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Circumstances In Which Company May Be Wound Up By Tribunal (Section 271 & 273)

Updated: Sep 30, 2022

What is Winding Up?

Winding up is a method to put a company to an end. It is a process where the life of a company comes to an end and its property is administered for the benefit of its creditors and its members. The liquidator is appointed and he takes control of the company, collects its assets, pays its debts, and finally distributes any surplus among the members according to their rights.

Types of Winding Up (Section 270)

According to section 270 of the act, there are 2 ways in which a company can be wound up:

  1. Compulsory winding up by the Tribunal (NCLT)

  2. Voluntary winding up.

Grounds of Winding Up by Tribunal (section 271)

Winding up by Tribunal is also known as Compulsory winding up. According to this provision, the Tribunal can order wind up in the following cases:

  1. Special resolution [s. 271(1)(b)] If the company by special resolution has been resolved, the tribunal winds it up. However, the power of the Tribunal is discretionary.

  2. Act against sovereignty A company can be wound up if it has acted against the sovereignty or integrity of India, against the interest of the State, etc.

  3. Fraudulent conduct of affairs The company will be wound up if the Tribunal is of the opinion that the company was formed fraudulently or unlawfully or the affairs of the company have been conducted fraudulently or the conduct or management of the members of the company is guilty of fraud or misconduct.

  4. Default in filing financial statements The company will be wound up if there is a default in filing with the Registrar its financial statements or annual returns for the immediately preceding five consecutive years.

  5. Just and equitable This is the last ground on which the Tribunal can order the winding up of a company. The company will be wound up if the Tribunal is of the opinion that it is just and equitable. This means that the Tribunal has very wide discretionary power to order the winding up of a company whenever it is desirable. The interest of the company, its employees, the creditors, shareholders, and the general public should be taken into consideration while ordering winding up.

Apart from the categories mentioned above, it is not possible to categorize the facts on just the basis of these categories. Therefore, the courts, in past, have resolved the companies based on the following categories:

  1. Deadlock- The order of winding up is just and equitable when there is a deadlock in the management of a company. For example, Maruti motors operating in India amalgamated their business with Suzuki, japan based company, to form a new company called Maruti Suzuki.

  2. Loss of substratum- It is just and equitable to wind up a company when the main object of the company has failed to materialize or it has lost its substratum.

  3. Losses- When the company cannot carry a business except for losses, the order of winding up is just and equitable.

  4. Oppression of minorities- It is just and equitable to wind up a company where the shareholders have opted for an aggressive or oppressive policy towards the minority.

  5. Fraudulent purpose- It is just and equitable to wind up a company if the Tribunal is convinced that the company was made for illegal purposes or fraudulent conduct.

  6. Incorporated or quasi-partnership- If a company is a one-man company or corporation of a family, the same legal requirements in such cases will be unjust. Therefore, to avoid such unjust situations, the act treats them differently in several aspects.

Powers of the Tribunal (Section 273)

After hearing a winding-up petition the Tribunal can:

(a) Dismiss it with or without costs;

(b) Make any interim order as it thinks fit;

(c) Appoint a provisional liquidator of the company till a winding-up order;

(d) Make an order for winding-up with or without costs;

(e) Any other order it thinks fit.

Note: The order shall be made within 90 days from the date of presentation of the petition.

Before appointing a liquidator, a reasonable opportunity to make its representation should be provided to the company. Tribunal can dispense such an order only for special reasons to be recorded in writing.

The tribunal is not to refuse a winding-up order on the ground that the assets of the company have been mortgaged for an amount equal to or above those assets or that the company has no assets.

The Tribunal may refuse to make an order if they observe that there are other remedies available to the petitioner and they are acting unreasonably seeking a winding-up order instead of availing of other remedies.

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