COMPANY LAW -II NOTES

CONTENTS

MODULE 1- DIRECTORS.........................................................................................................................3

MODULE 2- ACCOUNTS AND AUDIT......................................................................................................8

MODULE 3 – COMPANY MEETINGS.......................................................................................................9

MODULE 4- OPPRESSION AND MISMANAGEMNT...............................................................................10

MODULE 5- RESTRUCTURE..................................................................................................................11

MODULE 6- Winding Up......................................................................................................................12

MODULE 7- SEBI..................................................................................................................................26
 MODULE 1- DIRECTORS
Who are directors?
The supreme executive authority controlling the management and affairs of a company vest
in the team of directors of the company collectively known as its Board of Directors. At the
core of the corporate governance practice is the Board of Directors which overseas how the
management serves and protects the long term interest of all the stakeholders of the company.
The institution of Board of Directors was based on the premise that a group of trustworthy
and respectable people should look after the interest of the large number of shareholders who
are not directly involved in the management of the company. Therefore, the position of Board
of Director is that of trust or fiduciary relationship as the Board is interested with the
responsibility to act in the best interest of the company.
Although the Board comprises individual directors, yet the actions and deeds of directors
individually functioning cannot bind the company unless a particular director has been
specifically authorized by a Board resolution to discharge certain responsibilities on behalf of
the Company.
The Companies Act 2013 does not contain an exhaustive definition of the term Director
section 2 (34) of the act prescribes “director means the director appointed to the board of a
company.”
A company, although a legal entity in the eyes of law, is an artificial person existing only in
contemplation of law. It has no physical existence of its own. It has neither soul nor body of
its own. As such, it cannot act in its own person. It can do solely only through some human
agency. The person who is in charge of the management of the affairs of the company are
termed as directors. They are collectively known as the Board of directors or the board. The
directors are the brain of a company. They occupy a pivotal position in the structure of the
company. Directors take the decision regarding the management of a company collectively in
their meetings known as Board Meetings or at the meetings of their committees constituted
for certain specific purposes. Section 2 (10) of the Companies Act, 2013 defined that “Board
of Directors” or “Board”, in relation to a company, means the collective body of the directors
of the company.
Under the Companies Act, the company itself and its directors or the board of directors are
primary agents of the company to transact its operation. The position as to the directors of the
company depends upon the fact of each case. The director can act as the trustee of the
company, the employee of the company, officer of the company and even the agents of the
company. The article of a company may designate its directors as the governors, members of
the governing council or any other title, but as far as the law is concerned they are simply
directors.
A manager or any other managerial personnel is however, not a director- Deen Dayalu v Sri
B.P. Reddy.
Minimum/Maximum Number of Directors in a Company?
Section 149(1) of the Companies Act, 2013 requires that every company shall have a
minimum number of 3 directors in the case of a public company, two directors in the case of
a private company, and one director in the case of a One Person Company. A company can
appoint maximum 15 fifteen directors. A company may appoint more than fifteen directors
after passing a special resolution in general meeting and approval of Central Government is
not required. A period of one year has been provided to enable the companies to comply with
this requirement.
Legal position of Directors?
It is difficult to define the exact legal position of the directors of a company. The Companies
Act makes no effort to define their position. They have at various times been described by
judges as agents, trustees or managing partners. In Imperial Hydropathic Hotel Co
Blackpool v. Hampson ((1883) 23 Ch D 1)
L.J. Bowen stated that “the director has a versatile position in a corporate body. Directors are
described as trustees, or as agents and sometimes even as managing partners. These phrases
can not be used in their original sense , but shall be considered to understand particular
purpose”
1. Directors as agents
Directors may correctly be described as agents of the company. The company itself cannot act
in its own person, it can only act through directors, and the case is, as regards those directors
merely the ordinary case of principal and agent. The ordinary rule of agency will therefore
apply to any contract or transaction made by them on behalf of the company. Where the
directors contract in the name and on behalf of the company, it is the company which is liable
and not the directors.
In view of the director occupying the position of an agent the general principles of agency
would govern the relations of the director with the company and also govern the third parties
who deal with the company through its directors.
This authority they get from memorandum and articles of the company and if their act is
beyond it, it is ultra vires. Directors can bind the company as agents only when they act
collectively as a Board of directors.
However the directors do not fit in the role of agents as they are selected not employed with
authority and powers of directors are wide and independent in comparison to agents.
In Ferguson v. Wilson (1866) LR 2 Ch LR 77, the court had held that the company has no
person, it can act only through directors and the case is, as regards those directors, merely the
ordinary case of principal and agent.
Thus, where chief executive of company executed promissory note and borrowed amount for
company's sake, it could not be said that amount was borrowed by by him in his personal
capacity.- Kirlampudi Sugar Mills Ltd V G. Venkata Rao
But where surety was furnished by directors in their personal capacity and not for and on
behalf of the company, company could not be sued for amount of surety.- H.P. State
Electricty Board v Shivalik Casting
Directors as agents make the company liable even for the contempt of court.- Vinit Kumar
Mathur v UOI
In the case of Elkington & Co. v. Hurter {1892} 2CH 452 it was held that where directors
enter into contracts on behalf of the company, it is the company and not the directors who are
liable there under.
Being in the position of agent, directors should display a degree of care, skill and diligence in
the exercise of their power and function.
In the case of T R Pratt { Bombay } Ltd., v. M T Ltd., AIR 1938 PC 159 it was held that
notice to the directors amounts to notice to the company in the similar way a notice to the
agent in the ordinary course of business amounts to notice to the principal.
However, Directors incur a personal liability in the following circumstances where they
contract in their own names.
i. Where they use the companies name incorrectly, e,g by omitting the word ‘limited’.
ii. Where the contract is signed in such a way that it is not clear whether it is the
principal that is the company or the agent who is signing.
iii. Where they exceed their authority, for example when they borrow in excess of the
limits imposed upon them. – Weeks v Propert
iv. Where they contract in their own names
Rectification of unauthorized acts of directors.
 A transaction by the directors which is beyond their powers, but within the powers of
the company can be ratified by resolution of the company. – Bhajekar v Shinkar
 Shareholders can by their assent ratify acts of directors which are intra vires company,
though they may not be intra vires the board of directors. Balaswaraswathi v A.
Parameswara Iyer
 A non-existent entity cannot ratify any action which it could not have initiated.
Therefore, where on the date of presentation of the suit the company was admittedly
struck off the register and dissolved, there could be no question of ratification of an
action which a non-existent entity could not have initiated in the first instance. –
Floating Service v MV’ San Fransceco Dipalola

