India: Critical Analysis Of Just And Equitable Ground For Winding Up

Meta Title: Unraveling the Legal Threads: A Comprehensive Analysis of Just and Equitable Ground for Winding Up under the Companies Act, 2013

Introduction

The process of "winding up" a company involves distributing its assets among its unsecured creditors and investors. Pennington defines "winding up" or "liquidation" as the process of transferring control of a company from its board of directors to a "liquidator¹." The company will have no assets or obligations after winding up, making its dissolution a formality. A company cannot be made insolvent through the winding up process. Moreover, even a financially stable business could be closed.

According to Professor Gower, "winding up" a company means terminating its existence and distributing its assets to unsecured creditors and members. An administrator, or "liquidator," winds up a company, gathers its assets, pays its obligations, and divides any residual cash among the members according to their entitlements. The procedure may be used to re-incorporate with new aims, authorities, and management systems, not only bankrupt companies. A financially strong company might be dissolved. The company is not dissolved at the start of shut down. It maintains its legal entity and corporate powers. Company dissolution is the result of the winding up process.

Modes of winding up

With the passing of Insolvency and Bankruptcy Code, 2016, a company can now be wound up under the Companies Act, 2013 only by the Tribunal. The concept of voluntary winding up, as provided earlier, has been removed.

Section 271 of The Companies Act, 2013 provides grounds on which a company may be wound up by Tribunal:

1. If the company is unable to pay its debts
2. If the company's shareholders have approved a special resolution requesting that the Tribunal may wind up the company.
3. If the company's actions have been detrimental to Indian national security, international peace and stability, public safety, good taste, or morality; or to the integrity and independence of India as a nation.
4. if the Tribunal has ordered the winding up of the company under Chapter XIX
5. If the necessary statutory report has not been filed with the Registrar, or if the mandatory statutory meeting has not been organized.
6. Default in filing financial statements with the Registrar.
7. if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Just and Equitable ground

Section 271 (g) of The Companies Act, 2013 deals with just and equitable ground of winding up. The Tribunal has the jurisdiction to facilitate the winding up of a company in cases when it deems such action to be just and equitable. If the Tribunal deems a winding up order to be just and equitable, it has the authority to issue such order. Consequently, the Tribunal has significant discretionary power to issue winding-up orders as it considers suitable. The tribunal should duly consider the interests of the company, its workers, creditors, shareholders, and the broader public. For the Tribunal to render a determination on the justness and equity of winding up the company, it is imperative to consider all pertinent facts and circumstances pertaining to the company's establishment, functioning, and the unfortunate circumstances experienced by certain shareholders collectively. The interpretation of the just and equitable ground has historically relied on the application of the ejusdem generis criterion. The regulation has been completely abolished, and the words are to be understood as granting a broad discretionary authority, with the courts tasked with determining the grounds upon which such orders should be granted. The dissolution of a firm necessitates the presence of very persuasive justifications. The court has the discretion to refuse the issuance of a winding- up order if it concludes that the petitioner's actions are unreasonable, since they are choosing to pursue the winding-up of the company instead of exploring other remedies for their issue.

In exercising its jurisdiction on this basis, Tribunal shall accord full weight to the interests of the company, its workers, creditors, shareholders, and the public. When other remedies fail to adequately protect the company's general interests, a court may resort to relief based on the just and equitable ground. In Kiritbhai R. Patel v. Lavina Construction & Finance Ltd. [1999], the Gujarat High Court reached the same conclusion. The same reasoning that led to the dismissal of the winding up petition in Mills Ltd. [2004] 50 SCL 293 applies here. There are requirements for each of the first six reasons for winding up, but the "just and equitable" provision allows the court (now the Tribunal) to use its "wide and wise" discretion in the issue-Hind Overseas Pvt. LP vs. Ltd. ASIL XIII, Jhunjhunwala (1977).

There are few situations in which courts have dissolved companies in the past. Here are some of them:

(a) Deadlock

It is fair and just to order a company to be wound up when there is a stalemate in its management. Yenidle Tobacco Co., Ltd.⁸ is a well-known example of this.

