Twisting. Winding up UNDER. Company law with. Aseem NAHATA. Twisting 25 on Winding Up company law with Aseem Page 1

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1 Twisting 25 On Winding up UNDER Company law with Aseem NAHATA Twisting 25 on Winding Up company law with Aseem Page 1

2 CHAPTER Winding Up Q.1 What is WINDING-UP? Winding- up precedes dissolution. In the former case, the company still remains in existence, while the latter implies that the company is not extant any more. A company, being a body corporate, continues in existence until it is dissolved according to law. A company may be dissolved in following ways By removal of the company s name from the register by the Registrar (without winding-up order) (Section 560): By order of the Court or the order of the Central Government under Section 396: By winding- up Q.2 Meaning of Winding-Up and how it is different from dissolution? Winding- up more popularly known as liquidation of a company, relate to the proceedings by which (a) all its affairs are wound up, (b) its rights and liabilities are discerned, and (c) the claims of its creditors are settled either fully or to such an extent as may be warranted by the assets of the company. Having met all the obligations of the company out of the assets realised, the surplus assets of the company, if there be any, are distributed among its members in proportion to their rights laid down by the articles of association. On this being done and on compliance with certain other statutory requirements, the company is said to have been dissolved. Q.3 What is difference between Insolvency and Winding Up :- Individual or firm can be declared as insolvent. Company cannot be declared as insolvent even though it is unable to pay its debts. Company can be winding-up even though it is solvent. When company goes in winding-up, its assets are vested in company but administered by Liquidator, after winding up company is dissolved Q 4What are the various modes of Winding-Up. Following are the modes of winding up 1. Voluntary winding up a. Members' voluntary winding up b. Creditors' voluntary winding up 2. Compulsory winding up a. Company pass SR b. Default in SGM or filing Statutory report c. Non-commencement of business d. Reduction in number of members below minimum e. Inability to pay debts f. just & Equitable ground g. Default in filing Balance Sheet h. National interest PART-A WINDING-UP BY COURT OR GROUNDS FOR COMPULSORY WINDING UP- SEC-TION 433 OF COMPANIES ACT, 1956 Q.5 Who can file petition with court and on what grounds the petition can be filed? Court may order winding-up of company if the petition is filed with Court. An Application must be made to Court in a form known as a winding up petition. Following persons can file petition on various grounds mentioned later in this chapter. Company ROC Creditor Contributory CG On the following grounds or reasons petition can be filed to the Court for winding-up of company. Twisting 25 on Winding Up company law with Aseem Page 2

3 1. If Company passes special resolution If Company has passed special resolution to wind up company. The power of Court shall be exercised only where bona fide case is made out. The court may not order winding-up where it is opposed to public or company s interest. Who will file petition:- The company may file a petition where it has passed a special resolution for compulsory winding up. 2. Default in filing statutory report or holding statutory meeting. Now this is no more as company need not to hold statutory meeting and to statutory report. 3. Non-commencement or suspension of business. If company doesn't commence business within year from its incorporation or suspend business for whole year with following exception where no order for winding up will be ordered by court Suspension of business for temporary or unavoidable reasons. if there is reasonable prospectus of-business being re-started and where such possibility is there Business was suspended due to recession and shareholder filed petition The suspension must be of entire business and not part of it. Who can file petition :- Petition on this ground can be made by Registrar, company, creditors or contributory. 4. Reduction of members below minimum If the number of members in Public company reduces below than 7 or 2 in case of Private Company, winding-up petition may be allowed. Who can file petition:- Petition on this ground can be made by company or present member or creditor or Registrar with prior approval of the Central Government. Who is Contributory? It means every person liable to contribute to assets of company in the event of its being wound up, and includes holders of any shares which are fully paid-up. Contributory can file winding-up petition if following conditions are satisfied: Shares were originally allotted to him. Shares have been held by him and registered in his name for at least 6 months out of 18 months preceding the commencement of winding-up. Shares may be allotted to him or acquired by him on death of member. The legal representative of deceased shareholder is contributory. He can file winding-up petition even if his name is not entered into register of members. 5. Inability to pay debts. A creditor for more than Rs. 500 has served on company demand for payment and company has for 3 weeks thereafter neglected to pay or secure the payment provided. o Notice of demand should be served at registered office of company. o Notice must be signed by the creditor or his agent or any other authorized person. o It must be in respect of existing and payable debt exceeding Rs o o Debt should be undisputed. Where an inquiry under section 16 of Sick Industrial Companies Act has commenced or scheme of rehabilitation is under preparation, no proceeding for winding-up of company shall lie without consent of BIFR. Who can file petition:- creditor or registrar, Which Creditor can file winding up petition Creditor can file winding-up petition if company is unable to pay its debt. Creditor includes: o Assignee of debt o Secured creditor, o Debenture holder, o Trustee of debenture holders. Twisting 25 on Winding Up company law with Aseem Page 3