2. Directors as trustees
A trustee is a person in whom is vested the legal ownership of the assets which he administers
for the benefit of another or others. Director is regarded as trustees of the company’s assets
and of the powers that vest in them, because they administer those assets and perform duties
in the interest of the company and not for their own personal advantage. In Ramaswamy
Iyer VS Brahmayya and Company, the Madras High Court held that the directors of a
company are trustees for the company, and with reference to their powers of applying funds
of the company and for misuse of the power, they could be rendered liable as trustees and on
their deaths the cause of action survives against their legal representatives.
Besides, almost all the powers of directors, that is, of allotting shares, making calls, forfeiting
shares, accepting or rejecting transfers, etc, are powers in trust. They have been made liable
to make good money which they have misapplied upon the same footing as if they were
trustees.
Fiduciary capacity within which Directors have to act in joins upon them a duty to act on
behalf of a company with utmost good faith, utmost care and skill and due diligence, and in
interest of company they represent as was held in Dale and Carrington Investment Limited
VS PK Prathapan.
In Ramaswamy Iyer v. Brahmayya & Co {1966} 1 Comp LJ, 107, Madras, it was held
that the directors are trustees with reference to their power of applying funds of the company
and for misuse they could be liable, and on their death the cause of action survives against
their legal representatives.
In Selangor United Rubber Estates v. Cradock (1968) 1 WLR 1555, it was held that the
directors were trustees of the money standing to the credit of the company’s bank account
which they operated.
In Percival v. Wright (1902) 2 Ch 421, it was held that directors are trustees of the
company and not of any individual shareholders.
In Baket v. Gibbons [1972] 1 WLR 693 it was held that the position of trusteeship of
directors also extended to trade secrets and other items of intellectual property.

3. Directors as officers of the company

In Gopal Khaitan v State AIR 1969 Cal 132 Court had observed that the Directors are
limbs and organs of the company. Further Calcutta High Court observed that, “We should
treat certain officials as organs of the company, for whose action the company is to be held
liable just as a natural person is for the action of his limbs.”
The companies Act 2013 in section 2(59) treats them as officer of company. It says that,
“officer” includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more
of the directors is or are accustomed to act”.
Section 2 (60) keeps the directors in category of “officer in default”. The Companies Act,
2013 at several places punishes him as ‘officer in default’ for non-compliance of its
provisions.
Apart from being officer, they can serve to any post in official capacity so they can also be
employee of company. Lee v. Lee’s Air Farming Ltd., (1961) AC 1
In Re Lee Brehens & Co., (1932) 2 Comp Cas 588 Court observed that the directors are
agents of the company but they are not employees or servants of company. However there is
nothing in law to prevent a director from accepting employment under the company under a
special contract which he may enter in to with the company.
In Ram Prashad v. CIT {1972} 86 ITR 122, 127 {SC} It was observed that a director of a
company is not the servant of the company by reason of holding the position of director. But
he may work as a “director – employee” in the position of a whole time director or managing
director.
In CIT v. Armstrong Smith {1946} 16 Comp Cas 172 it was held that a director is not
prevented from entering into contractual relationship with the company so that apart from his
office of director he becomes entitled to remuneration as an employee of the company.
4. Directors as managing partners
The person holding this view consider a company as large partnership directors being charged
with the responsibility of managing the affairs. The other shareholders are virtually dormant
partners by virtue of the various provisions in the memorandum and articles. They enjoy vast
powers of management and act as the supreme policy and decision-making body.
5. Directors as employees of the company
Ordinarily a Director is elected by the shareholders in general meeting and once so elected,
he enjoys well defined rights and powers under the Act or the articles. Even the shareholders
who elect them cannot interfere with their rights or powers except under certain
circumstances. Whereas An employee appointed by the company under a contract of service
is a servant of the company. He does not enjoy any powers other than those vested in him by
the employer who can always direct his actions and interfere in his work.
In Lee Behrens & co. it was observed that directors are elected representatives of the
shareholders engaged in directing the affairs of the company on its behalf. As such, directors
are agents of the company and cannot be considered as employees or servants of the
company. However, the court also said that there is nothing in law to prevent a director from
accepting employment under the under the company under a special contract which he may
enter into with the company.
Accordingly, where a director accepts employment under the company under a separate
contract of service, in addition to the directorship, he is also treated as an employee or servant
of the company. He shall in such a case be entitled to the remuneration and other benefits
admissible to employees in addition to the remuneration as director.
Directors have sometimes been called as trustee or commercial trustee and sometimes they
have been called as managing partners. It does not matter. As long as you understand what
their real position is, which is that they are really commercial men managing a trading
concern for the benefit of themselves and all of the shareholders in it, they stand in a
fiduciary position towards the company in respect of their powers and capital
under their control.
 MODULE 2- ACCOUNTS AND AUDIT

Auditing

 Auditing is a systematic examination of the books and records of a business or other

organizations
 to verify and to report upon the facts regarding the financial operations and the results
thereof.
 Objective is to evaluate financial statements to see whether they truly and fairly
represent the actual financial position.

