the company is a mere bubble and does not carry on any business or does not have

any property (London & County Coal Co.. Re (1867) L.R. 3 Eq. 355].

PETITION (Section 439)

An application to the Court for the winding up of a company is made by a petition. A petition

for the winding up of a company may be presented, subject to the provisions of this Section,

in the following cases

1. Petition by the company [section 439 (1) (a)]: A company may itself present a petition

to the Court for winding up after it has passed a special resolution.

A company does not often present a petition to have itself wound up by the Court as it can

achieve this object more conveniently by passing a special resolution to wind up voluntarily.

2. Petition by any creditor or creditors [Section 439 (1) (b)]: A petition to the Court for

the winding up of a company may be filed by any creditor or creditors. The term ‘creditor’ is

not limited to one to whom a debt is due at the date of the petition and who can demand

immediate payment. Every person having a pecuniary claim against the company whether

actual or contingent is a creditor and such a person is competent to file a petition for the

winding up of the company.

3. Petition by any contributory or contributories [section 439 (1) (c)]. A contributory



means a person liable to contribute to the assets of the company on the event of its being

wound up and includes the holder of shares which are fully paid up. He can present a petition

for winding up a company even though he may be the holder of fully paid-up shares or that

the company may have no assets at all, or may have no surplus assets left for distribution

among the shareholders, after the satisfaction of its liabilities.

Grounds: A contributory can present a winding up petition if—

(a) the membership is reduced below the statutory minimum; or

(b) he is an original allottee of shares; or

(c) he has held his shares for any 6 out of the previous 18 months;

(d) the shares have devolved on him through the death of a former holder.

4. Petition by all or any of the prior parties whether together or separately [section

439 (1) (d)]: A petition for the winding up of a company under section 433 may be

presented by all or any of the parties, namely, the company, the creditors or the

contributories specified in section 433 (a), (b) and (c) whether together or separately.

5. Petition by the Registrar [section 439 (1) (e)]: The Registrar can present a petition for

winding up a company on the following grounds only, viz.

(a) If default is made by the company in delivering the statutory report to the Registrar or in

holding the statutory meeting.

(b) If the company does not commence its business within a from its incorporation, or

suspends its business for a whole year.

(c) 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.

(d) If the company is unable to pay its debts.

(e) If the Court is of opinion that it is just and equitable that the company should be wound

up.

6. Petition by the Central Government [section 439 (1) (J)]. Under section 243 the

Central Government may cause to be presented to the Court by any person authorised (by a

person authorized by it in this behalf) a petition for the winding up of a company where it

appears from the report of inspectors appointed to investigate the affairs of the company

under section 235 that :

(1) the business of the company is being conducted with intent to

a) defraud its creditors, members, or any other persons; or

b) otherwise for a fraudulent or unlawful purpose; or

c) in a manner oppressive of any of it members, or

d) that the company was formed for any fraudulent or unlawful purpose: or

(2) persons concerned in the formation of the company or the management of its affairs have

been guilty of fraud, misfeasance or other misconduct towards the company or towards any

of its members.

COMMENCEMENT OF WINDING UP (Section 441)

Where, before the presentation of a petition for the winding up of a company by the Court, a

resolution has been passed by the company for voluntary winding up, the winding up shall be

deemed to have commenced from the date of the resolution. In all other cases (i.e., where

the company has not previously passed a resolution for voluntary winding up) the winding up

of the company by the Court shall be deemed to commence at the time of the presentation

of the petition for the winding up. When an order is made for winding up, it relates back to

the date of the presentation of the petition. If no order for winding up is made and the

winding up petition is dismissed, the date of the presentation of the winding up petition has

no relevance. As such until winding up order is made company has to comply with the

requirements of the Companies Act 1956 as are required of a company not wound up.

Advertisement of petition: Every petition for winding up a company shall be advertised 14

days before the hearing, stating the date on which the petition was presented and the

names and addresses of petitioners.

POWERS OF COURT

Power of Court to stay or restrain proceedings against company (section 442): At any

time after the presentation of a winding up petition and before a winding up order has been



time after the presentation of a winding up petition and before a winding up order has been

made, the company or any creditor or contributory may apply to the Court for a stay of, or

restraint of, further proceedings in the Court.

Powers of Court on hearing petition (section 443): On hearing a winding up petition the

Court may -

(a) dismiss it, with or without costs; or

(b) adjourn the hearing conditionally or unconditionally; or

(c) make any interim order that it thinks fit; or

(d) make an order for winding up the company with or without costs or any other order as it

thinks fit.

The Court shall not refuse to make a winding up order merely because the assets have been

fully mortgaged or because there are no assets at all. Where the petition is presented on the

ground that it is just and equitable that the company should be wound up, the Court may

refuse to make a winding up order if the petitioners are acting unreasonably in seeking to

have the company wound up instead of pursuing some other remedy available to them.

CONSEQUENCES OF WINDING UP ORDER

Once the Court makes an order for the winding up of a company, its consequences date back

to the commencement of wining up. The other consequences of winding up by the Court are

as follows:

1. Intimation to Official Liquidator and Registrar (section 444): Where the Court makes

an order for the winding up of a company, it shall forthwith cause intimation to be sent to the

Official Liquidator and the Registrar of the order of winding up.

2. Copy of winding up order to be filed with the Registrar [section 455 (1) (1-A) and

(2)1. On the making of the winding up order it shall be the duty of the petitioner and of the

company to file with the Registrar within 30 days a certified copy of the order.

3. Order for winding up deemed to be notice of discharge [section 455 (3)]: The order

for winding up shall be deemed to be notice of discharge to the officers and employees of the

company, except when the business of the company is continued. Where a servant of the

company is on a contract of service for a fixed term and that term has not expired on the

date of the order of the winding up of the company, the order operates as a wrongful

discharge and damages are allowed for breach of contract of service and the servant is free

from his agreement not to compete with the company.