4 6. Just and equitable grounds. If Court is of opinion that it is just and equitable it may order to wind up the company. Power of court to grant winding-up under this head is discretionary. Court should consider public interest while granting winding-up order. examples where winding-up order on just and equitable can be granted: o Object of company was fraudulent. o Main object of company is completely achieved. o Complete deadlock in management. o Company is "bubble" and has no business to carry on. o Mismanagement and misapplication of funds of Private Ltd. o Disappearance of substratum. o Disappearance of substratum means loss of main object of company. o It is impossible to carry on business of company except at loss. o Board for Industrial and Financial Reconstruction (BIFR) recommended winding up. 7. Default in filing balance sheet Company has made default in with Registrar its balance sheet and statement of profit and loss or annual return for any 5 consecutive financial years. Who can file petition:- It can be filed by R.O.C. or Central Government or State Government. 8. National interest If company has acted against the interests of sovereignty and integrity of India, the security of the state, friendly relations with Foreign States, public order, decency or morality. If the court is of the opinion that company should be wound up under Section 424 G (i.e. being - a sick company is unlikely to become viable in future). Who can file petition :- For the default in filing Balance Sheet, national interest& Sick Company winding up petition can be filed by R.O.C. or Central Government or State Government. 9. Central Government Central government may file petition for winding-up where it appears from report of inspectors appointed to investigate the affair of company under section 237 of Companies Act, 1956 that business of company has been conducted for fraudulent or unlawful purpose. Q.6 How Liability of Contributories can be defined? ( Section 426) Contributories are divided in following two categories to determine liability: List A List A contributories means present members of company whose names appear in register of members on date of commencement of winding-up. List A Contributories shall be liable to contribute if the assets of the company are insufficient to meet the debts, liabilities and expenses of the winding-up. In such event they may be called upon to pay by order of Court unpaid amount on shares or guaranteed amount. List B List B contributories means past members of company. The members who ceased to be members within 1 year preceding the commencement of winding-up of the company. A liability of past member is secondary. A past member is liable to contribute if: He has ceased to be member within 1 year from commencement of winding up. It is in respect of debt, which is contracted by company while he was member. It appears to the Court that present members are not be able to satisfy the contributories required to be made by them. Liability of contributories is created by law. After winding-up order, Court settle list of contributories. Twisting 25 on Winding Up company law with Aseem Page 4

