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Key takeaways

  • Section 433 of the Companies Act, 2013 stands out in giving the court or tribunal the authority to wind up a company.
  • The tribunal will grant the petition for winding up based on the shareholders' just and equitable arguments, but only to the extent permitted by the law
  • In case the company is formed in a fraudulent manner, or it has reason to believe that the activity of the business is conducted fraudulently then that company is liable to be wound up by the tribunal.

Since the company is not a natural person but rather an artificial person, it cannot die naturally. Therefore, the only method of terminating it is through a legal procedure, for which there are two options: voluntary winding up and compulsory winding up.

Voluntary winding up is when the company and its creditors decide to dissolve themselves by amicably resolving any outstanding issues without the need for court intervention. But when the court or tribunal takes control of the situation, it is referred to as compulsory winding up.

According to Section 433 of the Companies Act, there are several ways for the court to wind up a company but 433(f) stands out in giving the court the authority to wind up a company. It expressly mentions the significance of the court's ruling in closing down any company. If the court determines, based on the facts and circumstances of the case, that it is necessary and advantageous for the company to be wound up, it will make the decision to do so for just and equitable grounds. On the basis of just and equitable grounds, the court and tribunal have the authority to dissolve a company. Tribunal has the discretion to dissolve any company for reasons that are Just and Equitable. Since the Act does not define these just and equitable criteria, it is up to the court to decide whether the case is just for everyone involved and to issue a wind-up order if it is.

Just and equitable winding up petition

Any winding up that occurs on a just and equitable basis differs from a winding up that occurs on a regular creditor's petition. In the event of a shareholder dispute, a petition is filed that is just and equitable. Consequently, the company's creditor is not necessary in it. Any shareholder of a company may file a petition if there has been a breakdown in confidence and management in the company. The court will then decide the case based on the facts and circumstances of the case. This is true if the breakdown in the shareholders' mutual trust and confidence is having a catastrophic effect on the company.

A petition known as a "Just and Equitable Winding Up Petition" can be used to address a company's shareholders and any conflicts that may arise between them. The court will determine whether closing or winding the company is necessary or whether doing so would be in the shareholders' and the company's best interests.

Only shareholders of a company whose assets were also contributed to the foundation of the company may file a petition for the winding up of the company. The shareholder must be a member of the company and be motivated to close the company. They are ineligible to submit for the winding-up petition if they have no ownership stake in or financial contribution to the company. Even though the majority of shareholders of a company are disregarding their rights, the minority shareholder still has the right to petition for the winding up of the company.

The court has noted that both the doctrine of "just and equitable" and the social and economic circumstances of the nation have undergone a significant shift. The court recognised that the term "Just and Equitable" had evolved from its purely technical definition to one that is more relevant and practical. As a result, a petition may be submitted whenever the shareholders feel it is necessary, and the court may decide to consider the circumstances of the case before making a decision. The verdict will be to the company's advantage.

As a result, the phrase "just and equitable" has a very broad meaning and does not place any restrictions on the court's authority. The court will examine the relevant facts and circumstances before making a decision regarding the company's closure on the basis of what is just and equitable. A winding-up petition can be filed to dissolve the company if there is a dispute inside it that cannot be settled. It should not be assumed that the company will be wound up right away because the court makes the decision whether to wind a company.

When may court order for winding up of company

If the court believes there are just and equitable reasons to do so, it may order the winding up of a company. In this instance, the court's discretionary power is exceedingly broad. Any of the reasons for winding up the company may be considered "just and equitable" causes. The court has been given this authority in order to protect the interests of the underrepresented group and the minority.

Prior to making such a decision, the court will consider the interests of all parties involved in the Company, including shareholders, creditors, employees, and the general public. If the court determines that the petitioner has access to another remedy that will adequately address his complaints and that the demand for the forcible winding up of the company is inappropriate, it may also decline to give the order. A few examples of ‘just and equitable’ grounds on the basis of which the court may order for the winding up of the company are given as follows:

  • When the object of the company was fraudulent,
  • When substratum of the company has disappeared i.e original object becomes impossible to attain;
  • The object for which the company is formed is illegal or becomes illegal by the change in the law;
  • The object for which the company was incorporated has been completed;
  • Deadlock in management due to differences among rival group and disagreement cannot be resolved in general or board meeting;
  • There has been mismanagement and misapplication of funds by directors of the private company.

The court will issue a winding-up order if, after taking the aforementioned criteria into account, it determines that the company's winding up should be mandatory and in the interests of justice.

Yenideje Tobacco Co. Ltd

Deadlock among the company's directors necessitates a deadlock among the shareholders or directors in order to use the petition for winding up on the basis of just and equitable source. However, a disagreement or lack of trust between the parties is sufficient to invoke such a petition to dissolve the company. In the case of Yenideje Tobacco Co. Ltd, according to the court's observation, a petition for winding up may be used in certain situations when there is a failure to communicate between a company's shareholders and directors, other than through a secretary. The court can accept the petition on the ground of the Just and Equitable doctrine.

Wide discretionary power for tribunal

This discretionary power granted to the tribunal can be used in the following circumstances:

  • In case the company does not pay the debts, the debt of the creditor exceeding Rs 1 lakhs is due and unpaid by the company within 21 days from the due date, or any execution decree is passed in favour of the creditor or tribunal has a reason that company will not pay off any debts then company would be liable for winding up.
  • In case a company has made the provisions by passing a special resolution that wound up is made by the tribunal.
  • In case of sick companies if no revival and rehabilitation is done, then tribunal may order for the winding up of a company.
  • In case the company is formed in a fraudulent manner, or it has reason to believe that the activity of the business is conducted fraudulently then that company is liable to be wound up by the tribunal.
  • In case the formation of the company is for any unlawful purpose, or the management of the company is guilty of misconduct or misfeasance, then winding up is necessary by the tribunal.
  • In case the company fails to submit annual returns and financial statements of the last five financial years continuously then the registrar made the company defaulter n liable for winding up.
  • If the tribunal has the opinion that winding up of a company is necessary for the good faith of the company.

Conclusion

This doctrine, which is based on the court's and tribunal's consideration, gives them the discretionary ability to wind up a company if necessary if it is not turning a profit and cannot achieve the goal for which it was created. The court and tribunal will grant the petition for winding up based on the shareholders' just and equitable arguments, but only to the extent permitted by the law.

Learn the practical aspects of CrPC HERE, CPC HERE, IPC HERE, Evidence Act HERE, Family Laws HERE, DV Act HERE


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