Types

 INTERNAL AUDIT - an independent, objective assurance and consulting activity

designed to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control, and
governance processes

 EXTERNAL AUDIT - Periodic or specific purpose (ad hoc) audit conducted by

external (independent) qualified accountant(s).
 Its objective is to determine, among other things, whether
1. the accounting records are accurate and complete
2. prepared in accordance with the provisions of Articles & Act
3. the statements prepared from the accounts present fairly the organization's
financial position, and the results of its financial operations.

AUDIT

A company conducts business using cash contributed by individuals who have no influence
over how the money is used. Therefore, they would like to see that their investments are
secure, being used for the intended purposes, and that the yearly accounts of the firm provide
a genuine and accurate picture of the company's financial situation. For this reason, the firm's
finances must be reviewed and audited by a suitably qualified and independent individual
who is neither an employee of the company nor in any way owed to or obligated to the
company.
There is, thus, the need of an agency to stand in between the shareholders and management.
The agency, viz., statutory auditors, should be technically qualified for the job and should
also be independent, and able to withstand the pressure of management. The provisions under
this heading spread over from Sections 139 to 148 are designed to subserve these and allied
purposes. Currently, the primary purpose of auditing is to determine if financial statements
accurately and fairly reflect a company's financial status. Fraud and error detection is just a
secondary purpose.
The Act seeks to ensure that the appointment of an auditor is not in the hands of the directors.
That is why it is vested in the general body of shareholders. In order to assure due and proper
attention, the number of appointments that an auditor may accept has been restricted. The Act
tries to assure in every possible way that an auditor is not a puppet of the directors.
The auditor makes his report to shareholders through the company and is responsible to the
company for any failure in the performance of his professional duty. The report has to state
whether the accounts have been prepared in accordance with the Act and whether they give a
true and fair view. The auditors have to carry out such investigation as will enable them to
form an opinion, inter-alia, on whether proper books have been kept and whether the
company has adequate internal financial controls system in place and, if not, the report must
so state. The report has to be read at the general meeting and has to be open to inspection by
any member. In addition to verifying compliance with the Act, the auditors have also to
acquaint themselves with their duties under the articles of the company, if any, so as to
assure due compliance with them.
The Audit Committee has been given a specific and larger role in the appointment of the
auditor and oversight of the audit service.
The Act acknowledging that rendering of non-audit services may pose threat to the
independence of the auditor prohibits a large number of non-audit services from being
rendered by the auditor. Even the permitted services would require approval of the Audit
Committee. As another measure to ensure independence of auditors, the disqualification
criteria have been made more stringent and have been extended to relatives of the auditors.
The auditor has the general duty of discharging the statutory functions with care and
diligence.
Stringent penalties have been prescribed for non-compliance with the provisions relating to
discharge of auditor’s duties. Imprisonment has been provided in certain cases. The Act also
provides for debarring the firm for a specified period in case the auditor has acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its
directors or officers.
The Act has recognised National Financial Reporting Authority (NFRA) as a statutory body
vested with powers including making recommendations to the Central Government on
formulation and laying down of accounting and auditing policies and standards for adoption
by companies or class of companies or their auditors, monitoring and enforcing the
compliance with accounting standards and auditing standards, overseeing the quality of
service of the professions associated with ensuring compliance with such standards,
suggesting measures required for improvement in quality of service,
The auditor is aware that fraud, if sufficiently substantial, may alter his judgement on whether
the financial statements present a truthful and fair perspective, and he takes this into account
when performing an audit. In its publication statement on Auditing Practices, the Research
Committee of the ICAI noted, “While an audit under the Companies Act is not intended and
cannot be depended upon to reveal all defalcations and other irregularities, their discovery
may be incidental to such an audit.” Similarly, although while the finding of purposeful
misrepresentations by management is typically more directly related with the objectives of an
audit, such a discovery cannot be guaranteed by an audit. The auditor's liability for failing to
detect fraud (which may vary with respect to clients and others) arises only when it is evident
that he did not use reasonable care and competence.
However, the auditor is frequently able to identify scams. When he encounters suspicious
conditions throughout the course of his audit, he must determine whether a fraud actually
exists and, if so, whether it is significant enough to change his judgement on the accounts he
is auditing. After the auditor has finished his audit, the discovery of fraud relating to that time
does not necessarily indicate that he was careless or did not perform his duties adequately.
Once the auditor has signed the report on the accounts, he cannot ensure that no fraud occurs.
If the auditor conducted his audit with due care and competence in accordance with the
anticipated professional standards, he would not be held liable for failing to detect the fraud.



MODULE 3 – COMPANY MEETINGS
MODULE 4- OPPRESSION AND MISMANAGEMNT
 MODULE 5- RESTRUCTURE

Mergers and Amalgamations The term ‘merger’ is not defined under the Companies Act, 2013 (“CA
2013”) or under Income Tax Act, 1961 (“ITA”). As a concept, ‘merger’ is a combination of two or more
entities into one; the desired effect being not just the accumulation of assets and liabilities of the
distinct entities, but organization of such entity into one business. The possible objectives of mergers
are manifold — economies ofscale, acquisition of technologies, accessto varied sectors/ markets etc.
Generally, in a merger, the merging entities would cease to exist and would merge into a single
surviving entity