4. Suits Stayed [section 446 (1)]. When a winding up order has been made, no suit or

other legal proceeding shall be commenced against the company except by leave of the

Court. Similarly pending suits shall not be proceeded with except by leave of the Court.

5. Powers of the Court [section 446 (2) and (3)]: The Court which is winding up the

company shall have jurisdiction to entertain, or dispose of—

(a) any suit or proceeding by or against the company;

(b) any claim made or against the company;

(c) any application made under section 391 for compromise with creditors and/or members;

(d) any question of priorities or any other question whatsoever, whether of law or fact, which

may relate to or arise in course of the winding up of the company.

6. Effect of winding up order (section 447): An order for winding up a company shall

operate in favour of all the creditors and of all the contributories of the company as if it had

been made on their joint petition.

7. Official Liquidator to be Liquidator (section 449): On a winding up order being made in

respect of a company, the official Liquidator shall, by virtue of his office, become the

liquidator of the company.

PROCEDURE OF WINDING UP BY THE COURT

Official Liquidator (section 448): For the purpose of winding up of companies the Court —

(a) there shall be attached to each High Court an Official Liquidator appointed by the Central

Government. The Official Liquidator shall be a whole-time officer. If the Central Government

considers that there will not be sufficient work for a whole time officer, it may appoint a part-

time officer to act as Official Liquidator:

(b) the Official Receiver attached to a District Court for insolvency purposes shall be the



Official Liquidator attached to the District Court. If there is no Official Receiver attached to a

District Court, then, such person as the Central Government may, by notification in the

Official Gazette, appoint for the purpose, shall be the Official Liquidator attached to the

District Court.

The Central Government may also appoint one or more Deputy or Assistant Official Liquidators

to assist the Official Liquidator in the discharge of his functions.

Liquidator (section 449): On a winding up order being made in respect of a company, the

Official Liquidator shall, by virtue of his office become the liquidator of the company.

Style etc. of liquidator (section 452): The liquidator shall be described by the style of The

Official Liquidator’ of the particular company in respect of which he acts, and not by his

individual name.

Provisional liquidator (section 450): At any time after the presentation of a winding up

petition and before the making of a winding up order, the Court may appoint the Official

Liquidator to be the liquidator provisionally.

A provisional liquidator is as much a liquidator in winding up in fact, the name provisional

liquidator is only a convenient label he has the same powers and to the extent these powers

imply duties, the same duties as a liquidator in a winding up. The Court may limit and restrict

his powers by the order appointing him or by a subsequent order. Otherwise, he has the same

powers as a liquidator has.

Notice to company before appointment of provisional liquidator: Before appointing a

provisional liquidator, the Court shall give notice to the company and give a reasonable

opportunity to it to make its representations. If the Court thinks fit, it may dispense with

such notice but in that case, it shall in writing record the special reasons for not giving the

notice.

On a winding up order being made by the Court, the Official Liquidator shall cease to hold

office as provisional liquidator and shall become the liquidator of the company.

Duties of liquidator

1. Proceedings in winding up [section 451 (1) and (3)]: The liquidator shall conduct the

proceedings in winding up the company and perform duties imposed by the Court. The acts of

the liquidator shall be valid notwithstanding any defect that may afterwards be discovered in

his appointment or qualification. Acts done, after his appointment has been shown to be

invalid, shall not be deemed to be validly done.

2. Report [section 455 (1)]:

(1) The Official Liquidator shall as soon as practicable after receipt of the statement of

affairs of the company (to be submitted under section 454), and not later than 6 months

from the date of the order of winding up submit a preliminary report to the Court. The report

shall contain particulars —

(a) as to the amount of the capital issued, subscribed, and paid-up, and the estimated

amount of assets and liabilities.

(b) if the company has failed, as to the cause of the failure; and

(c) whether, in his opinion, further inquiry is desirable as to any matter relating to the

promotion, formation, or failure of the company, or the conduct of business thereof.

(2) Additional reports: The Official Liquidator may, if he thinks fit, make further reports

stating the manner in which the company was promoted or formed. He may further state if

any fraud has been committed by any person in company’s promotion or formation, or since

the formation thereof. He may also state any other matters which it is desirable to bring to

the notice of the Court. If in any further report the Official Liquidator states that a fraud has

been committed, the Court shall have the further powers provided in section 478 as to the

public examination of promoters and officers.

3. Custody of company’s property (Section 456): Where a winding up order has been

made or where a provisional liquidator has been appointed, the liquidator / provisional

liquidator shall take into his custody all the property, effects and actionable claims to which

the company is entitled. So long as there is no liquidator, all the property and effects of the

company shall be deemed to be in the custody of the Court.

4. Exercise and control of liquidators powers (section 460):

(1) The liquidator shall, in the administration of the assets of the company and the

distribution thereof among creditors, have regard to any directions which may be given by



resolution of the creditors or contributories at any general meeting or by the committee of

inspection. Any directions by the creditors or contributories at any general meeting shall

override any directions given by the committee of inspection.

5. Meeting of creditors and contributories: The liquidator may summon general meetings of

the creditors or contributories whenever he thinks fit for the purpose of ascertaining their

wishes. He shall summon such meetings at such times as the creditors or contributories may

by resolution direct, or whenever requested in writing to do so by not less than 1/10th in

value of the creditors or contributories, as the case may be.

6. Directions from the Court: The liquidator may apply to the Court for directions in relation

to any particular matter arising in winding up. He shall also use his own discretion in the

administration of the assets of the company and in the distribution thereof among the

creditors.

7. Proper books (section 461): The liquidator shall keep proper books for making entries or

recording minutes of the proceedings at meetings and such other matters as may be

prescribed. Any creditor or contributory may, subject to the control of the Court, inspect any

such books personally or by his agent.

8. Audit of accounts (section 462): The liquidator shall, at such times as may be

prescribed but at least twice each year during his tenure of office present to the Court an

account of his receipts and payments as liquidator. The account shall be in the prescribed

form, shall be made in duplicate, and shall be duly verified. The Court shall cause the account

to be audited. For the purpose of the audit the liquidator shall furnish the Court with such

vouchers, information and the books as the Court may require. One copy of the audited

accounts shall be filed and kept by the Court. The other copy of the account shall be

delivered to the Registrar for filing. Each copy shall be open to the inspection of any creditor,

contributory or person interested.