W and R, both cigarette manufacturers, decided to combine their businesses and form a limited liability company (LLC) with themselves as the sole shareholders and directors. The articles stipulated that any disagreement would be settled through arbitration since they shared equal voting rights, but one of them disagreed with the decision. They eventually became so antagonistic towards one another that they refused to even communicate with one another through the secretary. Because of this impasse, the company was forced to close its doors even though it was profitable.

However, the "just and equitable" requirement must not be used in circumstances in which the sole issue at hand is a difference of opinion between the board's majority and the representatives of the minority. A case involving these facts was heard by the Madras High Court. It said that the fact that the different groups in the board could not get along is not enough to wind up the company. This was said in answer to a case where nine or ten directors from different groups have one view and only three directors have a different view. In this case, the business has been making money and building up a good reputation. Both Calcutta High Court and the Supreme Court of India have concluded that "winding up⁹ cannot be ordered on the grounds of friction and disputes between the Directors; the scramble for power is at the bottom of all," ¹⁰respectively. However, a hopeless impasse is not necessary for the functioning of the legal system.

(b) Loss of Substratum

When a company's primary purpose no longer exists or when it has lost its foundation, it is just and equitable to wind up the business. What gives a company its foundation is the reason or reasons for its existence (its primary goals). If a company has abandoned all its primary goals, rather than just some, or if it is unable to achieve any of its primary goals, then it has lost its foundation and must be dissolved.

Any number of things can happen for a business to lose the ability to reach its main goals. It will do this if it cannot buy the business it was set up to buy, if it cannot get the building permit it was created to get, or if it cannot get a patent for an invention it was created to use, with the hope that it would be granted. All these scenarios will result in it being unable to acquire the business that it was formed to purchase.¹¹

Since the powers granted in the memorandum of association are only ancillary and not general, the fact that the company is using them to carry on a different line of business or keep up the semblance of activity is not enough to save it. Even if the company's articles of in company state that "each of the powers conferred by the objects clause shall be a main object,"¹² the Tribunal will still determine the true reasons for the company's formation and dissolve it if it has strayed from those original goals.¹³

Respondent was a tyre manufacturing company in Dunlop India Ltd., In re [2013] 31 (Calcutta), but its two manufacturing facilities had been idle for quite some time. The company's assets, valued at over Rs. 2,300 crores, were taken without paying off its debts to creditors or providing back pay to its workers and other employees. Given these facts, a petition to dissolve the respondent company was filed. No workers or company employees were observed to have resisted the order to wind down operations. In addition, the company has failed to demonstrate any viable long- or short-term business plans. It was also clear that the responding company's management lied when they sold assets worth about Rs. 2,300 crores, Pundra Investments & Leasing Co. (P.) Ltd. v. Petron Mechanical Industries (P.) Ltd. [2000] Loss of substratum of the business can be admitted. If the Debt Recovery Tribunal directs the sale of a company's assets (under the RDBFI Act, 1993), then the company's foundation will be presumed to have been removed (Prakash Hassaram Mahtani v. Official Liquidator of Nielcom Ltd.

In International Caterers (P) Ltd. v. Manor Hotel (P) Ltd. [2007], after one of the parties unilaterally broke the terms of their agreement to build and run a hotel, the Delhi High Court said that the company should be shut down. This was a fair and just decision.

A temporary problem that does not cause the company to collapse should not be allowed to lead to its wind up, as stated in Re Shah Steam Navigation Co. Kaithal and General Mills Company. Co., Ltd. [1951] 31 Comp. Cas. 461¹⁴, To assess whether the company's foundation has been shaken, the Court has developed the following criteria:

1. company's focus has shifted;
2. the original purpose for which it was formed no longer exists; or
3. the company cannot operate without incurring losses, making it highly unlikely that its stated goal of making a profit from its trades will ever be realized; or
4. there are more liabilities than assets at the present

Kasimaries Ceramique (P.) Ltd. ruled that winding up procedures are not for family score settling. Due to the company's negligible liabilities in relation to its net worth and the fact that it can still pursue one or more of the memorandum's stated objectives despite the suspension of its primary business, the court denied the petition. This does not indicate that the company's foundation has been destroyed.