An Amalgamation is a combination of two or more companies into a new entity. Where two
or more companies agree to form a new company and transfer the assets and liabilities into
the new entity amalgamation is said to have taken place.
As per section 2(1B) the Income Tax Act, 1961 : Amalgamation means merger of either one
or more companies with another company or merger to two or more companies to form one
company in such a manner that all the assets/liabilities or the transferor company/companies
becomes the property/liability of the amalgamated company.
Horizontal Mergers
Also referred to as a ‘horizontal integration’, this kind of merger takes place between entities
engaged in competing businesses which are at the same stage of the industrial process.
A horizontal merger takes a company a step closer towards monopoly by eliminating
a competitor and establishing a stronger presence in the market. The other benefits of this
form of merger are the advantages of economies ofscale and economies ofscope. These forms
of merger are heavily scrutinized by the Competition Commission of India (“CCI”).
II. Vertical Mergers
Vertical mergers refer to the combination of two entities at different stages of the industrial
or production process. For example,the merger of a company engaged in construction
business
with a company engaged in production of brick or steel would lead to vertical integration.
Companies stand to gain on account of lower transaction costs and synchronization
of demand and supply. Moreover, vertical integration helps a company move towards greater
independence and self-sufficiency.
III. Congeneric Mergers
A congeneric merger is a type of merger where two companies are in the same or related
industries or markets but do not offer the same products. In a congeneric merger, the
companies
may share similar distribution channels, providing synergies for the merger. The acquiring
company and the target company may have overlapping technology or production systems,
making for easy integration of the two entities. This type of merger is often resorted
to by entities who intend to increase their market shares or expand their product lines.
Mergers & Acquisitions — An India Legal, Regulatory and Tax Perspective
© Nishith Desai Associates 2023 Provided upon request only 3
1. Introduction
IV. Conglomerate Mergers
A conglomerate merger is a merger between two entities in unrelated industries. The principal
reason for a conglomerate merger is utilization of financial resources, enlargement of debt
capacity, and increase in the value of outstanding shares by increased leverage and earnings
per share, and by lowering the average cost of capital.6 A merger with an unrelated business
also helps the company to foray into diverse businesses without having to incur large
start-up costs normally associated with a new business.
V. Cash Merger
In a ‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one entity receives
cash instead of shares in the merged entity. This is effectively an exit for the cashed-out
shareholders.
VI. Triangular Merger
Atriangular mergeris often resorted to,forregulatory and tax reasons.Asthe name suggests,
it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer.
Based on which entity is the survivor after such merger, a triangular merger may be forward
(when the target merges into the subsidiary and the subsidiary survives), or reverse (when
the subsidiary merges into the target and the target survives).
ACQUISITION
An ‘acquisition’ or ‘takeover’ is the purchase by one person, of controlling interest in the share
capital or of all or substantially all of the assets and/or liabilities, of the target. A takeover may be
friendly or hostile and may be structured either by way of agreement between the offeror and the
majority shareholders or purchase of shares from the open market or by making an offer for
acquisition of the target’s shares to the entire body of shareholders. Acquisitions may also be made
by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target. In
the latter case, entire business of the target may be acquired on a going concern basis or certain
assets and liabilities may be cherry picked and purchased by the acquirer. The transfer when a
business is acquired on a going concern basis is referred to as a ‘slump sale’ under the ITA. Section
2(42C) of the ITA defines slump sale as a “transfer of one or more undertakings as a result of the sale
for a lump sum consideration without values being assigned to the individual assets and liabilities in
such sales”. The legal and tax considerations of slump sale vis a vis an asset sale is discussed in
greater detail in Part VI of this Paper. Another form of acquisition may be by way of demerger. A
demerger is the opposite of a merger, involving the splitting up of one entity into two or more
entities. An entity which has more than 6 Ibid, note 4, at p. 59 Mergers & Acquisitions — An India
Legal, Regulatory and Tax Perspective 4 © Nishith Desai Associates 2023 Provided upon request only
1. Introduction one business, may decide to ‘hive off’ or ‘spin off’ one of its businesses into a new
entity. The shareholders of the original entity would generally receive shares of the new entity. In
some cases, if one of the business units of a company isfinancially sick and the other business unit(s)
isfinancially sound, the sick business units may be demerged from the company, thereby facilitating
the restructuring or sale of the sick business, without affecting the assets of the healthy business
unit(s). Conversely, a demerger may also be undertaken for moving a lucrative business into a
separate entity. A demerger may be completed through a court process under the Merger Provisions
or contractually by way of a business transfer agreement.

PROCEDURE

Since a merger essentially involves an arrangement between companies, those companies which
intend to merge must make an application to the National Company Law Tribunal (“NCLT”) having
jurisdiction over such company for (i) convening meetings of its respective shareholders and/or
creditors; (ii) or seeking dispensation of such meetings basis the consents received in writing from
the shareholders and creditors. Basis the NCLT order, either a meeting is convened or dispensed
with. If the majority in number, representing 3/4th in value of the creditors or shareholders present
and voting at such meeting (if the meeting is held) agree to the merger, then the merger, if
sanctioned by the NCLT, is binding on all creditors and shareholders of the company. The Merger
Provisions constitute a comprehensive code in themselves, and under these provisions, the NCLT has
full power to sanction any alterations in the corporate structure of a company. For example, in
ordinary circumstances a company must seek the approval of the NCLT for effecting a reduction of its
share capital. However, if a reduction of share capital forms part of the corporate restructuring
proposed by the company under the Merger Provisions, then the NCLT has the power to approve and
sanction such reduction in share capital and companies will not be req be required to follow a
separate process for reduction of share capital as stipulated under the CA 2013

RECONSTRUCTION

Reconstruction is a situation where a new company is formed and the assets

of the old one are transferred to the newly formed company. Reconstruction
is the key technique used for changing the capital structure of a firm. There
are a number of reasons due to which a company may go for reconstruction.
A few of them are:

1. By reconstruction, the company can simplify the capital structure.

2. It can eliminate all the past losses.
3. Helps in raising working capital, adjusting cumulated dividends.
4. May result in a reduction of fix charges.
A reconstruction of a company may be done internally or externally. In
external reconstruction, the old company is dissolved and a new one is
incorporated and the assets of the older one are transferred to the new one.
Whereas in internal restructuring, the old company continues, only its capital
structure is changed.
 MODULE 6- Winding Up
Meaning
As per section 2(94A) of the Companies Act, 2013, “winding up” means winding up under
This Act or liquidation under the Insolvency and Bankruptcy Code, 2016.

