Circumstances under Winding-Up By Court :

Section 433 deals with the circumstances in which a company may be wound up by the Court. These are as follows:

(a) If the company has by a special resolution resolved that it shall be wound up by the Court;

(b) if the company defaults in delivering the statutory report to the Registrar or in holding the statutory meeting. But instead of ordering such a company to be wound up, the Court may direct the report to be filed or the meeting to be held;

(c) if the company does not commence its business within a year from its incorporation or suspends its business for a whole year. It should be noted that the power of the court to wind up, when the company has not carried on business for a year , is discretionary and it will not be exercised unless there are indications that the company has no intention to start or to continue its business. However, the Court would not grant an order against the wishes of a majority of the contributories if the delay in commencing, or the interruption of, the business is explained and if it is satisfied that business would be commenced or resumed. [Murlidhar vs. Bengal Steam Co. Ltd., (1921) I.L.R. 47 Cal. 654];

(d) if the number of members is reduced below seven in the case of a public company or below two in the case of a private company, the court would, however, permit the company to wind up itself voluntarily. In this connection, it is necessary to recall that according to the provisions contained in Section 45 of the Act a member is personally liable for the debts of the company if the membership falls below the statutory minimum and the business is carried on for more than six months after the number has been so reduced and such a fact is within the knowledge of the shareholders;

(e) if the company is unable to pay its debts. Under Section 434, a company is deemed unable to pay its debts in any of the following circumstances:

(i) If a creditor of the company, to whom the company by assignment or otherwise owes a sum exceeding Rs.500, has demanded the same in writing, and the company has for 3 weeks thereafter neglected to pay the amount or to secure or compound for it to the reasonable satisfaction of the creditor.

The above-mentioned letter of demand may be delivered by registered post or otherwise at the registered office of the company. The meaning of the word “delivered in respect of a registered letter cannot be limited to cases when the registered letter is accepted by the addressee. A tender of such a letter, even if it is refused by the assessee, is a good delivery. The refusal to take the delivery of the letter precludes the addressee from pleading ignorance of its contents.

Prior to an order for winding-up of a company being made, it is required to be shown that the debt due from the company is presently payable and that the title of the petitioner is complete. A petition cannot be supported on the allegation that some debt is due, unless it was debt for which a statutory demand was made. [In Re. Jambad Coal Syndicate Ltd. I.L.R. 62 Col 294].

The demand under clause (i) above is called statutory notice. Notice served at some place other than the registered office of the company will be invalid [Ankhtiarpur Bihar Light Railway Co. Ltd. vs. Union of India [1954] 93 Cal. L.J. 271]. But if the company has no registered office, then the notice of demand for the payment of the debt may be given at the place where the company carries on business [British & Foreign Apparatus Co., 1865), 12L.T. 368]. Where the debt is bona fide disputed, clause (i) does not apply:

(ii) If execution or other process issued on a decree or order of any Court in favour of the creditor of the company is returned unsatisfied in whole or in par t; or

(iii) If it is proved to the satisfaction of the Court that the company is unable to pay its debts.

A company may be wound up even when its assets are valuable, if they are locked up in investments and the company is carried on at a loss. In considering whether a company is able to pay its debts, the company’s contingent and prospective liabilities have to be taken into account, and, therefore it may be unable to pay its debts, although it has paid its debts as they become due, if its existing and probable assets will be insufficient to meet its prospective liabilities.

To justify the application of clause (i) above, the company may be, in the words of Sir William James, V.C. “commercially insolvent”. Insolvency may be proved easily by notice under clause (i); under clause (ii), it is more difficult to prove to the satisfaction to the Court. For instance the fact that the liabilities of a company far exceed its assets does not ipso facto mean that the company is unable to pay its debts and does not give rise to a ground for compulsory winding up under Section 433. It is rather the “commercial insolvency” (i.e., the circumstances in which the existing assets and liabilities” are such as to make the Court feel satisfied that the existing and probable assets would be insufficient to meet the existing liability”) which affords an occasion for compulsory winding-up on the ground of inability to pay off its debts. A particular company may have the capacity to meet the demands of its creditors; in that case, a winding up order would be unjustified [Krishnaswamy vs. Stressed Concrete Construction (Pvt) Ltd. AIR. 1964 Mad. 191].

