6 Grounds on which a Court can Order a Winding up of a Company in India

Petition on this ground can be presented either by the Registrar or by a contributory and it should not be filed before the expiration of fourteen days after the last day on which the statutory meeting ought to have been held [Sec. 439 (7)].

3. Failure to commence business:

When a company fails to commence business within a year from its incorporation or suspends business for a year, it may be ordered to be wound up. The power of the court to pass an order for the winding up of the company on this ground is discretionary and will not be exercised unless there are indications that the company has no intention of continuing it business.

If the company’s trade has been suspended temporarily owing to the trade depression with bona fide intention to continue its operations when conditions improve, a prayer made to the court for the winding up of the company will not be granted as the intention to continue business after the improvement of conditions is clear. But in case chances of resuming business are gloomy, the court may order for the winding up of the company.

4. Reduction in membership:

When the number of members has fallen below seven in the case of a public company and two in the case of a private company, the company may be ordered to be wound up.

5. Inability to pay debts:

As per section 434, a company shall be deemed to be unable to pay its debts under the following circumstances:

(a) Notice for payment:

When a creditor to whom the company owes a sum exceeding T 500 [the Companies (Second Amendment) Act, 2002 has increased this amount to Rs. 1 lakh, but that has not yet become operative] has served on the company a demand for payment and the company has for three weeks thereafter neglected to pay the sum or otherwise satisfy the creditor, it shall be deemed that the company has become unable to pay its debt. It is essential that the debt is payable presently.

Mere omission by itself will not amount to negligence. Further, where a debt is bonafide disputed, there is no negligence to pay. Failure to pay public deposits on their due dates amount to inability to pay debts. A dividend when declared becomes a debt due by the company and the shareholder can also apply for company’s liquidation if the company is unable to pay his dividend.

(b) Decree:

If a decree or order issued by a court in favour of a creditor of the company remains unsatisfied on its execution.

(c) Commercial insolvency:

It is proved to the satisfaction of the court that the company cannot pay its debts. This implies commercial insolvency of the company as is disclosed by its balance sheet. The mere fact that the company is incurring losses does not mean that it is unable to pay its debts, for its assets may be more than its liabilities.

Liabilities for this purpose will include all contingent and prospective liabilities and even if the debt relied upon in the petition is disputed bona fide, the company may be wound up if the applicant can prove the insolvency of the company. However, non-payment of a bona fide disputed claim is no proof of insolvency.

Merely because the liabilities of a company have exceeded the assets, an order for ‘compulsory winding up’ cannot be passed unless it is proved that the company has failed to pay its liabilities when payment was demanded.

Similarly, courts may pass an order for the winding up of the company when default in the payment of the debt after demand within three weeks has been committed by the company even though the assets of the company were much than the liabilities. The debts in all cases must be real, immediately payable and without any bonafide and reasonable dispute with regard to it.

6. Just and equitable:

The court may order for the winding up of a company if it thinks that there are just and equitable grounds for doing so. The court has very large discretionary power in this case.

The term ‘just and equitable’ grounds may include any of the grounds for the winding up of the company. This power has been given to the court to safeguard the interests of the minority and the weaker group of members.

Court, before passing such an order, will take into account the interest of the shareholders, creditors, employees and also the general public. Court may also refuse to grant an order for the compulsory winding up of the company if it is of the opinion that some other remedy is available to the petitioner to redress his grievances and that the demand for the winding up of the company is unreasonable. A few examples of ‘just and equitable’ grounds on the basis of which the court may order for the winding up of the company are given as follows:

(i) Oppression of minority:

In cases where those who control the company, abuse their power to such an extent that it seriously prejudices the interests of minority shareholders, the court may order for the winding up of the company.

The court will issue such an order only when it is impossible for the business of the company to be carried on for the benefit of the company as a whole owing to the way in which voting power is held and used.

(ii) Deadlock in management:

Where there is a complete deadlock in the management of the company, the company may be ordered to be wound up. But mere incompatibility of good relations between the rival factions of the directorate i.e., the majority group and minority group will not be sufficient for ordering winding up.

Re. Yenidje Tobacco Ltd. W and R were the only two shareholders as well as the directors of a private company. Subsequently some serious differences developed and they became hostile to each other.

They stopped even talking to each other. It was held that there was complete deadlock in the management of the company and, therefore, it would be just and equitable to order for its winding up.

(iii) Loss of substratum:

Where the objects for which a company was constituted have either failed or become substantially impossible to be carried out, i.e., ‘substratum of the company’ is lost; the company may be ordered to be wound up on just and equitable grounds.

However, a temporary difficulty which does not knock out the company’ objects and purposes may not be permitted to become a ground for liquidation. Loss of substratum is a question of fact depending on the circumstances of the case.

Re. Steam Navigation Co:

A steamship was formed mainly with the object of acquiring the business of a firm engaged in plying steamers. The business was acquired, but later on due to serious differences between the two, seven out of nine steamers acquired were returned.

A shareholder filed a petition to the court for the compulsory winding up of the company on the ground of loss of substratum. The petition was rejected since the company could purchase more steamers and carry out its original objects.

The substratum of a company is said to disappear when the objects have substantially failed or it is impossible to carry on business except at a loss or existing liabilities are far in excess of existing and possible assets. An illustration is:

Re. German Date Coffee Co:

A company was incorporated to manufacture coffee from dates under a patent to be granted by the Government of Germany. The German patent was not granted and the company embarked upon other patents.

The company was ordered to be wound up on just and equitable grounds as the company was held to lost its substratum and it was impossible to carry out the objects for which it was formed.

(iv) Losses:

When the business of a company cannot be carried on except at a loss, the company may be wound up by an order of the court on just and equitable grounds. But mere apprehension on the part of some shareholders that the company will not be able to earn profits cannot be just and equitable ground for the winding up order.

(a) Fraudulent object:

If the business or the objects of the company are fraudulent or illegal, or have become illegal with the changes in the law, the court may order the company to be wound up on just and equitable grounds. It will not be a valid defence in such a case that the profits earned will be used for philanthropic purposes.

However, the mere fact of having been a fraud in the promotion or fraudulent misrepresentation in the prospectus will not be sufficient ground for a winding up order, for the majority of shareholders may waive the fraud.

(vi) Bubble company:

When a company is a bubble company i.e. it does not carry on any business in reality or does not own any property.

(vii) Private companies in the nature of partnership:

Where a private company consisting of one or more families or relatives or friends is in the nature of partnership business and circumstances justify dissolution of partnership under the Partnership Act, such as loss of mutual confidence on account of mis- conduct of one or more partner or a state of complete dead-lock, such a company may be ordered to be wound up on just and equitable grounds. This is because in such a case it is impossible to carry on business of Die Company (Re. Dais collates).

Besides these grounds the Companies (Second Amendment) Act, 2002, which has not yet been notified to be effective, has added three more grounds of compulsory winding up of a company. These are:

(i) Default in filing Annual Accounts or Annual Returns with the Registrar for any 5 consecutive financial years.

(ii) Company working against the interests of State — sovereignty, integrity and security; or public order, decency or morality.

(iii) Winding up of a Sick Industrial Company when its revival is unlikely within a reasonable time.