Write short notes on:Winding-up of unregistered companies.. (b) Dissolution of a defunct company

(a) Meaning of Unregistered Company (Section 582)

Section 582 of the Companies Act defines an unregistered company. The definition is given in two parts, viz., (i) What the expression ‘unregistered company’ includes; and (ii) What it does not. Clause (b) of Section 582 provides that ‘unregistered company’ shall include any partnership, association or company consisting of more than seven members at the time when the petition for its winding-up is presented before the Court. The expression, however, does not include (i) a railway company incorporated by any Act of Parliament or other Indian law or any Act of Parliament of U .K.; (ii) a company registered under the Companies Act, 1956; or (iii) a company registered under any previous companies law and not being a company the registered office whereof was in Burma, Aden or Pakistan immediately before the separation of that country from India:

An illegal association is not an unregistered company and, therefore, cannot be wound-up under section 583 [Reghubar Dayal Vs. The Sarafa Chamber AIR [1954] All 555].

The definition of ‘unregistered company’ as given under Section 582 should, thus, be read along with Section 11 of the Act. Accordingly, an unregistered company consists of a partnership, association or company having more than seven members but not more than ten members (in case of banking business) and twenty members (in case of other business). If membership exceeds ten or twenty as the case may be, it will be an illegal association and the provisions of Part X of the Act will not apply.

Also, an association or company having less than seven members cannot be wound-up by the Court as an unregistered company.

Winding-up of an Unregistered Company (Section 583)

The rules relating to winding-up of unregistered companies are:

1. No unregistered company shall be wound-up voluntarily or subject to the supervision of the Court [Section 583(3)]. Thus, an unregistered company can only be compulsorily wound-up by the Court.

2. The circumstances under which an unregistered company may be wound-up

are as follows:

(a) If the company is dissolved or has ceased to carry on business or is

carrying on business only for the purposes of winding-up its affairs.

(b) If the company is unable to pay its debts.

(c) If the Court is of the opinion that it is jusrand equitable that the company

should b’e wound-up [Section 583(4)].

As per Section 583(5) an unregistered company shall be deemed unable to pay its

debts in the following circumstances:

(i) if a creditor, to whom the company is indebted in a sum exceeding Rs. 500, has served on the company a demand under his hand requiring the company pay the sum so due, and the company has, for three weeks neglected to pay the sum or to secure or compound for to the satisfaction of the creditor.

(ii) If any suit or other legal proceedings have been instituted against any member for any debt or demand que, or claimed to be due, from the company or from him in his character of member, and notice in writing of the institution of the suit or proceedings having been served on the company and the company has not, within ten days thereafter:

(a) paid, secured or compounded the debt or demand; or (b) procured the suit or legal proceedings to be stayed; or

(c) indemnified the defendant to his satisfaction against the suit of other legal

proceeding and against all costs, damages and expenses to be incurred by him by reason of the same.

(iii) If execution or other process issued on a decree or order of any Court in favour of a creditor against the company or any member thereof is returned unsatisfied in whole or in part.

(iv) If it is otherwise proved to the satisfaction of the Court that the company is

unable to pay its debts. .

As to which Court shall have the jurisdiction in the matter of winding-up of an

unregistered company, sub-section (2) of Section 583 provides as follows:

For the purpose of determining the Court having jurisdiction in the matter of the winding-up, an unregistered company shall be deemed to be registered in the State where its principal place of business is situate or, if it has a principal place of business situated in more than one State, then, in each State where it has a principal place of business. The principal place of business of that State, where the winding-up proceedings have been instituted, shall be deemed to be the registered office of the company for the purposes of winding-up.

Duties of Liquidator

The duties of liquidator with respect to the unpaid money and refundable assets which remains undistributed after six months from the date on which they become payable are enumerated in Section 555 of the Companies Act, 1956. These are:

1. The liquidator shall forthwith pay the said money into the public account of India in the Reserve Bank of India in a separate account known as the Companies Liquidation Account.