In the Registrar of Companies, Punjab vs. Ajanta Lucky Scheme and Investment Co. Private Ltd. and Others (1973), 43 Comp Cas. 314, the Registrar of Companies filed petition for the winding-up of the respondent company under Section 433 (e) read with Section 439 (5) of the Act on the ground that the company was unable to pay debts and that its liabilities exceeded its assets. The two issues that emerged therefrom were as follows, viz. (a) whether the company was unable to pay its debts and meet its liability; and (b) whether it was a proper case for winding-up. Held: (a) That for determining the company‟s ability or otherwise to pay its debts, it was to be considered whether the company was able to meet its liability as and when they accrued due. Section 434 of the Act prescribes the circumstances in which a company was to be treated as unable to pay its debts. Admi ttedly, none of these circumstances was present in the case in question and no complaint had even been received by the company from its creditors as regards non-fulfilment of any of their claims against the company. In a case where no debt had been due, a demand therefore could not be made. The mere fact that certain liabilities might accrue due in future, which could exceed the existing assets of the company, would not necessarily lead to the conclusion that the company would be unable to meet its liabilities when they accrued due. The mere fact of the company’s liabilities being in excess of its assets could not ipso facto be a ground for putting the company into liquidation. The test would be that the company should be commercially solvent, i.e., the company ought to be on a position to meet its liabilities as and when they arose: (b) that there was no ground for winding-up, because it was shown that (i) the paid-up capital had augmented, every year the business flourished, there were additions to list profit and the subscribers‟ claims on maturity had been met; and (ii) any creditor or contributory or even the Reserve Bank had never lodged any complaint against the financial stability of the company.

(f) “just and equitable” rule: Where there is a petition of the Court to wind up a company on the ground that it is “just and equitable”, the court has power to make a winding-up order in any case where the special circumstances are such that it appears just to make such an order. Such orders have been made by the Court in the following circumstances:

(i) Where the substratum of the company has disappeared, e.g., where the main object of the company was to acquire and work a mine or patent or concession which could not be obtained or where the mine was worthless or the patent was invalid or the concession has lapsed [Re, German Date Coffee Co. (1882) 20 Ch. D. 169].

A company will not be wound up because it has ceased to carry on one of several businesses authorised by its memorandum unless, upon a fair construction of the memorandum, that business is regarded as the main object of the company [Re. Amalgamated Syndicate (1897) 2 Ch. 600]. Similarly, a company which has amalgamated with another company cannot be wound up on the ground that it has ceased to carry on business as a separate company.

Thus the substratum of a company is deemed to have disappeared or gone, if the main object for which the company was formed has become impracticable, i.e., permanently impracticable. “Usual tests for determining whether the substratum of the company has disappeared are whether: (a) the subject-matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss, which means that there is no reasonable hope that the object of trading at a profit can be attained or (d) the existing and probable assets are insufficient to meet the existing liabilities” [In re Kaithal and General mills Co. Ltd., 1951,31, Comp. Cas. 461].

Where the substratum has gone, the Court can wind-up the company, even though the majority of shareholders oppose the winding-up order. But before the Court can wind-up on this account, it must be proved that the whole of the business of the company has become impossible of being carried on. The question whether the substratum has gone or not would depend not on the intention of the Board of Directors or of the shareholders, but would depend upon, and should be decided by the Court, on a true and accurate construction of the memorandum of association and the actual facts of the case [Mohan Lal Mehta vs. Chunilal Mehta (1962) 32 Comp. Cas. 970]. If there are two or more main objects and some are frustrated and some are pursued, the company cannot be wound up. All the main objects must be destroyed in order to justify winding-up [Kitson & Co. (1946) I.A.E.R. 435 (C.A.)]. It should be noted that even if the substratum is gone, if the members do not ask for winding-up, carrying on of the other objects of the memorandum will not be ultra vires.

(ii) Where there is a deadlock or a crisis in the management of a company, e.g., where the two sole shareholders, who were also directors, were not on speaking term owing to disagreement [Re, Yenidje Tobacco Co. 1916, 2 Ch. 426]; Where there is a deteriorating state of management and control of business owing to sharp differences between the members as reflected in their resolutions at their meetings [Vijayalakshmi Talkies vs. Rao. A.I.R. 966 Andh.Pr.285]; where the mismanagement is such that there is no practicability of remedying it [Rajamundry Electric Corporation vs. Rao, A.I.R. 1955 S.C. 213]. However, factions, quarrels; etc., among shareholders are not sufficient grounds [S.S. Raj Kumar vs. Project Castings Private Ltd. (1968) I Comp. L.J. 41].

(iii) Where the company has been formed to carry on a fraudulent or an illegal business.

(iv) If the company is a “bubble”, i.e., if it never had any business to carry on [Re London & Country Coal Co. 1867, 3 Eq. 355].

(v) Where the company is insolvent and is being carried on for the benefit of the debenture holders [Re. Clandown Colliery Co. (1915), I Ch.369].

(vi) Where the petitioner was excluded from all participation in the business.

(vii) Where preponderance of voting power was permanently vested in a Board in which minority shareholders had justifiable no confidence [Loch vs. John Blackwood Ltd. (1924) A.C. 783].

Clause (f) of Section 433 should not be construed as ejusdem generis [i.e. of the same kind or natural with the other clauses [a] to [c] of that Section. The ground need not at all be similar to any of the other grounds mentioned in Sectioned in Section 433