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Winding up ofcompanies is indeed atime consuming andcomplex process andcompulsory winding upby the court takes ten tofifteen years. Thisarticle based on a studyundertaken by theauthors seeks to identifythe reasons for the longdelays.

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Slow Process of Winding up of CompaniesDr. J. P. Sharma, FCS, Department of Commerce (SDC), Faculty of Commerce & Business,Delhi School of Economics, Delhi.Amrita Singh, Lecturer, Jagan Institute of Management (JIMS), New Delhi.

INTRODUCTIONA company comes into existence by a legal process and when it desires to end its existence it mustagain go through the legal process of winding up of its affairs. Winding up of company is theprocess whereby its life is extinguished and its property administered for the benefit of its creditorsand members. An administrator is appointed and he takes control of the company, collects itsassets, pays its debts and finally distributes the surplus if any among the members in accordancewith their rights. Thus winding up is the last stage in the life of a company.The Companies Act, 1956 provides a mechanism for winding up of companies. There are three modesof winding up under the Act. A company may be wound up by an order of the Court that is calledcompulsory winding up or winding up by the Court. Winding up by the creditors or memberswithout any intervention of the Court is called voluntary winding up. In voluntary winding up, thecompany and its creditors are left free to settle their affairs without going to the Court. In the case ofvoluntary winding up, the creditors or members may apply to the Court for directions or orders. Sucha winding up is known as winding up subject to the supervision of the Court.Winding up of a company is a time consuming process. In the Indian context the process is veryslow and a large number of petitions are pending before the office of Official Liquidators appointedby the Court. As per the data provided by the Minister of Company Affairs (now Minister ofCorporate Affairs) there were 6259 winding up petitions pending before different Courts in thecountry as on March 31st, 2005(1) . As the entire process of winding-up currently takes, in somecases, even more than 15 years as compared to only few (2 to 3) years in most of the developedcountries, it is imperative that the Indian law be remodeled on international lines. In the year1999, the Government of India set up a High Level Committee headed by Justice V.B. BalakrishnaEradi(2) . This Committee was asked to examine and make recommendations with regard to thedesirability of changes in existing law relating to winding up of companies so as to achieve moretransparency and avoid delays in the final liquidation of the companies; the mechanism throughwhich the management of companies will be conducted after the winding up of order is issued andthe authority which will supervise timely completion of proceedings; the rules of winding up andadjudication of insolvency of companies; the manner in which the assets of the companies arebrought to sale and the proceeds are distributed efficiently and a self-contained note on windingup of companies having regard to the Sick Industrial Companies (Special Provisions) Act, 1985 andthe Securities Contracts (Regulation) Act, 1956 with a view to creating confidence in the mind ofinvestors, creditors, labour and other shareholders. The committee presented its Report to theGovernment on 31st August 2000.The committee(3) highlighted the problems regarding winding up of a company that were causingdelays like delay in filing of statement of affairs, delay in handing over updated books of accountand records, delay in finalization of list of creditors and debtors, inadequate power and staff givento Official Liquidator, non availability of funds etc. The reason for delays was also the multiplicityof litigation before various Courts or quasi-judicial bodies. To enable the process of winding up tobe completed in a time bound manner the Eradi Committee recommended that the provisions ofPart VII of the Companies Act, 1956, be amended to include the provisions for setting up of aNational Tribunal which will have the jurisdiction and power presently exercised by CompanyLaw Board under the Companies Act, 1956; the power to consider rehabilitation and revival ofcompanies, a mandate presently entrusted to BIFR/AAFIR under SICA and the jurisdiction andpower relating to winding up of companies presently vested in the High Courts. In view of aboverecommendations Article 323B of the Constitution was advised to be amended to set up NationalTribunal, SICA be repealed and the Companies Act, 1956 be amended. Accordingly the CompaniesAct, 1956 was amended by the Companies (Second Amendment) Act, 2002. The amendment provided

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Articlesfor establishment of National Company Law Tribunal (NCLT)and National Company Law Appellate Tribunal (NCLAT) tohandle the winding up of companies. However, the constitutionof NCLT/NCLAT has been held up due to a legal challenge andthe matter is pending before the Supreme Court.(4)