2. The liquidator shall, on the dissolution of the company, similarly pay into the said account any money representing unpaid dividends or undistributed assets in his hands at the date of dissolution.

3. The liquidator shall, when making any payment in both the cases furnish to such officer as the Central Government may appoint in this behalf, a statement in the prescribed form, setting forth, in respect of all sums included in such payment, the nature of the sums, the names and last known addresses of the persons entitled to participate therein, and such other particulars as may be prescribed.

4. The liquidator shall be entitled to a receipt from the Reserve Bank of India for any money paid to it in both the cases; and receipt shall be an effectual discharge of the liquidator in respect thereof.

5. Where the company is being wound-up by the Court, the liquidator shall make payments referred to in both the cases by transfer from the account referred to in Section 552 (i.e., the public accounts of India in the RBI).

6. Where the company is being wound-up voluntarily or subject to the supervision of the Court, the liquidator shall, when filing the statement in pursuance of sub-section (1) of Section 551, indicate the sum of money which is payable to the Reserve Bank of India in both the cases which he has in his hands or under his control during the six months preceding the date to which the said

statement is brought down, and shall, within 14 days of the date of filing of the said statement, pay that sum into the Companies Liquidation Account.

7. Any money paid into the Companies Liquidation Account in pursuance of this Section, which remains unclaimed thereafter for a period of 15 years, shall be transferred to the General Revenue Account of the Central Government; but a claim to any money so transferred may be preferred under sub-section (7) and shall be dealt with as if such transfer had not been made; the order, if any, for payment on the claim being treated as an order for refund or revenue.

8. Any liquidator retaining any money which should have been paid by him into

the Companies Liquidation Account under this section shall:

(a) pay interest on the amount retained at the rate of 12% per annum and also pay such penalty as may be determined by the Registrar. However, the Centrl Government may in proper case remit either in part or in whole the amount of interest which the liquidator is required to pay under this

clause;

(b) be liable to pay any expenses occasioned by reason of his default; and (c) where the winding-up is by or under the supervision of the Court,

also be liable to have all or such part of his remuneration as the Court may think just to be disallowed, and to be removed from his office by the court.

What are the powers of the court to order winding-up subject to its super

Voluntary Winding-up Under Supervision of the Court

At any time after a company has passed a resolution for voluntary winding-up, the court may make an order that the voluntary winding-up should continue subject to the supervision of the Court [Section 522]. Application for such supervision may be made by a creditor, or a contributory, or the company, or the liquidator.

“One advantage of having a supervision order is that the liquidator is allowed to occupy the same position and exercise the same power (subject to restrictions, where necessary) as a voluntary liquidator. At the same time the advantage of a compulsory winding-up as regards stay of suits and other proceedings and making and enforcing calls, etc., are also secured and the Court is empowered to exercise all the powers which it can exercise in a compulsory winding-up... In truth, a supervision order is an amalgam of both_a volu...”ltary winding-up and a winding-up by Court as it is made on such terms and conditions as the Court thinks just” [Avadh Behari J., in N. Rajaraman Vs. Hindustan Brown Boveri Ltd.].

Such an order is passed by the court where

1. the resolution for winding-up was obtained by fraud, or

2. the rules relating to winding-up order are not being observed, or 3. the liquidator is prejudicial or is negligent in collecting the assets.

The Court, in such a case, gets the same powers as it has in the case of compulsory winding-up under order of the Court. The Court may also appoint an additional liquidator or liquidators. It may also remove any liquidator and fill any vacancy occasioned by the removal or by death or by resignation [Section 524]. A liquidator so appointed shall have the same powers, be subject to the same obligations and in all respects stand in the same position as if he had been appointed in accordance with the provisions of the Act relating to the appointment of liquidator in voluntary windingup, subject, however, to any restrictions the Court may impose [Section 525].