A company has to be incorporated and registered according to the Companies Act 2013.
Similarly, when a company is to be closed, a proper procedure has to be followed. This
process of realisation of assets, payment to creditors and distribution of surplus among the
shareholders in order to finally dissolve the company is called winding up. Thus, it can be
said that winding up is the last stage after which a company ceases to exist and is finally
dissolved.

Winding up of a company is the process whereby its life is ended and its property
administered for the benefit of its creditors and members. An administrator, called a
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 respective
rights.

In the words of Pennington winding up or liquidation is the process by which the

management of a company's affairs is taken out of its directors' hands, its assets are realised
by a liquidator, and its debts and liabilities are discharged out of the proceeds of realisation
and any surplus of assets remaining is returned to its members or shareholders.

At the end of the winding up the company will have no assets or liabilities, and it will
therefore be simply a formal step for it to be dissolved, that is, for its legal personality as a
corporation to be brought to an end.

Modes of winding up

1. Compulsory winding up. (Sec. 272)

2. Liquidation under Insolvency and Bankruptcy Code, 2016.

Grounds for winding up

Sec 271 provides grounds for winding up

1. By passing special resolution

When a company has by passing a special resolution resolved to be wound up by the
Tribunal, winding up order may be made by the Tribunal. The resolution may be passed for
any cause whatever. Tribunal may not order for the winding up if it finds it to be opposed to
public interest or the interest of the company as a whole.- B Vishwanathan v Seshasyee
Paper and Boards Ltd.

While passing the order the court also has to take into the account the possible financial
revival of the company, when the co. is incurring loss that led the co. to pass such resolution.

This clause is based on the premise that, barring other circumstances, the share- holders
themselves are the best judge to decide as to whether or not the company should go out of
existence. It is the shareholders who had formed themselves into the company and, therefore,
it is for them to dissolve the company. The directors are not entitled to file a winding up
petition without the authority of the general meeting. Of course, the directors may file such a
petition, subject to the general meeting ratifying their action - Galway & Salt Hill
Tramways Co, In re [1918] 1 IR 62/521 LG 93. The company has to call general body
meeting and pass a special resolution including therein specifically their resolve for winding
up by court (now Tribunal) and setting out grounds in the explanatory statement appended
thereto as to why such winding up of the company is called for.

It may be noted that the court (now Tribunal) has a discretion in the matter and is under no
obligation to order winding up merely because company has so resolved. The word 'may' in
the section denotes that the court (Tribunal) is vested with a discretion in taking a decision.
The discretion, no doubt, is to be exercised in a judicial manner - New Kerala Chits &
Traders (P.) Ltd. V. Official Liquidator [1981] 51 Comp. Cas. 601 (Ker.).

The company can file a petition before the Tribunal for winding up even without passing a
special resolution (Section 272), it can also present the petition on other grounds mentioned
in 271. A company whose name is not in the register of companies is not entitled to file a
winding up petition

2. Company Acting against the Sovereignty and Integrity of India, Security of the
State, the Friendly Relations with Foreign States, Public Order, Decency and
Morality.

If the company acting against the interest of sovereignty and integrity of India, the security
of state, the friendly relations with foreign states, public order, decency and morality, the
petition on this ground shall be made by Central or a State Government to the Tribunal. The
words ‘decency’ and ‘morality’ have not been defined in the Act

3. Affairs being Conducted in a Fraudulent or Unlawful Manner

The Registrar or any other person authorised by the Central Government may make an
application to the Tribunal for winding up on this ground. The Tribunal may order winding up
on the following grounds.

i) The affairs of the company are being conducted in a fraudulent manner; or

ii) The Company was formed for fraudulent or unlawful purpose; or

iii) The persons concerned in the formation of the company or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith.

It may be noted, besides above provision, Central Government may directly file a petition for
winding up in case of inspector’s, report on investigation

Where it was found that the company was incorporated and obtained a contract from
Government at of India within one and half months of its incorporation without having any
technical experience, by resorting to various frauds, misfeasance, connived with officials etc.,
the Bengaluru Bench of NCLT held to appoint the provisional liquidator, pending final
adjudication of main petition for winding up. [Antrix Corporation Ltd. v. Devas
Multimedia The decision of the NCLT was upheld by the Appellate Tribunal, On appeal, the
Supreme Court upheld NCLAT order on winding up on the grounds of fraud u/s 271(1) (c) of
the Companies Act, 2013. Devas Multimedia becomes the first company in India to be wound
up for fraud u/s 271(1)(c) of Companies Act, 2013. [Devas Multimedia (P.) Ltd. v. Antrix
Corporation Ltd. [2022] 134 taxmann.com 168 (SC)]

4. Company making default in filing with the Registrar its Financial Statements or
Annual returns

The company has to file two separate documents (a) financial statements and (b) annual
return to the Registrar. The default in not filing these documents should have been for
immediately preceding five consecutive financial years, only then winding up may be
ordered. If default is for two or three or four years, this provision cannot be invoked. Again, it
may be noted that winding up may be ordered if the default relates to either non-filing of
financial statements or annual returns. It is not necessary that the default has to be for both
financial statements and annual return. The default has to be in respect of immediately
preceding five consecutive financial years. It means that default in the earlier year is not a
ground for winding up under the clause. it is a welcome feature as non-accountability and
indiscipline in running the affairs of the co. is widespread and chronic

5. Just and Equitable

The tribunal may also order for the winding up of a company if it is of the opinion that it is
just an equitable that the company should be wound up. These words have not been defined
in the Act. The power under this clause, according to A. Ramaiya, should be used only “when
there is a strong ground because companies as far as possible, should be left to self
governance and self determination through the wishes of majority of shareholders”.