HISTORY OF WINDING UP LAWSThe law of company winding up India is the cherished child ofEnglish parents born and brought up in England. Such laws enactedin India from time to time have been following the Englishprovisions with, minor changes here and there. Therefore, a briefresume of the origin and growth of winding up laws in England isessential for logical understanding of winding up laws in India.Four phases are discernible in the course of this development viz.,- the first covers the period up to 1844; the second phase relates tothe period between 1844 and 1856; the third which may be regardedas the period modeled on English Provisions, commences withthe passing of the Joint Stock Companies Act, 1846, and extends to1956 and the final phase that starts from 1956 and extends to thepresent day is known as the era of modern company law.In England, prior to 1844, there was no distinct body of legalprinciples that could be regarded as the law of companyliquidation. All companies, except those that enjoyed the privilegeof incorporation by statute, or charter, were of the settlementdeed type, and were treated as enlarged partnerships. To theirwinding up, therefore, the law of partnership applied. Theliability of the members of a company, like partners, wasunlimited. Secondly, no satisfactory procedure existed forcompulsory winding up at the instance of contributories. Thus,a need was felt for a simple form of procedure for makingcompanys assets available for the payment of debts, as well assome means by which the members could bring an unsuccessfulventure to an end, and also fix a limit to the extent of theirliabilities. To achieve these objects, various Acts were passedfrom 1844 to 1856, which were known as winding up Acts. TheseActs had some defects, such as no provision was made to limitthe liability of shareholders. While corporate assets constitutedthe primary fund out of which liabilities were to be satisfied, anydeficiency could be made good by resorting to the membersprivate property. Secondly no attempt was made to limit theremedies of creditors as to levy execution on the personalproperty of the shareholders. The Companies Act of 1856removed these defects. With the passing of this Act, a singlesystem of winding up, which could be set in motion by anycontributory, creditor, or by the company itself, was introduced.The Act also provided for the limited liabilities of shareholdersas to the nominal value of their respective shares. A procedurefor enabling voluntary winding up subject to courts supervisionwas introduced by the Act of 1857, and extended in the followingyear. These Acts were repealed by the Companies Act of 1862providing for three modes of winding up - winding up by thecourt; voluntary winding up; and voluntary winding up subjectto supervision of the court, The Act of 1890 and the Rules thereunder introduced a procedure for winding up. These provisionssubsequently were reproduced by the English Companies Act of1948, which now constitutes the existing legislation, and alsogoverns the company liquidation in England today.

In India, following the English Act of 1844, an Act was passed in1850 containing similar provisions of company liquidation.Another Act was passed in 1860 on the lines of the English Act of1856 and 1857. After enacting various amending Acts between1882 and 1913, the Act of 1913 came into force that modified thewinding up provisions to a great extent. Gradually, the CompaniesAct, 1956, amending the law and procedure relating to compulsorywinding up, came into operation and is operational till date.

METHODOLOGYWinding up of the company is the process by which themanagement of a companys affairs is taken from the directorshands, its assets realized by a Liquidator, and its debts paid outof the proceeds of realization. It is conducted in accordance withthe rules laid down in the Companies Act. Due to the lengthyprocess of winding up various cases are lying before High Courtsin the country. This article based on a study attempts to study thereasons for slow winding up of the companies.

LIMITATIONS OF THE STUDYApart from the basic limitation of inadequacy of time andresources needed for conducting a study of this type, followingwere some of the other limitations of the study. They have beenidentified in the course of conducting this study and need to bekept in mind while examining the conclusions emerging out ofthis study.

(i) The study only concentrates on compulsory winding upby the Court and does not cover other modes of windingup i.e. members voluntary winding up and creditorsvoluntary winding up.

(ii) Although in-depth interviews were conducted with variousgovernment Officials linked with the process of windingup for obtaining valuable inputs, it was felt during thecourse of interview that many issues were kept hidden.

(iii) As is common with most of the work related withbehavioral sciences, some degree of subjectiveness has atendency to creep in. However; careful efforts were madeto prevent these from affecting the findings.