The liquidator shall cause the audited account or its summary to be printed. He shall send a

printed copy of the account or its summary by post to every creditor and to every

contributory. The Court may dispense with compliance with this provision.

9. Appointment of committee of inspection (section 464): The Court may at the time of

making an order for the winding up of a company, or at any time thereafter, direct that there

shall be appointed a committee of inspection to act with the liquidator.

10. Pending liquidation [section 551]: The liquidator shall, within 2 months of the expiry of

each year from the commencement of winding up, file a statement duly audited by a qualified

auditor of the company with respect to the proceedings in, and position of the liquidation.

The statement shall be filed—

(a) in the case of a winding up by or subject to the supervision of the Court in Court ; and

(b) In the case of a voluntary winding up, with the Registrar.

When the statement is filed in Court, a copy shall simultaneously be filed with the Registrar

and shall be kept by him along with the other records of the company.

Powers of liquidator

1. Powers exercisable with the sanction of the Court [section 457 (1)]: The liquidator in

a winding by the Court shall have power, with the sanction of the Court,—

(1) To institute or defend suits and other legal proceedings, civil or criminal, in the name and

on behalf of the company.

(2) To carry on the business of the company so far as may be necessary for the beneficial

winding up of the company.

(3) To sell the immovable and movable property and its actionable claims with power to

transfer the whole or sell the same in parcels.

(4) To raise money on the security of the company’s assets: The assets include all

contributions which the liquidator is entitled to get from the members, past or present as well

as all assets which have been misappropriated as against creditors [Stringers Case. (1869) 4

Ch. App. 45].

(5) To do all such other things as may be necessary for winding up the affairs of the

company and distributing its assets.

2. Powers exercisable without the sanction of the Court [section 457 (2)]: The

liquidator in a winding up by the Court shall have power, without the sanction of the Court:

(1) to do all acts and to execute documents and deeds on behalf of the company under its



(1) to do all acts and to execute documents and deeds on behalf of the company under its

seal;

(2) to inspect the records and returns of the company or the files of the Registrar without

payment of any fee;

(3) to prove, rank and claim in the insolvency of any contributory for any balance against his

estate and to receive dividends;

(4) to draw, accept, make and endorse any bill of exchange, hundi or promissory note on

behalf of the company in the course of its business;

(5) to take out, in his official name, letters of administration to any deceased contributory,

and to do any other act necessary for obtaining payment of any money due from a

contributory or his estate;

(6) to appoint an agent to do any business which he is unable to do himself.

3. Powers exercisable in case of onerous contracts (section 535): The term ‘onerous’

means a right to property e.g., a lease, in which the obligations attaching to it exceed the

advantage to be derived from it. The liquidator may with the leave of the Court disclaim

onerous contracts, and properties. This shall be done within 12 months after the

commencement of the winding up, unless the Court extends time.

STATEMENT OF AFFAIRS (section 454)

Contents of statement: Within 21 days of the relevant date (i.e. the date of the

appointment of a provisional liquidator, or where no such appointment is made, the date of

winding up order), the company shall submit a statement to the Official Liquidator as to the

affairs of the company. The Court may in its discretion direct that the company need not

submit this statement. The statement shall be in the prescribed form, verified by affidavit and

contain the following particulars:

1. The assets of the company, showing separately cash in hand and at bank and negotiable

securities;

2. Its debts and liabilities.

3. Names, residences and occupations of its creditors, stating separately the amount of

secured and unsecured debts.

4. In the case of secured debts, particulars of the securities held by the creditors, their value

and dates on which they were given.

5. The debts due to the company and names and the addresses of persons from whom they

are due and the amount likely to be realised.

6. Such further information as may be required by the Official Liquidator.

The Official Liquidator or the Court may extend the period of 21 days for the submission of

the statement to a maximum period of 3 months.

Who is to submit the statement? The statement shall be submitted and verified by one or

more of the persons who are at the relevant date directors and by the person who is at that

date the manager, secretary or other chief officer of the company. The Official Liquidator

may also require any of the following persons to submit and verify the statement. The

persons required to submit and verify the statement may be—

(a) present or past officers of the company;

(b) persons who have taken part in the formation of the company at any time within 1 year

before the relevant date;

(c) present employees or employees within 1 year before the relevant date, and who are

capable of giving the information required;

(d) employees and officers of another company which is or was within 1 year before the

relevant date, an officer of the company to which the statement relates.

COMMITTEE OF INSPECTION (sections 464 and 465)

Appointment and composition of committee (section 464): The Court may, at the time

of making an order for the winding up of a company or at any time thereafter, direct that

there shall be appointed a committee of inspection to act with the liquidator. The liquidator

shall then within 2 months from the date of such direction convene a meeting of the creditors

of the company for the purpose of determining the membership of the committee.

Within 14 days of the creditors’ meeting, the liquidator shall call a meeting of the

contributories to consider the decision of the creditors with respect to the membership of the



contributories to consider the decision of the creditors with respect to the membership of the

committee. The contributories may accept the decision of the creditors with or without

modification or reject it. If the contributories do not accept the decision of the creditors, the

liquidator shall apply to the Court for directions as to what shall be the composition of the

committee and who shall be its members.

Constitution and proceedings of the committee (section 465): The committee of

inspection shall not have more than 12 members. The members shall be creditors and

contributories of the company in such proportions as may be agreed on by the meetings of

creditors and contributories. In case of difference of opinion between creditors and

contributories, the proportion shall be determined by the Court.

The committee of inspection shall have the right to inspect the accounts of the liquidator at

all reasonable times. It shall meet at appointed times. The liquidator or any member of the

committee may also call its meeting as and when he thinks necessary. The quorum of its

meeting shall be 1/3rd of the total number of the members or 2 whichever is higher. It may

act by a majority of its members present at a meeting, but it shall not act unless a quorum is

present.