The winding up must be just and equitable, not only to the persons applying, but also to the
company and to all of its shareholder. And this was expressed in Prem Seth versus National
Industrial Corporation Limited.

The Tribunal should not make an order on this ground for winding up, if there is any other
remedy available. It is a remedy of last resort. – Gadadhar Dixit v Utkal Flour Mills

The following grounds, based on leading cases, have been held as “Just and Equitable”.

a) Loss of Substratum: A company’s substratum means sole purpose or main objects, for
which company was formed, cannot be achieved e.g. it fails to obtain a patent for invention
on the assumption that it will be granted or it fails to acquire the business which the company
was formed to purchase or fails to build a building on ground that local authority did not
grant permission.

The fact that the company is exercising some of the ancillary powers conferred by its
memorandum of association will not save it, because these powers are intended merely to aid
it in achieving its main objects, and not to enable it to carry on a different kind of business or
to preserve some appearance of activity.

In Dunlop India Ltd., respondent was a tyre manufacturing company; however, its two
manufacturing facilities had not been functioning for a long period of time. Properties of
value in excess of Rs. 2,300 crore had been removed from company without meeting debts of
its creditors or even offering unpaid wages and salaries to its workmen and other employees.
In such circumstances, instant petition was filed seeking winding up of respondent- company.
It was noted that no workmen or employee of company had appeared to resist order of
winding up. Further, company had been unable to show any prospects of it carrying on any
business in near or distant future. Besides, conduct of management of respondent-company in
fraudulently selling off assets estimated at Rs. 2,300 crore made it just and equitable for
company to be wound up. Accordingly, the Court allowed petition for winding up of the
company.

Where plant and machinery have been sold off and the company was not carrying on any
business other than earning interest, a petition for winding up on the ground of loss of
substratum of the business can be admitted Pundra Investments & Leasing Co. (P.) Ltd. v.
Petron Mechanical Industries.

However, a temporary difficulty which does not knock out the company's bottom shall not be
permitted to become a ground for liquidation Re-Shah Steam Navigation Co. [1908] 10
Bom. L.R. 107

In re, Kailtal and General Mills Co. Ltd (1955) 31 Comp. Cons. 46], the Court laid down
the following test to determine as to whether the substratum of the company has disappeared:

a) Where the subject matter of the company has 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 loss which means
that there is no reasonable hope that the object of trading at a profit can be attained.
d) The existing or probable assets are insufficient to meet the existing liabilities.

Majestic Infracon (P.) Lid. v . Etisalat Mauritius Ltd., (2014] 45 the Bombay High Court
held that inability of the company to carry on main business or undertake any other business
in a commercially viable manner indicates that the company has lost its substratum and it is
just and equitable to wind up the company. The telecom licences allotted to the company
were cancelled by a judgment of the SC. The petition was filed on the ground that the
substratum of the co. was lost.

b) Illegality of objects and fraud: If any company’s objects are illegal or become illegal by
change of law, it will be wound up by Tribunal. Similarly, if a company is promoted in order
to perpetrate a serious fraud or deception on the person who are invited to subscribe for its
shares, the Tribunal will wind it up.
Again, a winding up order was made against a company whose promoters sold a business to
them at a gross overvalue, and when the deception was discovered, bought up at a very low
price most of the shares subscribed for by the public, so as to prevent the company from
suing them for their misfeasance, and so as to wind the company up voluntarily and distribute
its assets among themselves. When the defence raised by the respondent is based on falsity in
terms of the doc produced as regards the status of the debt claimed by the petitioner, the
court held that the respondent is liable to be wound up not only for non-payment debt but also
for lack of commercial morality on the just and equitable ground Friends Tea Co. Ltd.,

However, for winding up on this ground, fraud in the prospectus or in the manner conducting
company's business is not sufficient. It must be shown that the anginal object of creating the
company was fraudulent or illegal - Re T.E. Brismead & sons ltd

c) Deadlock in management: If a private company has only two members as directors and
the two are not on speaking terms. Tribunal will make a winding up order, even though there
is a provision in articles that one director shall have a casting vote at board meetings or that
the disputes shall be settled by arbitration. If there is a loss of confidence in the Board of
directors or refusal by one of the three directors to attend meeting to make a quorum.

In Sumit Gupta VS MOD Serap Industries. The bench admitted the winding up petition as
there was a deadlock situation in management of a company and company was not engaged
in business and also it had sold all its assets for liquidating its liabilities.

In this case, the petitioners managed the company before their displacement for about 20
years and were facing charges of misappropriation of companies fund and mismanagement.
The court in this case held that if there is an alternative remedy available to the petitioner
winding, a petition shall be dismissed. Ashutosh Sharma v Torque Cables

Since a petitioner should not have done anything to prejudice the company and create a
deadlock, his petition would not be approved as he was found to have done the same. Vishnu
Kumar Agarwlla v Sreelall Foreign Money Changers ltd

d) Bubble Company: If the company is just on paper and never carried on its business. Re-
London and County Coal Co.. Such co. are called ‘fly by night’ co.

e) Oppression: A winding up petition may lie where the majority shareholder have adopted
an aggressive policy towards minority under Section 241. R. Sabapathy Rao v Sabapathy
Press Ltd.
Also, any member of a company may complain that the affairs of the company have been or
are being conducted in a manner prejudicial to public interest or oppressive to him and other
members. Under section 242 (1b) the Tribunal can order winding up on “just and equitable”
ground.