RESULTSOn studying the process of winding up it can be easily concludedthat it is relatively easy to incorporate a company in India, but it isa time and money consuming process to wind up a company. Theproblems that emerged out of the study mainly relate to delay infiling of statement of affairs, delay in handing over updated booksof account and records, delay in finalization of list of creditors anddebtors, inadequate power and supportive staff given to the OfficialLiquidator, non availability of funds etc.Under the current provisions of the Companies Act, on specifiedmatters, powers of decision are reserved either for the CentralGovernment itself or available to CLB or High Court. There is aneed to consolidate and entrust to a single body like the oneintroduced in the Companies Act, 2002 called the Tribunal (NCLT)the powers and jurisdiction presently being exercised by variousbodies. The NCLT shall serve as a single window settlement ofcases, related to the corporate affairs. The multiplicity of litigationbefore multiple quasi judicial bodies like the Company Law

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ArticlesBoard, BIFR and High Courts causes delay in winding upproceedings. The establishment of NCLT/NCLAT will prove tobe of great help to the corporate world by speeding-up the entireprocess of winding up. Civil courts under the amended provisionshave also been barred from granting injunctions which wouldavoid unnecessary long-drawn civil suits.The study also suggests that every company should file itsstatement of affairs synchronous with the petition for windingup or while opposing a petition for its winding up. The statementshall be filed along with the names and addresses of the directors,creditors and debtors of the company and the location of assetsand their values and such other information as ordered by theTribunal. This provision will reduce the delay that occurs inmaking of statement of affairs of the company.To tackle the problem of paucity of funds it has been proposed toput in place Revival and Rehabilitation Fund through collectionof a cess which will be levied at the rate of .005% -1% on the annualturnover or the gross receipts of the company. This proposed fundwill take care of the interim payment of wages to the workers,protection of assets and for other rehabilitation measures.Further, the Official Liquidator should also be entrusted withwide powers such as appointment of Chartered Surveyors andChartered Accountants to value the assets of the Company.

JUDICIAL PRONOUNCEMENTSWinding up in India is conducted in accordance with the ruleslaid down in the Companies Act, 1956. As per section 10 of theAct, the High Court has been given the jurisdiction to deal withthe company affairs and its winding up. Due to the lengthyprocess of winding up of the companies, cases are pending beforevarious High Courts in the country. The succeeding paragraphstend to analyse the probable reasons for delay in winding upproceedings and also the problems faced by the petitioners duringthe process. An analysis of some judicial pronouncements onwinding up cases has also been done to give support to the study.

(i) L.R.Rangaier and Sons v. Coffee Board and others, AIR 1999(Kerela) 258. The appellant company was incorporated in1954 with a paid up share capital of Rs. 4,75,000. Winding uppetition was filed by two creditors in 1990 to wind up thecompany under sections 433 and 434 of the Companies Act,1956 and soon a provisional liquidator was appointed bythe company Court. When the Coffee Board, which was aprime supplier of coffee to the company, came to know ofthe initiation of the liquidation proceedings it got impleadedin the company petition and obtained permission from thecourt to remove the coffee kept in-the godown of thecompany. In view of the objection from the workers againstthe removal of coffee, an Advocate Commissioner wasappointed for supervising the curing operation. When theAdvocate Commissioner inspected the godown it wasrevealed that 17 tons of coffee kept in the godown worthRs.43, 52,977.64 was found missing. Thereafter the CoffeeBoard filed a petition to be substituted as original petitionerand to prosecute the winding up proceedings at the instanceof the coffee board by substituting it in the place of thepetitioners in Company Petition. The company made a pleasaying that it was a case of disputed debt as there were certain

counter claims from the coffee board. The case went on fornine years after which the petition was accepted and thecompany was ordered winding up.