GENERAL POWERS OF THE COURT

To facilitate the winding up of a company by the Court, the Companies Act, 1956 gives the

following powers to the Court. These powers are in addition to the powers conferred on the

Court by section 433 on hearing the petition.

1. Stay of winding up proceedings (section 466): The Court may at any time after

making a winding up order on the application either of the Official Liquidator or of any creditor

or contributory, stay the winding up proceedings. The Court may before making an order,

require the Official Liquidator to furnish to the Court, a report with respect to any facts or

matters which are in his opinion relevant to the application.

2. (1) Settlement of list of contributories (section 467): The Court may settle the list of

contributories who are liable to contribute to the assets of the company, with the power to

rectify the register of members.

(2) Payment of debts due by contributory (section 469): The Court may also order any

contributory to pay money due by him to the company, apart from any call.

(3) Power to make calls (section 470): The Court may also make calls on all or any of the

contributories for payment of any money which it considers necessary to satisfy the debts

and liabilities of the company for the expenses of winding up and for adjustment of the rights

of the contributories.

(4) Adjustment of rights of contributories (section 475): The Court shall adjust the rights

of contributories among themselves and distribute any surplus among persons entitled

thereto.

3. Delivery of property (section 468): The Court may at any time after making a winding

up order, direct delivery to the liquidator of any money, property or books and papers in the

custody or control of any contributory, trustee, receiver, banker, agent, officer or other

employee of the company to which the company is prima facie entitled.

4. Exclusion of creditors (section 474): The Court may fix a time within which creditors

shall prove their debts or claims. It may exclude creditors not proving within the time from

the benefit of any distribution made before those debts and claims are proved.

5. Order as to costs (section 476): in case of deficiency of assets to satisfy the liabilities,

the Court may give priority to the payment, out of the assets, of costs, charges and

expenses of the winding up proceedings.

6. Summoning of persons suspected of having property of the company (section 477):

The Court may at any time after the appointment of a provisional liquidator or the making of a

winding up order, summon before it any officer of the company or person known or suspected

to have in his possession any property or books or papers of the company. It may also

summon any person who is known or suspected to be indebted to the company. The Court

may also summon any person whom the Court considers capable of giving information

concerning the promotion, formation, trade, dealings, property, books or papers, or affairs of

the company.

7. Public examination (Section 478): If in the opinion of the Official Liquidator a fraud has

been committed by any person in the promotion or formation of the company, or by any

officer of the company in relation to the company he shall make a report to the Court. In

such a case the Court may direct that that person or officer shall attend before the Court

and be publicly examined as to the promotion or formation or the conduct of the business of



and be publicly examined as to the promotion or formation or the conduct of the business of

the company, or as to his conduct and dealings as an officer thereof.

8. Arrest of absconding contributory (Sec. 479). If at any time either before or after making a

winding up order, the Court believes that a contributory is about to quit India or to abscond

or to remove and conceal any pperty for the pmpose of avoid ingpayinent or avoiding

examination. he may be arrested anjhe relevant books, papers and movable property may be

seized.

9. Meeting of creditors or contributories (Section 557): In all matters relating to the

winding up of a company the Court may convene meetings of creditors or contributories for

the purpose of ascertaining their wishes.

DISSOLUTION OF COMPANY (Section 481)

Dissolution puts an end to the existence of a company. A company which has been dissolved

no longer exists as a separate entity capable of holding property or of being sued in the Court

[Employers’ Liability Assurance Corpn. v. Sedgwick Collins & Co.. (1927) A.C. 95].

Grounds for dissolution: The Court shall make an order for the dissolution of a company —

(1) when the affairs of the company have been completely wound up, or

(2) when the Court is of opinion that the liquidator cannot proceed with the winding up for

want of funds and assets, or

(3) for any other reason.

The Court shall make an order for the dissolution of the company only when it is just and

reasonable in the circumstances of the case that such an order should be made. The

company shall be dissolved from the date of the order of the Court. Within 30 days of the

order of the Court, the liquidator shall send a copy of the order to the Registrar who shall

make in his books a minute of the dissolution of the company.

CONTRIBUTORY

Definition of contributory (Section 428): The term ‘contributory’ means every person liable

to contribute to the assets of a company in the event of its being wound up and includes the

holder of any shares which are fully paid up.

List of contributories: The list shall be prepared in two parts, viz., List A and List B.

List A shall include the present members of the company, i.e., members whose names appear

in the company’s register of members at the time of the winding up of the company.

List B shall include the past members of the company. i.e. members who ceased to be

members within one year preceding the commencement of the winding up of the company.

Liability of contributories (Section 426): in the event of a company being wound up every

present and past member shall be liable to contribute to the assets of the company to an

amount sufficient—

(a) for payment of (1) its debts and liabilities, and (ii) costs, charges and expenses of the

winding up, and

(b) for the adjustment of the rights of the contributories among themselves.

Liability of present members: The liability of a present member (i.e. List A contributory)

shall be limited—

(1) in the case of a company limited by shares, to the amount remaining unpaid on the

shares; and

(2) in the case of a company limited by guarantee, to the amount undertaken to be

contributed by him to the assets of the company in the event of its being wound up.

Liability of past members: A past member (i.e. List B contributory) shall not be liable to

contribute —

(1) if he has ceased to be a member for 1 year or more before the commencement of the

winding up;

(2) in respect of any debt or liability of the company contracted after he ceased to be a

member;

(3) if it appears to the Court that the present members will be able to satisfy the

contributions required to be made by them.

Where there have been several transfers of the same shares within a year before the winding



Where there have been several transfers of the same shares within a year before the winding

up, the primary liability is that of the latest transferor in case of default by the A List

contributories [Humby’s Case, (1872) 426 L.T. 936].