1. Effect of Superoision Order [Section 5261. Unless the Court imposes restrictions on the exercise of any powers by the liquidator, he will have all the powers conferred on a liquidator in voluntary winding-up [Section 526(1)]. The Court will also have as wide powers as in compulsory winding-up. The Court may stay suits or legal proceedings.

It can make or enforce calls and all other orders necessary for beneficial winding-up of the company [Section 526(2)].

2. Powers of Court to Order Compulsory Winding-up [Section 527]. The court may pass an order for compulsory winding-up superseding the order of winding-up under its supervision. The Court may then appoint a person who is the liquidator, either provisionally or permanently to be liquidator in winding-up by the court in addition to and subject to the control of Official Liquidator.

22. Explain the duties of a liquidator of a company with regard to the following under the Companies Act, 1956:

(i) the money in his hand representing the dividend payable to any creditor, which remained unpaid for a period of six months after the date on which the dividend was declared; and

The shareholders competent to make n application to CLB are

(i) in case of a company having share capital, not less than 200 members or members holding not less than 1j10th of the total voting power therein;

(ii) in case of a company having no share capital, not less than 1j5th of the persons

on the company’s register of members.

The application by members should be supported by necessary evidence to show

that the applicants have good reasons for requiring the investigation (Sec. 236).

The CLB, after hearing the parties, may declare that the affairs of the company ought to be investigated and on such declaration, the Central Government shall appoint one or more Inspectors to investigate the affairs of the company in such manner as directed by the Central Government.

BUY-BACK OF SHARES

“A company’ cannot buy-back its own shares”, eXI)lain. Are there any exceptions to it?

Section 77 of the Companies Act does lIot permit a company to purchase its own shares, for it involves permanent reduction in share capital which is a

cushion to the creditors. The Companies Act also does not allow

reduction of share capital except for certain legitimate purposes by adapting’

the procedure given in Sections 100 to t03. .

There has been persistent demand from the corporate sector, in its endeavour to meet the international practices, to allow companies to buyback their

own securities (shares or debentures). Responding to this demand,

.the Government amended the Companies Act and allowed the corporate sector to buy-back its own shares vide Companies (Amendment) Act 1999. By

this Act a new Section 77 A was inserted containing the provisions permitting the companies to buy-back their own securities subject to certain conditions.

The major reasons for buy-back may be one or more of the following: (a) To increase underlying share value, as EPS (earning per sharc)

increases after buy-back. In turn. it will push up the market value of the remaining shares.

(b) For adjusting the capital base, if the company is over-capitalised

andor to achieve optimum debt-equity ratio.

© To p,’event hostile takeover as it will reduce the floating stock from

the market and s: JTe prices will also be increased in the market.

Excitations. The provision of Section 81 do not apply

(i) to a private company unless its Articles provide otherwise.

(i i) to the increase of subscribed capital of public company caused by the exercise of an option by convertible debentures or loans, as per terms of issue,

provided the terms of issue are duly approved: (a) by the Central Government; and (b) by a special resolution of the company.

Where the convertible debentures are issued to or loan is obtained from the Government, or any institution specified by the Goverrunent in this behalf.

the Government approval and passing of special resolution is not necessary.

What are Bonus Shares ‘! When are they issued? State the legal provisions in relation to the issue of such shares.

When a company accumulates large free reserves and intends to bridge the gap between the capital and fixed assets, it issues Bonus Shares to its equity

(ordinary) shareholders. Therefore a bonus issue cannot be made where there is no undistributed profits or reserves with the company since the nlain

purpose of issue of Bonus Shares is to capitalise proh,s which are available for distribution as dividend. For this purpose the SecmitiesPremium Account

uls 78 (2) and the Capital Redemption Reserve Account (us 80 (5), can also be applied for the issue of bonus shares.

Companies issue Bonus Shares out of its accumulated profits and reserve and the shareholders do not pay anything to the issue of bonus shares.

For making an issue of bonus shares, the following conditions must be complied with:

I. Sufficient undistributed profits must be there. The two other sources from which bonus shares may be financed are Securities Premium Account

and Cal)ital Rcdcml)tion Resenre Account [Section 78 (2) & 80 (5)].