In the case of Majestic Infracon (P.) Ltd. v. Etisalat Mauritius Ltd., [2014], the Bombay High Court rendered a ruling stating that a company need to be wound up if it has experienced a loss of its substratum, rendering it incapable of doing its primary business or engaging in any other financially feasible activities. A ruling by the Supreme Court invalidated the company's telecom licenses. It was argued in the petition for winding up that the company should be dissolved because the company's substratum had been almost entirely eroded.

The petitioner in Etisalat Mauritius Ltd. v. Etisalat DB Telecom (P.) Ltd. [2015] 55 271 (Bombay) invested heavily in the company and had lawfully acquired thirteen 2G licenses, which were the company's primary assets. But a Supreme Court ruling invalidated those licenses, so the company can no longer fulfil its primary purpose, which was to provide 2G telecommunication services in India. The petitioner and the second respondent each owned about 45 percent of the company's shares. Respondent No. 2 removed its two nominees from the Board of Directors, rendering the board ineffective. Considering the dissent expressed by Respondent No. 2 and their suggested plan for the revitalization of the firm, the petitioner, who has a significant stake in the company, has initiated legal proceedings by filing a winding up petition based on the grounds of just and equitable circumstances. The Bombay High Court granted the petition to dissolve the company due to an "irretrievable breakdown" in trust and credibility between the company's major shareholders. The court also found that respondent No. 2's proposed scheme was unrealistic, speculative, and impossible to implement because the company's liabilities greatly exceeded its assets.

In Arasor Company v. Xalted Information Systems (P.) Ltd. [2015] 60 445 (Karnataka), the high court refused to hear a petition to wind down the petitioner's business because the petitioner had failed to pay franchise taxes. The court determined that the petitioner's lack of existence at the time of filing the winding up petition rendered it ineligible for maintenance.

(c) Losses

If a company is making losses and cannot continue operations, it is only just to wind up.¹⁵ When there is no possibility of turning a profit from trading, it serves no purpose for a company to continue operations. In Shah Steamship Navigation Co, Re, the Bombay High Court stated, "the court will not be justified in making a winding up order merely on the ground that the company has made losses; and is likely to make further losses."

(d) Oppression of Minority

If the majority owners have implemented a strategy that is deemed aggressive, oppressive, or detrimental to the interests of the minority shareholders, it might be argued that the dissolution of the firm is a just and equitable course of action. The Madras High Court's ruling in R. Rao V. Sabapathi¹⁶, whose name appears on the publishing house's logo, is a case in point. The judge stated:

In a case where the board of directors had undue sway over the company's operations, the managing director had the upper hand in shareholder votes, and the family that controlled the board kept most of the company's earnings for itself. Shareholders had complained that they had not received a copy of the balance sheet or heard the auditor's report read at the annual meeting.

(e) Fraudulent purpose

If a business was founded dishonestly or for illegal gain, it should be wound up. The Madras High Court made this ruling in Universal Mutual Aid and Poor Houses Association Limited v. Thopa Naidu¹⁷. If a company's primary purpose is to run a lottery, even if it also has charitable goals, it will still be considered an illegally formed entity and will be forced to dissolve.

Most shareholders can waive the fraud, so "the mere fact of there having been a fraud in promotion, or fraudulent misrepresentation in the prospectus will not be sufficient to found a winding up order."¹⁸ It is just and equitable for the Tribunal to order a company to be dissolved if any of its purposes are illegal or would become illegal because of a change in the law.¹⁹

The Tribunal will dissolve a company that engaged in deceptive marketing practices or attempted to deceive individuals who were solicited to subscribe for its shares. Consequently, a winding up order was issued due to the inclusion of misleading information in the company's prospectus. Specifically, the prospectus falsely indicated that the company had entered into an agreement to acquire an established business, including the rights to use its name, for a significant amount of money. As a result, individuals who subscribed to the company's shares were intentionally deceived by the misleading name and exaggerated purchase price, leading them to believe that the vendor firm was a reputable entity distinct from the actual business whose name it unlawfully imitated. In this case, the company was forced to dissolve after its promoters sold them a business at an exorbitant price.²⁰

The respondent's complaint was based on papers it knew to be fake to cast doubt on the petitioner's debt claim. As a result, the court said that the respondent could be shut down for "just and equitable" reasons other than not paying the debt.