Ex-contractu and ex-lege liability: Under section 429, the liability of a member to be

included in the list of contributories is not ex-contractu, i.e., it does not arise as a result of

the contract of membership. His liability is ex-lege which means that it arises by reason of the

fact that his name appears in the register of members even though the allotment to him was

void or that he had sold his shares to a purchaser who has not got his name registered in the

register. In the absence of rectification of the register, his liability is absolute under section

429.

Before a company goes into liquidation, the liability of a member to contribute is measured by

the contractual obligation arising from membership. But after liquidation section 429 imposes a

new liability on the shareholders in respect of unpaid calls made before or after the winding

up. Such calls can be recovered even if they are barred by limitation before the order of

winding up was made.

VOLUNTARY WINDING UP (Section 484 to 520)

Voluntary winding up means winding up by the members or creditors of a company without

interference by the Court. The object of a voluntary winding up is that the company, i.e. the

members as well as the creditors, are left free to settle their affairs without going to the

Court. They may however apply to the Court for any directions, if and when necessary.

Circumstances in which a company may be wound up voluntarily (Section 484): A

company may be wound up voluntarily —

(1) By passing an ordinary resolution: When the period, if any fixed for the duration of a

company by the Articles has expired, the company in general meeting may pass an ordinary

resolution for its voluntary winding up. The company may also do so when the event, if any,

on the occurrence of which the Articles provide that the company is to be dissolved, has

occurred.

(2) By passing a special resolution: A company may at any time pass a special resolution

that it be wound up voluntarily. No reasons need be given where the members pass a special

resolution for the voluntary winding up of the company. Even the Articles cannot prevent the

exercise of this statutory right.

Commencement of voluntary winding up (section 486): A voluntary winding up shall be

deemed to commence at the time when the resolution (ordinary or special, as the case may

be) for its voluntary winding up is passed.

Advertisement of resolution (Section 485): Within 14 days of the passing of the

resolution for voluntary winding up of the company, the company shall give notice of the

resolution by advertisement in the Official Gazette, and also in some newspaper circulating in

the district of the registered office of the company.

TYPES OF VOLUNTARY WINDING UP

A voluntary winding up may be a:

1. members’ voluntary winding up, or

2. creditors’ voluntary winding up.

1. MEMBERS’ VOLUNTARY WINDING UP

Declaration of solvency (Section 488): In a voluntary winding up of a company if a

declaration of its solvency is made in accordance with the provisions of section 488, it is a

members’ voluntary winding up. The declaration shall be made by a majority of the directors

at a meeting of the Board that the company has no debts or that it will be able to pay its

debts full within 3 years from the commencement of the winding up. The declaration shall be

verified by an affidavit.

The declaration shall have effect only when it is —

(a) made within five weeks immediately before the date of the resolution, and delivered to

the Registrar for registration before that date; and

(b) accompanied by a copy of the report of the auditors of the company on (i) the profit and

loss account of the company from the date of the last profit and loss account to the latest

practicable date immediately before the declaration of solvency, (ii) the balance sheet of the

company, and (iii) a statement of the company’s assets and liabilities as on the last

mentioned date.

A winding up in the case of which a declaration has been made and delivered is referred to as



A winding up in the case of which a declaration has been made and delivered is referred to as

a member voluntary winding up and a winding up in the case of which a declaration has not

been so made and delivered is referred to as a creditors’ voluntary winding up.

Provisions applicable to a members’ voluntary winding up:

Section 490 to 498 shall apply in relation to a members’ voluntary winding up (section 489).

The provisions of these Sections are as follows:

1. Appointment and remuneration of liquidators (section 490): The company in general

meeting shall appoint one or more liquidators for the purpose of winding up its affairs and

distributing its assets. It shall also fix the remuneration, if any, to be paid to the liquidator or

liquidators. Any remuneration so fixed shall not be increased in any circumstances, The

liquidator shall not take charge of his office before his remuneration is fixed as aforesaid.

2. Board’s powers to cease on appointment of a liquidator (section 491): On the

appointment of a .liquidator, all the powers of the Board of directors, the managing or whole-

time directors, and manager, shall cease except when the company in general meeting or the

liquidator may sanction them to continue.

3. Power to fill vacancy in office of liquidator (section 492): If a vacancy occurs by

death, resignation or otherwise in the office of any liquidator appointed by the company, the

company in general meeting may fill the vacancy. For this purpose a general meeting may be

convened by any contributory or by the continuing liquidator or liquidators, if any.

4. Notice of appointment of liquidator to be given to Registrar (section 493): The

company shall give notice to the Registrar of the appointment of a liquidator or liquidators. It

shall also give notice of every vacancy occurring in the office of liquidator and of the names

of the liquidators appointed to fill every such vacancy. The notice shall be given by the

company within 10 days of the event to which it relates.

5. Power of liquidator to accept shares, etc. as the consideration for sale of property

(section 494): This was discussed in detail in the Chapter on “Compromises, Amalgamations

and Reconstructions.”

6. Duty of liquidator to call creditors’ meeting in case of insolvency (section 495): if

the liquidator is at any time of opinion that the company will not be able to pay its debts in

full within the period stated in the declaration, he shall forthwith summon a meeting of the

creditors. He shall lay before the meeting a statement of the assets and liabilities of the

company. Thereafter the winding up shall become creditors voluntary winding up.

7. Duty to call general meeting at the end of each year (section 496): In the event of

the winding up continuing for more than 1 year the liquidator shall call a general meeting of

the company at the end of the first year from the commencement of the winding up.

Likewise, he shall call a general meeting at the end of each succeeding year. He shall lay

before the meeting an account of his acts and dealings and of the conduct of the winding up

during the year.

8. Final meeting and dissolution (section 497): As soon as the affairs of the company are

fully wound up, the liquidator shall make up an account of the winding up showing how the

winding up has been conducted and how the property of the company has been disposed of.

He shall then call a general meeting of the company and lay before it the accounts showing

how the winding up has been conducted.

The meeting shall be called by advertisement —

(a) specifying the time, place and object of the meeting; and

(b) published not less than one month before the meeting in the Official Gazette, and also in

some newspaper circulating in the district of the registered office of the company.