Thus, a company was wound up on the petition of minority shareholders when the directors,
who held a majority of the issued shares, had persistently refused to call annual general
meetings, or to submit accounts to the petitioners, or to have auditors appointed, or to give
the petitioners any information about the company's affairs, all these being part of a scheme
to coerce the petitioners into selling their shares to the directors at a price somewhat less than
quarter of their real worth. Loch v John Backwood

The acts of oppression by those who promote or control a company must be of a serious
character for the Tribunal to wind the company up. Isolated acts of misconduct by the
directors will not suffice, and the Tribunal will not make a winding up order merely because
the promoters have issued a false prospectus

f) Other: If the number of members fall below the statutory minimum, its winding up can be
ordered on “just and equitable ground’. Similarly, if company is not following democratic
principles of fairness or lacking in commercial morality or where directors making charges
against each other the Tribunal can order winding up of the company. Re Davis And Coltett
Ltd, one member improperly excluded the other who held half the shares from taking part in
the co. business. held, the company be wound up.

In considering the petition on just and equitable ground, the court will have regard to broad
democratic legal principles- N Sundarasawmy v Bangalore Turf Club Ltd.

Two of the grounds- inability to pay debt and voluntary winding up under XIX have been
deleted by passing of IBC

Who can File petition section 272

The following can file petition to the Tribunal for winding up of a company.

1. The Company- A company can make a petition to the Tribunal for its winding up by
an order of the Tribunal, when the members of the company have resolved by passing
a special resolution to wind up the affairs of the company. Managing director or the
directors cannot file such a petition on their own account unless they do it on behalf of
 the company and with the proper authority of the members in the general meeting.
(Section 272(5))
Where the directors find the company to be insolvent due to circumstances which
ought to be investigated by the tribunal, they may file a petition for winding up order
on behalf of the company. In such circumstances, a director may make a petition even
without obtaining the sanction of the general meeting of the co- State of Madras v
Madras Electric Tramway Ltd
2. The contributory or contributories i.e., persons who are liable to contribute to
the assets of the company- A contributory shall be entitled to present a petition for
the winding up of a company, notwithstanding that 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, and
shares in respect of which he is a contributory or some of them were either originally
allotted to him or have been held by him, and registered in his name, for at least six
months during the eighteen months immediately before the commencement of the
winding up or have devolved on him through the death of a former holder.
thus, In Re Gattapardo Ltd. [1969] 2 All ER 344, a transfer though executed and
stamped in June 1967, was registered in October 1968. The shareholder presented a
winding up petition in December, 1968. Held, the petition was not valid since she had
not held shares for six months as required by the Act.
3. The Registrar- Registrar may with the previous sanction of the Central Government
make petition to the Tribunal for the winding up the company only in the following
cases:
a) when it appears that the company has become unable to pay debts from the
accounts of the company or from the report of the inspectors appointed by the Central
Government under section 210; or
b) If the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial
years.
c) if the company has acted 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.
d) if on an application made by the Registrar or any other person authorized by the
Central Government by notification under this Act, the Tribunal is of the opinion that
 the affairs of the company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purpose, or the persons concerned
in the formation or management of its affairs have been guilty of fraud, misfeasance
or misconduct in connection therewith and that it is proper that the company be
wound up.
ROC V All India GrounNut Syndicate- such petition must be filed within
reasonable time of the obtain of the govt. sanction.

4. The Central or State Government or any other person authorised by Central

Government; The central government made petition for winding up where it appears
from the report of inspectors appointed to investigate the affairs of a company on a
section 213 on the ground, it is just an equitable that the company should be wound
up. The government may authorize any person to act on its behalf for the purpose,
including the registrar,
5. Any creditor or creditors- A creditor may make a petition to the Tribunal for the
winding up of the company, when he is able to prove that the company is unable to
pay off his debts exceeding Rs. 1, 00,000 within three weeks of the notice of demand
or where a decree or any other process issued by the Tribunal in favour of a creditor
of a company is returned unsatisfied in whole or in part. Law does not recognize any
difference between the secured and unsecured creditors for this purpose. ‘A secured
creditor is as much entitled as of right to file a petition as an unsecured creditor.’ But
in case of secured creditor’s petition, winding up order shall not be made where the
security is adequate, and no other creditor supports the petition.
A contingent or prospective creditor can also file a winding up petition if he obtains
the prior consent of the Tribunal. The Tribunal shall grant the permission only when:
(i) It is satisfied that there is a prima facie case for the winding up of the company;
and
(ii) The creditor provides such security for costs as the Tribunal thinks reasonable.
The Tribunal may, before passing a winding up order, on a creditor’s petition,
ascertain the wishes of other creditors. If the majority of the creditors in value oppose,
and the Tribunal having regard to the company’s assets and liabilities considers the
opposition reasonable, it may refuse to pass a winding up order
6. No (1), (2) and (5) together- check once regarding joint petition
Procedure for Winding Up

1. Filing of Petition:

It is presented by the company to the Tribunal, along with the statement of affairs. If it is
filed by any other person, company is allowed to file objections.

2. Provisional Liquidator:

At any time after presentation of winding up petition and before the making of a winding-
up order, the Tribunal may appoint a provisional liquidator. Before making such
appointment, however, the Tribunal must give notice to the company so as to enable it to
make its representation in the matter unless, for reasons to be recorded in writing, it
thinks fit to dispense with such notice. The powers of the provisional liquidator are the
same as those of a liquidator unless limited by the Tribunal.

3. Company Liquidator:

On a winding up order being made in respect of a company, the Tribunal shall appoint
official liquidator or liquidator. The liquidator should be registered under insolvency and
bankruptcy Code 2016. A liquidator can be replaced or removed.

4. Winding up Committee:

Within three months of winding up order, the company liquidator shall make an
application to form a winding up committee to assist and monitor progress of winding up.
A monthly report along with the minutes of meeting of the winding up committee shall be
placed before the Tribunal by company liquidator, the convener. The company liquidator
must submit a preliminary report to the Tribunal within sixty days from the winding up
order.