(ii) Garodia Hardware Store v. Nimodia Plantations and IndustriesPvt. Ltd. AIR 1998 (Gau). Nimodia Plantations and IndustriesPvt. Ltd was a Pvt. Ltd. Company incorporated under theCompanies Act 1956. The Company owned and possesseda tea garden, namely, Hautley Tea Estate within the Sub Division of Gloaghat, in Assam. The petitioners were apartnership firm registered under Indian Partnership Act.The firms filed petition under Section 433 (e) and (f).According to the petitioner firms the company was not ina position to meet the liabilities and was running at a lossand there was no chance to make profit. The petition filedby the creditors of the company on the ground of inabilityof the company to pay debts even after regular remindersand evidence showing the inability of the company to paywages to workers. On the other hand the company filed anaffidavit in opposition saying that they had sold theundertaking to another company but the sale deed was notcompleted. A suit for injunction had been obtained againstthe property of the company and thus the company wasnot in a position to pay the debts. The company also pleadedthat they were not served any notice in this regard. Thecourt though admitted this fact, but as the company wasfacing financial difficulties and was unable to pay its debtsordered the winding up of the company in 1996 i.e. afteralmost nine years after filing of petition.

(iii) Karam Chand Thapar and Bros. (Coal) Sales Ltd. v. Acme PaperLtd. AIR 1994 (Delhi) 1. The petition was filed by thecreditors of the company in 1987 on ground of non-paymentof the money due to them. The petitioner had sent regularreminders to the company but when no response wasreceived they filed a petition for winding up. The plea ofthe respondent company in this regard was on two grounds.Firstly as per the company as the creditors had offered totake back the goods, there was novation of the earliercontract and thus no amount was due to them. The secondplea of the company was that a suit had also been filedwith the civil court and hence winding up could not beordered. However, the plea of the company was rejected.The company was ordered to be wound up in 1998. Thus ittook almost eleven years for the court to decide a simplecase of inability to pay debt by a company.

(iv) Andhra Steel Corporation Ltd. v. Bank of Baroda, AIR 1995 (Cal)367. In this case, the bank had certain dues from the companyand hence it filed a petition in 1986 for winding up thecompany. The court did not order winding up but directedthe company to make payment to the bank in instalments.The company however failed to pay even the instalmentson time and thus the petitioner requested the court forwinding up of the company. However, the company pleadedthat the court could not order winding up by virtue of theRecovery of Debts due to Banks and Financial InstitutionsAct, 1993. As per this Act the banks and financial institutionsare required to file cases with the Tribunal set for the purposeunder the Act of 1993. The plea was rejected as it wassubmitted that the Tribunal had no authority to decide the

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Articleswinding up as this right was reserved with the High Court.Thus the company was ordered to be wound up in the year1994 taking about nine years for the case to be decided.

(v) Shri Sham Lal Gupta v. Hamco Industries Pvt. Ltd. AIR 1995(P&H) 6. The petitioner, filed this petition for winding up ofM/s Hamco Industries Pvt. Ltd., on the ground that it wasunable to pay its debts. As per the facts of the case the companywanted to float some shares with a view to increase its capital.The petitioner, who along with his family members wasshareholder of the company applied for allotment of 110shares in his name and sent the share application form dulyfiled to the company along with a sum of Rs. 1.10 lacs in1982, but the company did not float any fresh shares and,therefore, none was allotted to the petitioner. According tothe petitioner, the share money paid by him continued toremain in deposit with the company for a couple of years. Inthe year 1990 the petitioner demanded the return of hismoney and wrote some letters to the company in this regard.The petition for winding up was made in 1990, eight yearsafter depositing the money. However as per the companyversion the payment had already been made to the petitionerin 1988. The petitioner pleaded that the amount paid to himin 1988 was not related with the share application money;rather it was for settlement of the shares transferred by thepetitioner to his brother who was a shareholder in thecompany. On analyzing the facts of the case the companyadmitted the claim of the petitioner but because the amounthad become time barred their plea was rejected. The courttook almost eight years to decide the petition.