5 Q.7 Define the Procedure for Winding Up by Court and Consequences of Winding-Up Order by Court ( Sections 444 To 447) 1. At any time after presentation of winding-up petition and before making winding-up Court may appoint the Official Liquidator to be Liquidator provisionally after order, giving notice to the company. On hearing winding-up petition Court may either: a. Dismiss it, or u Adjourn it, or b. Make an interim order, or c. Make any other order as it thinks fit. 2. As soon as winding-up order is made, Court shall give intimation of it to the Official Liquidator and the Registrar. Petitioner and company must also file with the Registrar within 30 days certified copy of Court order. 3. On filing of certified copy of Court's order Registrar shall notify the order in the Official Gazette. 4. Order of the winding up is deemed to be notice of discharge to the officers and employees except where the business of the company is to be carried for beneficial winding-up. 5. On winding-up order power of Board of Directors cease. It is vested in favor of Liquidator. But Board of Directors has power to appeal against the order of winding-up. 6. The directors and other officers of every company shall ensure that books of account of company are completed and audited up to date of winding-up order by Court and submitted to it. 7. No suit can be commenced against the company after the winding up order without permission of Court. Any existing suits or proceeding in any other Court shall be transferred to the Court in which winding-up of the company proceeding. 8. Official Liquidator becomes the Liquidator of the company and takes the possession and control of assets of the company. Official Liquidator to be appointed from the panel of professionals. 9. Any disposition of the property or execution without the leave of the Court, after the commencement of the winding-up proceeding shall be void. 10. Any floating charge created within 12 months immediately preceding the commencement of winding up is void unless it is proved that the company after the creation of charge was solvent. Q.8 What are the provisions od Appointment of Liquidator (Sections 448 To 453) Appointment of Liquidator Central government appoints an Official Liquidator with every High Court. Official receiver of district court is appointed as Official Liquidator of that Court. Central Government may appoint any other office as Official Liquidator if District Court has no official receiver. Central Government may appoint Assistant or Deputy Official Liquidator to assist Official Liquidator as per requirement. In compulsory winding-up Official Liquidator is appointed as Liquidator of company. Court may appoint provisional liquidator to protect the assets of company or to protect the interest of creditor spending hearing of winding-up petition. Before appointing provisional Liquidator Court shall give reasonable opportunity to company and reason should be recorded in writing. Provisional liquidator has same powers as that of Official Liquidator. Once winding-up order is made, provisional Liquidator will become Liquidator of company automatically. Official Liquidator receives his remuneration from the Central Government. Central government is entitled to recover fees from the company for services rendered by Liquidator. Acts of Liquidator will be valid even if his appointment is discovered as invalid for the reason of any defect or disqualification. Q.9 What are the duties and powers of Liquidator (Sections 450 To 453 ) Liquidator can do all things as may be necessary for winding-up affair. Liquidator perform duties as imposed by Court. Liquidator is required to submit preliminary report to court as soon as he receives statement of affairs from directors of company. In case, he has not received the statement of affairs within 6 months, he can get extension of time. The report should contain following details: 1. Detail about capital 2. Estimated amount of assets and debt due from contributories. Separate particulars is required to be given for : a. Cash and negotiable securities b. Debt from contributories c. Unpaid calls 3. Estimated amount of liability 4. Opinion that whether further inquiry is required in the matter of promotion, formation or conduct of business. 5. Liquidator may prepare further report when he is of the opinion that fraud has committed in promotion or formation of company. Twisting 25 on Winding Up company law with Aseem Page 5

6 6. Liquidator is required to maintain accounts and records of winding-up proceeding. He is required to maintain accounts in prescribed Form. He is required to submit account of receipt and payment twice in year. 7. Audited copy of accounts should be filed with Court and Registrar. Audited copy filed with registrar is open for inspection to creditor, contributory and any other interested person. Audited copy is send to creditor and contributory. If the Government Company is under Liquidaton, copy of accounts is placed before Central Government or State Government as the case may be. 8. Liquidator should take custody of all properties and actionable claim belonging to company. Liquidator may take help of magistrate for the purpose of taking custody of property. 9. Liquidator is bound to call general meeting of creditors and contributories at such time, as the creditors or contributory may by resolutions direct or whenever requested in writing to do so, by not less than 1 / 10th in value. Powers-Section Liquidator is required to institute or defend any suit, prosecution or other legal proceeding, civil or criminal on behalf of company. 2. Liquidator may carry on business of company if it is necessary for beneficial winding-up. Liquidator can carry on business as allowed under object clause of memorandum. But liquidator must not make any secret profit. 3. Liquidator may appoint advocate, attorney, pleader entitled to appear before the Court and to assist him. 4. Liquidator can raise money on security of assets of company with permission of Court. Liquidator can disclaim onerous property with permission of Court. (Refer the ne paragraph for detail discussion on onerous property) 5. Liquidator can do following acts without permission of Court: o To execute document on behalf of company o To affix common seal o Inspect records and document of company at office of Registrar. o To deal with negotiable instrument on behalf of company. o To prove and rank claim of contributories. Q.10 What do you mean by phenomenon Disclaimer of Onerous Property ( Section 535 ) Onerous means executory contract involving heavy obligations. Onerous property means a property which has ceased to be an asset and has become a liability. Examples of onerous property Land of any tenure, burdened with onerous covenants, Partly paid-up shares or stock in companies loss making contracts. Requirement of valid disclaimer Liquidator may disclaim any onerous property within 12 months from the date of commencement of winding-up. Where Liquidator has come to know about onerous-property after one month from commencement of winding-up, disclaimer can be exercised even after period of 12 months. Disclaimer should be written and signed by the Liquidator. Permission of Court is required for such disclaimer. Court may impose certain terms and conditions as it thinks fit. Court has discretionary power to grant or refuse. Court may require to issue notice to interested parties. If any interested person in property makes an application to Liquidator to decide whether he will or he will not disclaim property, Liquidator should give notice within 28 days.court may extend period. Q.11 What is Statement of Affairs by Directors ( Section 454 ) When winding-up order is made, directors of the company must submit to Official Liquidator statement of affairs within 21 days from relevant date. This period may be extended up to 3 months by liquidator or by Court.Statement has to verify by director, manager, and secretary. Persons preparing statement of affairs and affidavit is entitled to recover the cost of same from Official Liquidator or provisional Liquidator. Creditors or contributor of the company can inspect and obtain copy of the statement. Particulars to be provided Following particulars are provided under the statement of affairs: Assets of company separately cash in hand and at bank. Negotiable securities. Its liability and debts. Name and address of company's creditors indicating amount of secured/unsecured debts and prescribed details in secured debt. Twisting 25 on Winding Up company law with Aseem Page 6