5. Advisory Committee:

The Tribunal may, at the time of making winding up order of a company, or at any time
thereafter direct to form an advisory committee to act with company liquidator and to
report to Tribunal on such matters as Tribunal may direct. The maximum members of the
committee is twelve, being creditors and contributories. The committee has the right to
inspect books of accounts and other documents, assets and properties of the company
under liquidation at reasonable time. The quorum is 1/3rd of total members or two
whichever is higher. The company liquidator shall chair the meetings of the Advisory
Committee.

6. Dissolution of the Company:

When the affair of a company have been completely wound up, the company liquidator
shall make an application to the Tribunal for dissolution of the company. Upon receipt of
the report from the company liquidator or otherwise, the Tribunal on forming an opinion
that it is just and reasonable to order dissolution, shall make an order for dissolution of
the company. The company shall be dissolved effective from the date of order. When the
company is dissolved, no suit or proceeding will lie against the company because a
dissolved company has no existence in the eyes of law.

Rank of assets

Preferential Payments

In the event of winding up certain payments are to rank in priority to others. These are
called preferential payments. Under section 326 the following shall be paid in priority to
other debts:

1) Workmen dues;

2) Where a secured creditor has realised a secured asset, so much of debts due to such
secured creditor, as could not be realised by him or the amount of workmen’s portion in
his security if payable, under law, whichever is less, PariPassu with workmen’s dues.

Under Section 327, order of priority subject to section 326 is given below:

1) All revenues, taxes, cesses and rates due to the Central or a State Government or to a
local authority. The amount should have become due and payable within twelve months
before winding up order.

2) All wages or salary of an employee due for a period not exceeding four months.

3) All accrued holiday remuneration becoming payable to an employee on his termination

or death.

4) All amount due in respect of contributions payable during twelve months under
Employees State Insurance Act.
5) All amounts in respect of any compensation payable under Workmen’s Compensation
Act.

6) All sums due to an employee from provident fund, a pension fund, a gratuity fund or
any other fund

7) Expenses of any investigation, held in pursuance of section 213 or 216 in so as they are
payable by the company. T

Thus the order of priority in paying off debts in winding up shall be follows:

a) workmen’s dues and debts due to secured creditors

b) Cost and expenses of winding up

c) Preferential debts

d) Floating charge

e) Unsecured Creditors

Contributory

A contributory is a person liable to contribute to the assets of a company in the event of

winding up and includes the holder of any shares which are fully paid up (section 2(26). A
holder of fully paid up shares shall have rights as a contributory and no liability as a
contributory.

The following persons shall be liable as a contributories on the winding up of a company.

a) Present and Past Members: Every present and past member liable to contribute to the
assets of the company for payment of debts, liabilities and costs of winding up and for
adjustment of rights of the contributories is a contributory. A past member shall be liable
to contribute the amount unpaid on the shares in respect of which he is a contributory or
the amount he has guaranteed to pay in the event of winding up. A past member shall not
be liable to contribute:

i) if he ceased to be a member for one year or more before commencement of

winding up; or
ii) in respect of any debt or liability contracted after he ceased to be member; or iv)

iii) the present members are able to the satisfy the contribution required.
b) A director and manager whose liability is unlimited except if he ceased to hold office
for a year or upward before commencement of winding up. A past director or manager
shall not be liable for contribution if the debt and liability of the company was contracted
after he ceased to hold that office.

c) Assignee of a contributory, legal representative of a deceased member, liquidator of a

company which is a member and Debtors are other contributories.

d) Subscribers to the Memorandum: Subscribers to the Memorandum shall be deemed as

contributories for the amount unpaid on the shares they agreed to subscribes for.

case laws from book pg 1028

Removal of the name of company

Once the affairs of the company are fully wound up, the official liquidator shall submit a
final report to the Central Government, with a copy to Tribunal. The Cental Government
shall order dissolution of the company and Registrar shall strike off the name of the
company from the register of companies and publish a notification to this effect. The
company will cease to be an artificial person created by law

Powers of tribunal under sec 273

liquidator

IBC

The enactment of the IBC in 2016 introduced a separate voluntary liquidation process,
which is more commonly adopted for winding down a corporate person (which includes
both a company and an LLP) these days. Prior to the IBC, a company could initiate
voluntary liquidation under Section 304 of the Companies Act, which was subsequently
omitted by the IBC. The process of Voluntary Liquidation has become more streamlined
under Section 59 of the IBC, read along with Voluntary Liquidation Regulations, since it
does not envisage the intervention of the NCLT for commencing voluntary liquidation
process.

In terms of process, prior to initiating voluntary liquidation, the company is required to

prepare a valuation report and a statement of assets and liabilities of the company as on
the liquidation commencement date (i.e. the date from when the company has no
liabilities, employees and assets, except cash and bank balance required to make
payments if any claim is filed and to cover the liquidation expenses). Thereafter, the
company may initiate the process by passing a director’s declaration, stating that the
company is not in debt and is not being liquidated to defraud any person.[12] After
issuing the declaration of solvency, the company is required to pass a special resolution
appointing a liquidator[13], following which the company shall cease all business
operations except as far as required for the winding up of the business. The role of
government regulators is restricted since the company is merely required to notify the
Registrar and the Insolvency and Bankruptcy Board of India (“IBBI”) regarding its
resolution to liquidate the company[14]. This ensures that there is no delay in
commencing the liquidation process. Liquidation is also required to be conducted as
mandated under the Voluntary Liquidation Regulations by the liquidator within 270 days
(if the company has creditors who have approved the special resolution) or 90 days in
certain specified cases.[15]

The process does not involve the courts or the NCLT until the final stage, wherein after
completion of the liquidation process, the liquidator submits the final report to the NCLT,
along with an application for dissolution of the Company. The NCLT is therefore merely
required to ascertain whether the company has fulfilled all the compliances and
procedural requirements as mandated under the IBC and the Voluntary Liquidation
Regulations, before passing an order of dissolution.
 MODULE 7- SEBI

n narayna v adjucating authoryt

Indian lcuncil of inestors v uoi