Winding Up of a Company by a Tribunal- Analysis
Adv. & IP Akhila Bolla
(B.Com, LL.B, LL.M, PGIP)
Adv. K.S. Samiksha
(B. Com, LL.B)
Introduction
The Companies Act, 2013 in India contains provisions for the winding up of a company under Chapter XX. The term “winding up” as outlined in Section 270 of the Companies Act, 2013, refers to the different modes of winding up by either a Tribunal or voluntary. Sections 271 and 272 are particularly relevant when the winding up process is initiated by a Tribunal, outlining both the grounds and the process.
Section 271: Circumstances in which company may be wound up by Tribunal
Section 271 of the Companies Act, 2013, specifies the situations where a company may be wound up by a Tribunal. These are the grounds under which the Tribunal may order the winding up:
- If the company is unable to pay its debts (Section 271(a)): A company is deemed unable to pay its debts if it fails to meet a creditor’s demand for payment of a debt exceeding Rs. 1 Lakh within three weeks of the demand.
- If the company has, by special resolution (Section 271(b)): a petition for winding up of a company can be prevented if a special resolution has been passed by the company in this regard.
- If the company has acted against the interests of the sovereignty and integrity (Section 271(c)): if the company engages in activities against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency, or morality, it can be wound up on this ground. This provision aims to protect national security and public interest.
- The affairs of the company have been conducted in a fraudulent manner (Section 271(e)): When a company has been involved in fraudulent or unlawful activities, or was formed with a fraudulent purpose, the Tribunal may order its dissolution upon a application made by the Registrar or any other person authorised by the Central Government.
- Default in filing with the Registrar its financial statements (Section 271(f)): If a company fails to file its financial statements or annual returns for five consecutive years, it may be found up for non-compliance.
- Just and equitable that the company should be wound up (Section 271(g)): If the Tribunal is of the opinion that it is “just and equitable” to wind up the company, it may issue a winding-up order. This can apply in cases where there is a management deadlock, a loss of business purpose or a complete breakdown in shareholders confidence.
Section 272: Petition for Winding Up
Section 272 outlines the procedure for filing a petition to wind up a company and who may initiate such petition:
- Petition for the winding up shall be presented by (Section 272(1)): A petition to the Tribunal for the winding up of company shall be presented by the company itself, any creditors, any contributories or shareholders, the Registrar of the company or any person authorised by the Central Government or the State Government.
- Specific Conditions under sub-sections (2) to (7): Sub-section (2) clarifies that secured creditors, debenture holders and trustees for debenture holders are considered creditors and may file for winding up. Sub-section (3) allows a contributory shareholder to petition for winding up even if they hold fully paid-up shares, the company lacks assets, or no surplus assets remain for distribution. Sub-section (4) permits the Registrar to file a petition on most of the grounds under Section 271(1) excluding clauses (b), (d) and (g). Sub-section (5), if the company itself petitions for winding up, it must submit a statement of affairs in the prescribed format. Sub-section (6) requires contingent or prospective creditors to seek Tribunal permission, with a prima facie case for winding up and reasonable security for costs before admission. Sub-section (7) mandates that a copy of the petition be filed with the Registrar, who must submit to the Tribunal within sixty days.
Rules regarding the Winding-Up petition process as per the Companies (Winding Up) Rules, 2020
- Petition for winding up (Rule 3): A winding-up petition under Section 272(1) must be presented in Form WIN 1 or WIN 2, in triplicate, and verified by an affidavit in Form WIN 3.
- Statement of Affairs (Rule 4): Required under Section 272(4) or Section 274(1), it must be submitted in Form WIN 4, containing information up to 30 days before petition filing, and verified by an affidavit in Form WIN 5.
- Admission of petition and directions as to advertisement (Rule 5): Upon filing, the Tribunal will admit the petition, set a hearing date, and give instructions for advertising the petition. If filed by a non-company party, the company must be notified and given an opportunity to be heard.
- Copy of petition and Advertisement (Rule 6 and 7): Any contributory may request a copy of the petition within 24 hours by paying five rupees per page. The petition must be advertised at least 14 days before the hearing date in a widely circulated using Form WIN 6.
- Application for leave to withdraw petition (Rule 8): The petitioner needs the Tribunal’s permission to withdraw a petition after filing, and no withdrawal can occur before the advertised hearing date.
- Substitution for original petitioner and procedure (Rule 9 and 10): If the original petitioner is ineligible, fails to advertise, consents to withdraw, or does not appear at the hearing, the Tribunal may allow a substitution with a person eligible to prosecute the petition. Upon substitution, the hearing is rescheduled, and the substituted petitioner, and available to contributories.
- Affidavit-in-objection and Reply (Rule 11 and 12): Affidavits objecting to the petition must be filed within 30 days of the order, served to the petitioner. Replies to objections must be filed at least seven days before the hearing and served on the party who filed the objection.
Situations in which the petition can be filed
- Insolvency: When the company is unable to pay its debts or fulfil its obligations, creditors or the company may seek winding up.
- Misconduct and Fraud: If the company has engaged in fraudulent or unlawful activities, a petition may be filed by creditors, contributories, or the government.
- Non-Compliance: The ROC may file if the company fails to file financial statements or annual returns for five consecutive years.
- Loss of Business Purpose: When the company’s primary purpose (substratum) fails, shareholders may file for winding up on equitable grounds.
- Public Interest Concerns: The government may file if the company poses a threat to public order, decency, or national security.
Role of Judiciary in Winding Up proceedings
In the case of Etisalat Mauritius Ltd. v. Etisalat DB Telecom (P) Ltd. (CP 114/2012), there was a deadlock and irretrievable breakdown between major shareholders of the company which further hampered its performance and work and no scheme or solution could be propounded, the Tribunal ordered to wind up the company
Conclusion
Sections 271 and 272 of the Companies Act, 2013 provide a structured framework for winding up a company through the Tribunal. This ensures that companies that cannot continue to operate legally, ethically, or financially are dissolved in an orderly manner, protecting creditors, shareholders, and public interest.