Within one week after the meeting, the liquidator shall send to the Registrar and the Official

Liquidator a copy each of the account and shall make a return to each of the holding of the

meeting and of the date thereof. If a quorum is not present at the final meeting, the

liquidator shall make a return that the meeting was duly called but could not be held for want

of quorum.

The Registrar on receiving the account and return shall register them. The Official Liquidator

on receiving them, shall make a scrutiny of the books and papers of the company. The

liquidator of the company and present officers shall give the Official Liquidator all reasonable

facilities to make the scrutiny. On such scrutiny the Official Liquidator shall make a report to

the Court. If the report shows that the affairs of the company have been conducted in a

manner not prejudicial to the interests of its members or to public interest, then from the

date of the submission of the report to the Court, the company shall be deemed to be



date of the submission of the report to the Court, the company shall be deemed to be

dissolved.

9. Provisions as to annual and final meeting in case of insolvency (section 498): If in

the case of a members’ voluntary winding up the liquidator finds that the company is

insolvent, sections 508 and 509 which deal with the duty of the liquidator to call a meeting of

the company and of creditors at the end of each year (section 508) and final meeting and

dissolution (section 509) in case of a creditors voluntary winding up shall apply as if the

winding up were a creditors voluntary winding up and not a members’ voluntary winding up. It

should be noted that in such a case section 508 and 509 shall apply to the exclusion of

sections 496 and 497.

2. CREDITORS’ VOLUNTARY WINDING UP:

A voluntary winding up of a company in which declaration of its solvency is not made is

referred to as a creditors’ voluntary winding up.

Provisions applicable to creditors voluntary winding up

Sections 500 to 509 shall apply in relation to a creditors’ voluntary winding up (section 499).

The provisions of these Sections are as follows:

1. Meeting of creditors (section 500): The company shall call a meeting of the creditors of

the company on the day on which there is to be held the general meeting of the company at

which the resolution for voluntary winding up is to be proposed, or on the next day. It shall

send notices of the meeting to the creditors by post simultaneously with the sending of the

notices of meeting of the company. It shall also cause notice of the meeting of the creditors

to be advertised once at least in the Official Gazette and once at least in 2 newspapers

circulating in the district of the registered office of the company.

The Board of directors of the company shall cause a full statement of the position of the

company’s affairs together with a list of the creditors and the estimated amount of their

claims to be laid before the meeting. It shall also appoint one of their members to preside at

this meeting. It shall be the duty of the director so appointed to attend the meeting and

preside thereat.

2. Notice of resolution to be given to Registrar (Section 501): Notice of any resolution

passed at the creditors’ meeting shall be given by the company to the Registrar within 10

days of the passing thereof.

3. Appointment of liquidator (Section 502): The creditors and the members at their

respective meetings may nominate a liquidator. If they nominate different persons, the

creditors’ nominee shall be the liquidator. But any director, member or creditor of the

company may apply to the Court for an order that the person nominated as liquidator by the

company or any other person shall be the liquidator. The application shall be made to the

Court within 7 days after the date on which the nomination was made by the creditors.

If no person is nominated by the creditors, the person nominated by the members shall be the

liquidator. Likewise, if no person is nominated by the company, the person nominated by the

creditors shall be the liquidator.

4. Appointment of committee of inspection (section 503): The creditors at their meeting

may if they think fit, appoint a committee of inspection consisting of not more than 5

persons. If such a committee is appointed, the company may also at a general meeting

appoint not more than 5 members to the committee. However, the creditors may, if they

think fit resolve that all or any of the persons appointed by the company ought not to be

members of the committee of inspection. If the creditors and members do not agree on a

common list, the Court may constitute a committee of inspection.

5. Liquidator’s remuneration (section 504): The committee of inspection, or if there is no

such committee, the creditors, may fix the remuneration of the liquidator. Where the

remuneration is not so fixed, it shall be determined by the Court. The remuneration shall not

be increased in any circumstances.

6. Board’s powers to cease on appointment of liquidator (section 505): On the

appointment of a liquidator, all the powers of the Board of directors shall cease. But the

committee of inspection, or if there is no such committee, the creditors in general meeting,

may sanction the continuance of the Board.

7. Power to fill vacancy in office of liquidator (Section 506): If a vacancy occurs by

death, resignation or otherwise, in the office of a liquidator (other than a liquidator appointed

by, or by the direction of, the Court), the creditors in general meeting may fill the vacancy.

8. Power of liquidator to accept shares etc., as consideration for sale of property



8. Power of liquidator to accept shares etc., as consideration for sale of property

(Section 507): The provisions of section 494 (discussed in previous chapter) shall apply in

the case of a creditors’ voluntary winding up. However the powers of the liquidator under

section 494 shall not be exercised except with the sanction either of the Court or of the

committee of inspection.

9. Duty of liquidator to call meeting at the end of each year (Section 508): The

liquidator shall call a general meeting of the company and a meeting of the creditors every

year, within 3 months from the close of every year. This will be so if the winding up continues

for more than 1 year. He shall lay before the meeting an account of his acts and dealings and

of the conduct of winding up during the preceding year and position of the winding up.

10. Final meeting and dissolution (Section 509): As soon as the affairs of the company

are fully wound up, the liquidator shall make up an account of the winding up showing how

the winding up has been conducted and how the property of the company has been disposed

of. He shall then call a general meeting of the company and a meeting of the creditors for the

purpose of laying the account before the meeting and giving explanation therefor. Thereafter

the procedure shall be the same as laid down in section 497.

Members’ and creditors’ voluntary winding up compared

1. Declaration of solvency: In case of a members’ voluntary winding up, there is declaration

of solvency. In case of a creditors’ voluntary winding up, there is no such declaration.

2. Control of winding up: In a members’ voluntary winding up, the members control the

winding up of the company and the creditors do not participate directly as the company

makes a declaration of solvency. In a creditors’ voluntary winding up, the creditors control

the winding up of the company as the company is deemed to be insolvent.