(vi) SBI Mutual Fund v. Vikas WSP Ltd. AIR 2006 (P & H) 368. SBIMutual Fund, the petitioner, filed a petition under sections433(e) and 433(f) seeking winding-up of the respondent-company, alleging that the respondent, after havingdeclared dividend for the year 2000-01, failed to remit thesaid amount. The petitioner filed the petition before theHigh Court of Punjab and Haryana in the year 2001. As perthe petitioner the company had declared the dividend butfailed to pay the amount. The petitioners had sent regularreminders to the company but they received no response.On the other hand the respondent company contended thatthey had dispatched the dividend vouchers and later onmade a statement that the dividend warrant got burnt andhence could not pay the amount. The company howeverpleaded that they had deposited the money in a bank undercurrent account but did not name the bank. Thus it wassubmitted that the claim of the petitioners was admissibleand the company was ordered winding up taking about sixyears for the court to decide.

CONCLUSIONThe Ministry of Corporate Affairs has since introduced onlineregistration of companies in the country. The first such companyregistered online was in south India (Coimbatore) in the summerof 2006, when the Ministry of Corporate Affairs launched its newweb site www.mca.gov.in. Around 18000 companies(5) have beenincorporated on line up-to November 2006. With the launch ofMCA 21, companies in the country can be formed in less than anhour. But, when it comes to closing a company, as revealed by

the present study, the process in many cases has taken more than10 years and in some cases even more than 15 years. The findingsof this study have been supported by one another recent study,which revealed that it takes just 35 days to register a business inIndia, but when it comes to winding up a company, it can drag toas long as 10 years(6) . Acknowledging the unduly slow process ofwinding of companies in the country, the Minister of CompanyAffairs (now Minister of Corporate Affairs) in the Rajya Sabhaon 12th December 2006 stated that there were 6259 winding uppetitions filed pending before different courts of the country ason 31st March, 2005. Such companies are undergoing the lengthyprocess to wind up their businesses. There is an urgent need totake the process of liberalization a step further and recognizethat so long as a company is acting in the interest of shareholdersand otherwise observing the law of the land it should have thefreedom to manage its affairs, merge, amalgamate, restructureand reorganize or plan its affairs as it considers best in the interestof the stakeholders. The process of winding up should besimplified and the interference by the Government or Court orany other authority should only be in the event of any detrimentto the interest of shareholders. Ministry of Corporate Affairs ison the job and once the NCLT/NCLAT are made functional, theproblems faced by companies and other petitioners may be solvedto a greater extent. Footnotes1. Answer to a question raised by Shri Jai Prakash Aggarwal, Rajya

Sabha and answered by the Minister of Company Affairs, (unstarredquestion no. 2133, 12th December06.)

2. The Government had constituted on 22.10.99 a Committee consistingof experts to examine the existing law relating to winding upproceedings of companies in order to re-model it in line with thelatest developments and innovations in the corporate law andgovernance and to suggest reforms in the procedure at variousstages followed in the insolvency proceedings of companies to avoidunnecessary delays in tune with the international practice in thisfield.

3. The Eradi Committee had also visited Offices of OfficialLiquidators, Ministry of Company Affairs (MCA) at a fewMetropolitan Centres to actually see the difficulties faced by them.It had also constituted a Sub-Group to study the Insolvency Lawsof other countries including UK, Singapore etc.

4. Replying to a question of a Member of Parliament, raised in theRajya Sabha on 8th August, 2006, the Minister of Company AffairsMr. Prem Chand Gupta stated that the Company Law Board (CLB)is functional currently and both the National Company LawTribunal (NCLT) and the National Company Law AppellateTribunal (NCLAT) have not been constituted as yet. The reasongiven is, the provisions of the Companies Act, 1956 relating tosetting up of NCLT/NCLAT faced a legal challenge, and the matteris sub-judice on account of a Special Leave Petition (SLP) filed bythe Central Government in the Supreme Court, following a rulingby the Madras High Court in the matter. As the NCLT has not yetbeen constituted by the Central Government, the Company LawBoard (CLB), the Board for Industrial and Financial Reconstruction(BIFR) and the High Courts continue to discharge their function asbefore.

5. News statement of the Minister of Company Affairs Mr. PremChand Gupta published in the Indian Express (business page) of11th November 2006.

6. Doing Business in South Asia 2007, World Bank Report.

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