T & F Tea Co., Inc. Ltd., In re [2012] 112 Cal. Super.

(f) Incorporated or Quasi-Partnership

As has been pointed out, large company's and companies that are managed by a single individual have very few things in common with one another. If each of these groups were required to adhere to the same legal standards, it would not only be cumbersome but also unjust. The legislation handles them differently in a variety of different ways to avoid anything like this from occurring. Even if the Act treats them equally, courts must discern between them. One challenge in dissolving a small private company is how to use the fair and equitable provision. After a series of decisions, the House of Lords ruled in Ebrahimi v. Westbourne Galleries Ltd that a private company may be wound up under the just and equitable ground. It was found that the firm is a partnership firm. It is possible because partnership principles apply to the just and equitable ground.

Lord Wilber says a private firm is an incorporated partnership if at least one of these traits are present:

1. Personal relationships and trust play a large role in the success of many businesses, making the transformation from partnership to limited liability company a common
2. a pact or understanding that all the shareholders will take part in running the company (or at least most of them, since there will inevitably be some "sleeping members").
3. If trust is broken or a member is removed from management, he will not be able to sell his shares and leave the

The public interest may also require a compulsory winding up. A recent ruling by the English Court of Appeal provides an example of behavior that is at odds with the public interest.²¹ Investors were advised to put their money into American companies whose shares could not be easily traded, and the company was in violation of its investment agreement, all while keeping poor records and pretending to be unbiased in financial matters. The court decided that dissolving the company was necessary because it was draining the country's financial resources.

Conclusion

The Tribunal has a very wide discretionary power to order winding up whenever it appears to be up the company requires a fair consideration of all circumstances connected with the formation and the carrying on the business of the company and the common misfortune which has fallen on the Tribunal. For a long period ejusdem generis dominated interpretations of the just and equitable provision. But the rule has been entirely abandoned and the words are to be treated as conferring a discretionary power which is of the widest character and the courts are left to work out for themselves the principles on which such orders should be granted.

1. Bibliography

• COMPANY LAW BY AVTAR SINGH
• 22ND Edition (1979)
• PRINCIPLES OF MODERN COMPANY LAW BY GROVER,6TH Edition (1997)
• SMITH AND COMPANY LAW 6TH Edition (1986)
• NORTHEY AND INTRODUCTION TO COMPANY LAW,2ND Edition

Footnotes

1 Company Law, 5th Edition, Page 839 Pennington's

8 (1916) 2 ch 426

9 Veeramachineni Seethiah v Venkatasubbiah, AIR 1949 Mad 675

10 A.N.RAY j in Hind Overseas Ltd, Re, (1968) 2 Comp Lj 95,

11 Re Varieties Ltd. [1893] 2 Ch. 235.

12 Re German Date Coffee Co. [1882] 20 Ch. 169; Re Kitson & Co. Ltd. [1946] 1 All ER 435.

13 Cotman v. Brougham [1918] AC 514 at 520, per Lord Parker so, the business should have been shut down. So, the Court agreed to the request to end the company. It was decided that the company was doing nothing but collecting interest after its assets were sold. This led to the filing of a petition to end the company.

14 Also see Virendra Singh Bhandari v. Nandlal Bhandari & Sons Ltd. [1982] 52 Comp. Cas. 36 (MP).

15 (1901) 10 bom LR 107

16 AIR 1925 Mad 489

17 AIR 1933 Mad 16

18 Oriental Navigation Company v bhanaram Agarwala, AIR 1922 Cal 365 20 R.S Nock,The Ford Foundation Workshop On Company Law, 21 (1972) 2 WLR 1289

19 Princess Resuss v. Bos [1871] LR 5 HL 176; Re International Securities Corpn. [1908] 25 TLR 31.

20 Re Thest Surrey Tanning Co. [1866] LR 2 Eq 737.

21 Walter L Jacob & Co Ltd,Re (1989) BCLC 345 CA

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