3. Meetings: In a members’ voluntary winding up, there is no meeting of creditors. In a

creditors’ voluntary winding up, whenever there is a meeting of contributories, there is a

corresponding meeting of creditors.

4. Appointment of liquidator: In a members’ voluntary winding up, the liquidator is

appointed by the company and his remuneration is fixed by the company. In a creditors’

voluntary winding up, he is appointed by the creditors and his remuneration is fixed by the

committee of inspection or, if there is no such committee, by the creditors.

5. Committee of inspection: There is no committee of inspection in a members’ voluntary

winding up; in a creditors’ voluntary winding up the creditors may appoint a committee of

inspection.

6. Powers of liquidator: In a members’ voluntary winding up, the liquidator can exercise

certain powers with the sanction of a special resolution of the company; in a creditors’

voluntary winding up, he can do so with the sanction of the Court or the committee of

inspection or of a meeting of the creditors.

WINDING UP SUBJECT TO SUPERVISION OF COURT (Section 522 to 527):

Power of Court to order winding up subject to supervision by Court (section 522):

Winding up subject to the supervision of the Court presupposes a voluntary winding up of a

company. At any time after a company has passed a resolution for voluntary winding up, the

Court may make an order that the voluntary winding up shall continue, but subject to the

supervision of the Court. The Court may give such liberty to creditors, contributories or

others to apply to it as it thinks just.

Right to present winding up petition (section 440): Where a company is being wound up

voluntarily subject to the supervision of the Court, a petition for is winding up by the Court

may be presented by—

(a) any person authorised to do so under section 439 (which deals with provisions as to

applications for winding up) : or

(b) the Official Liquidator.

The Court shall not make a winding up order on the petition presented to it unless it is

satisfied that the voluntary winding up or winding up subject to the supervision of the Court

cannot be continued with due regard to the interests of the creditors or contributories or

both.

Effect of petition for winding up (section 523): A petition for the continuance of a

voluntary winding up subject to the supervision of the Court shall be deemed to be a petition

for winding up by the Court.

Power of Court to appoint or remove liquidators (Section 524): Where an order is made



Power of Court to appoint or remove liquidators (Section 524): Where an order is made

for a winding up subject to supervision of the Court, the Court may, by that or any

subsequent order, appoint an additional liquidator or liquidators. The Court may remove any

such liquidator and fill any vacancy occasioned by the removal, or by death or resignation.

The Court may appoint the Official Liquidator as a liquidator. It may also appoint or remove a

liquidator on an application made by the Registrar.

CONSEQUENCES OF WINDING UP

1. Consequences as to shareholders/members

In a company limited by shares, a shareholder is liable to pay the full amount up to the face

value of the shares held by him. His liability continues even after the company goes Into

liquidation, but he is then described as a contributory. Açontributory may be present or past.

The liability of present and past contributories has already been discussed in this Chapter.

In a company limited by guarantee, the members are liable to contribute up to the amount

guaranteed by them.

2. Consequences as to creditors

(1) Where the company is solvent (Section 528): Where a company is being wound up all

debts payable on a contingency and all claims against the company, present or future,

certain or contingent, ascertained or sounding only in damages, shall be admissible to proof

against the company. A just estimate of the value of such debts or claims shall be made.

Where a solvent company is wound up all claims of creditors, when proved, are fully met.

(2) Where the company is insolvent (Section 529): Where a company is insolvent and is

wound up, the same rules shall prevail as in the case of insolvency with regard to:

(a) debts provable;

(b) the valuation of annuities and future and contingent liabilities; and

(c) the respective rights of secured and unsecured creditors.

The security of every secured creditor shall, however, be deemed to be subject to a, pari

passu charge in favour of the workmen to the extent of the workmen’s portion therein. Where

a secured creditor instead of relinquishing his security and proving debt, opts to realise his

security—

(a) the liquidator shall be entitled to represent the workmen and enforce the workmen’s

charge;

(b) any amount realised by the liquidator by way of enforcement of the workmen’s charge

shall be applied rateably for the discharge of workmen’s dues; and

(c) the debt due to the secured creditor or the amount of the workmen’s portion in his

security, shall rank pari passu with the workmen’s dues for the purposes of section 529-A

(which deals with overriding preferential payments).

All persons who in any such case would be entitled to prove for and receive dividends out of

the assets of the company may come in under the winding up, and make such claims against

the company as they are entitled to make.

Secured and unsecured creditors: The creditors may be secured or unsecured. A secured

creditor has 3 alternatives before him:

(i) He may rely on his security and ignore the liquidation.

(ii) He may value his security and prove for the deficit.

(iii) He may surrender his security and prove for the whole debt.

If a secured creditor instead of relinquishing his security and proving his debt proceeds to

realise his security, he shall be liable to pay his portion of the expenses incurred by the

liquidator (including a provisional liquidator, if any) for preservation of the security before its

realisation by the secured creditor.

Preferential payments (section 530): In a winding up, some unsecured debts are paid,

subject to the provisions of section 529-A, in priority to other unsecured debts. These

payments are known as ‘preferential payments’ and are as follows:

(a) All revenues, taxes, cess and rates due to the Central Government or a State

Government or to a local authority at the relevant date. The amount should have become

due and payable within the 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



(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

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 of any employee, in respect of services rendered to the company and

due for a period not exceeding 4 months within the 12 months before winding up. The amount

shall not, in case of any one claimant, exceed such sum as may be notified by the Central

Government in the Official Gazette.

(c) All accrued holiday remuneration becoming payable to any employee on account of

winding up.

(d) All amounts due in respect of contributions payable during the 12 months before the

winding up order under the Employees’ State insurance Act, 1948. This, however, does not

apply when the company is being wound up voluntarily for the purpose of reconstruction or

amalgamation with another company.

(e) All amounts due in respect of any compensation or liability under the Workmen’s

Compensation Act, 1923 in respect of death or disablement of any employee of the company.