2. Articles must permit such an issue.

3. Suitable resolution by the Board of Directors must be passed. 4. Formal approval of the shareholders in a general meeting must be secured. For this

purpose, ordinary resolution must be passed.

Point of DistinctIon Public Company Private Company

1. Minimum number A public company must .A private company must
of members have at least seven have at least 2 members.
members.
2. Maximum number I No limit I Its members should not
of members exceed 50 in number (ex-
elusive of past and
present employees).
3. Minimum number I Three I Two
of directors
4. Public invitation for I It is free to invite the It cannot invite the public
capital public to buy its shares to buy its shares and de-
and debentures. dentures.
5. Commencement of I It cannot commence It can commence business
business business after incor- immediately after incor-
proration unless cer- proration.
certificate of commence-
meant of business is
obtained.
6. Prospectus I It must issue and file a Need not issue and file a
prospectus or state- prospectus or a statement
meant in lieu of pro- in lieu of prospectus.
conspectus before al1ot-
ing shares.
7. Allotment of shares I It cannot allot shares It can allot shares without
without receiving the raising the minimum
minimum subscription. subscription.
8. Statutory meeting I It 0 must hold a statutory It is not required to hold
meeting and must file the statutory meeting and
statutory report with the to file statutory report.
Registrar within six
months from the date of
obtaining the certificate
to commence business.
9. Transfer of shares I Its shares are freely I Its shares are not freely
transferable. transferable.


10. Minimum paid-up
capital
11. Share warrants

11. Rulc3 regarding
directors

12. Managerial
remuneration

13. End-words of the
name
14. Quorum


Five lakh at the time of incorporation.
It cannot issue share warrants.
Appointment, re-appointment etc. of directors suhject to Government approval.
Legal restrictions. Total managerial remuneration in a public company cannot exceed 11 % of the nct profits (Section 198).
Public Ltd. or Ltd.

If the articles of a company do not provide for a large quorum, 5 members personally present are quorum for a meeting.


One lakh at the time of incorporation.
It can issue share warrants.

No Government approval required for appointment, re-appointment etc. of directors.
No such restriction applies to a private company.

Private Ltd.

It is 2 in the case of II private company.


In addition to the above, a private company enjoys special privileges. A public company enjoys no such privileges.

The Indian Companies Act 1956

1. as regards the State of Nagaland, it applies, subject to such modifications, if any, as the Central Govemment, by notification in the Official Gazette
specify
2. as regards the State of Go a and Union Territory of Daman and Diu, such of the provisions of the Act shall not apply or shall apply with such exceptions
and modification for such period or periods with effect from the 26th January 1963 or any subsequent date, to any existing company or any company
registered under this Act on or after 26th January 1963, as may be specified by the Central Government by notification in the official Gazette (Sec 620-B),
and
3. as regards the State of Jammu and Kaslunir, such of the provisions of the Act shall not apply or shall apply with such exceptions and modifications, with


effect from the commencement of the Central Laws (Extension to Jammu and Kashmir) Act 1968 (Le. 15th August 1968) or any subsequent date, to any
existing company or any company registered under this Act after 15th August 1968, as may be specified by the Central Government by notification in the
official Gazette
Main Ob.iectives. The main objectives of new Companies Act of 1956 are as under
(i) To protect the interests of large number of shareholders as there exists separation of ownership from management in company form of organisation.
(ii) To safeguard the interests of the creditors in view of the limitedliability feature of the company.
(iii) To help the development of companies in India on healthy lines as corporate form of orgamsation constitutes a very important sector of the economy.
(iv) To help the achievement of socio-economic policy of the Government of India namely, establishing a socialistic pattern of society.
(v) To equip the Government with necessary powers to intervene directly in the affairs of the company in the public interest so that the interests of various
sections of the society e.g. consumers. labourers, shareholders, suppliers etc., may be protected from unscmpulous management.