(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 in pursuance of section 235 or 237, in so far as

they are payable by the company.

Advances made by a third person to pay wages or salary to any employee, or in the case of

his death to any other person in his right on account of holiday remuneration, shall, in a

winding up, have the same priority as the persons to whom these payments are made out of

money advanced have priority.

Primrose (Builders) Ltd., Re (1950) Ch. 561. A bank allowed overdrafts to a company for the

purpose of paying the wages of the company on the understanding that an amount equal to

the loan would shortly be paid in order to reduce the overdraft. Held, the bank was entitled

to preferential payment in respect of the overdrafts.

3. Consequences as to servants and officers

A winding up order shall be deemed to be a notice of discharge to the officers and employees

of the company, except when the business of the company is continued. Such a discharge

shall relieve them of all obligations under their contract of service. A voluntary winding up

shall also operate as a notice of discharge to the company’s servants.

4. Consequences as to proceedings against the company

When a winding up order has been made or the Official Liquidator has been appointed as

provisional liquidator, no suit or other legal proceeding against the company shall be

commenced except by leave of the Court. Similarly if a suit is pending against the company

at the date of the winding up order, it shall not be proceeded with against the company,

except by leave of the Court. In a voluntary winding up also, the Court may restrain

proceedings against the company if it thinks fit.

5. Consequences as to costs

If assets are insufficient to satisfy liabilities, the Court may order for payment of the costs,

charges and expenses of the winding up out of the assets of the company. The payment

shall be made in such order of priority inter se as the Court thinks just. Similarly all costs,

charges and expenses properly incurred in a voluntary winding up, including the remuneration

of the liquidator, shall be paid out of the assets of the company in priority to all other claims.

The payment shall, however, be subject to the rights of secured creditors.

DEFUNCT COMPANY

A company is said to be ‘defunct’ when it is not carrying on business or when it is not in

operation. Section 560 deals with defunct companies. If a company has ceased to carry on

business, the Registrar may strike it off the Register as a defunct company in accordance

with section 560.

Procedure to be followed by the Registrar

1. Letter by Registrar to inquire if company is in operation: Where the Registrar has

reasonable cause to believe that a company is not carrying on business or is not in operation,



reasonable cause to believe that a company is not carrying on business or is not in operation,

he shall send to the company by post a letter inquiring whether the company is carrying on

business or is in operation.

2. Registered letter if no reply received within one month: If the Registrar does not

receive an answer within one month of the sending of the letter, he shall, within 14 days

after the expiry of the month, send to the company by post a registered letter referring to

the first letter, and stating that no answer thereto has been received. He shall further

mention in the letter that if no reply is received to the second letter within one month, a

notice will be published in the Official Gazette with a view to striking the name of the

company off the Register.

3. Publication in the Official Gazette to strike off name: If the Registrar either receives an

answer that the company is not carrying on business or does not receive any answer within

one month of the sending of the registered letter, he may publish in the Official Gazette and

send to the company by registered post, a notice that at the expiration of 3 months from the

date of that notice, the name of the company will be struck off the Register and the

company will be dissolved. The company may, however, within three months show cause why

it should not be dissolved.

4. Same procedure in winding up if no liquidator is acting or no return is received: The

above procedure is also followed where a company is being wound up and the Registrar has

reasonable cause to believe either that no liquidator is acting, or that the affairs of the

company have been completely wound up, and returns required to be made by the liquidator

have not been made for a period of 6 consecutive months.

When is a company dissolved? At the expiry of the time (i.e. 3 months) mentioned in the

notice aforesaid, the Registrar may strike the name of the company off the Register, unless

cause to the contrary is previously shown by the company. He shall then publish notice of

this fact in the Official Gazette. It is on the publication in the Official Gazette of this notice

that the company shall stand dissolved.

Restoration of company’s name

Where the Registrar has struck the name of a company off the Register as a defunct

company, the power of the Court to order the name of the company to be restored to the

Register lasts for 20 years.

The procedure to be followed for the restoration of the name of the company to the Register

is as follows:

1. Application by aggrieved member or creditor within 20 years: If the company, or any

member or creditor of the company, feels aggrieved by the name of the company having been

struck off the Register, he may, within 20 years from the publication in the Official Gazette of

the notice aforesaid, apply to the Court.

2. Restoration of name by Court on being satisfied: The Court may order that the name

of the company be restored to the Register if it is satisfied that the company was, at the

time of striking off the name, carrying on business or was in operation or otherwise that it is

just that the name of the company be restored to the Register.

3. Directions by the Court: The Court may on passing any such order give necessary

directions for placing the company and all other persons in the same position as nearly as

may be as if the name of the company had not been struck off.

4. Certified copy of order of court to be delivered to Registrar: Upon a certified copy of

the order of the Court being delivered to the Registrar for registration, the company shall be

deemed to have continued in existence as if its name had not been struck off.

Letter or notice to company to be sent at registered office or care of director etc. or to

subscribers to Memorandum: A letter or notice to be sent to the company under section 560

may be addressed to the company at its registered office, or if no office has been registered,

to the care of some director, manager or other officer of the company. If there is no director,

manager or officer of the company whose name and address are known to the Registrar, the

notice may be sent to each of the persons who subscribed the Memorandum, addressed to

him at the address mentioned in the Memorandum. The notice to be sent to the liquidator

may be addressed to the liquidator at his last known place of business.

[1] insignificant

[2] honesty



1Like 1 0ShareShare 32

Published in Corporate Law

Source : self and ND Kapoor

Other Articles by Melam Ram Pav an Kumar

DIVYA JAIN Wrote on 23 March 2011

jyoti Wrote on 19 January 2011

CS CA NISHANT SAURABH Wrote on 18 January 2011

3 Comments for this Article

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i believe the procedure, as narrated by you have undergone a change AnD

the third mode of winding up no longer exist in the COMPANIES ACT, 1956.

Kindly confirm..it would be of great help.

Thnx sir. its just lyk summary of whole winding up chapter

nicely explained sir

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