7 Debts due to company - name and address of persons, amount likely to be realized. Such other information as required by Liquidator. Q.12 What is Committee of Inspection? Section ( ) Court may at time after making an order for winding-up company or any time thereafter direct that there shall be appointed a committee of inspection to act with Liquidator. It is Appointment not mandatory for Court to appoint committee of inspection. When such direction is given, Liquidator shall within 2 months from date of such direction, convene meeting of creditors to determine who are to be members of committee. Liquidator shall within 14 days from the date of creditors' meeting, or such further time as Court may grant/convene meeting of the contributors to consider the decision of the creditors. If the meeting of contributories does not accept decision of creditors' meeting, Liquidator creditors shall apply to Court to determine composition of committee. Constitution and proceeding of committee of inspection - Section 465 Committee consists of not more than 12 persons. How many of them will be from creditors and how many from contributors will be determined by Court in case they fail to determine proportions. Committee has right to inspect the accounts of Liquidator. Committee shall meet at such time as Liquidator or any members of committee of inspection think it necessary. Quorum of committee shall be 1/3rd of total no. of members or 2 whichever is higher. Decision of committee shall be by majority of members Present at meeting. Person is ceased to be member of committee if he : Resign by notice in writing signed by him and delivered to Liquidator. Remains absent himself from 5 consecutive meetings without leave of absence. Is declared as insolvent or compound with his creditor. Member of committee may be removed at meeting by giving 7days' notice. On vacancy in committee, Liquidator shall forthwith call meeting of creditor or contributory as the case may be and appoint another person as member. Court on opinion of Liquidator, decide not to fill the vacancy arising in committee. A member of committee of inspection stands in fiduciary relationship. A member of committee is not entitled for any remuneration. However Court may authorize payment of remuneration. Q.13 When Dissolution of Company By Order Of Court takes place? Section 481 When the affair of the company is completely wound up or Court is of opinion that the Liquidator cannot proceed with the winding-up of company for want of the funds and it is reasonable to issue dissolution order, Court may grant dissolution order. The company is dissolved from the date of order of dissolution by Court. When the company is dissolved no suit or proceedings will lie against the Company. This is because a dissolved company has no legal existence.copy of Court order for dissolution should be filed by Liquidator to Registrar within 30 days. PART- B Q.14 What is Voluntary Winding Up? Section 484 Winding up by members or creditors without any intervention of Court is known as voluntary winding-up. Company and its creditors are left free to settle their affairs without going to Court. Circumstances for voluntary winding-up Voluntary winding-up may take place when: When period fixed in its Articles has expired or event specified in Article has taken place and company has passed ordinary resolution. For on any other reason by passing special resolution even if Article do not contain any provision. Q.14 How many Types of voluntary winding-ups are there? Voluntary winding-up is divided into: Members' voluntary winding-up. Creditors' voluntary winding-up. Twisting 25 on Winding Up company law with Aseem Page 7

8 Q. 15.What is Procedure for Members' Voluntary Winding-Up or Steps to be taken for Members' Voluntary Winding-Up Members' voluntary winding-up is possible only when the company is solvent and is unable to pay its liabilities full. Voluntary winding-up shall be deemed to be commenced when resolution is passed. Before company pass resolution for winding-up, its directors should make declaration of solvency. Appointment of Liquidator - Members of company should appoint Liquidator by passing resolution and fix the remuneration. Remuneration once fixed at members' meeting can't be increased. Body corporate can't be appointed as liquidator. Generally director or secretary is appointer, act as Liquidator. Declaration of solvency is filed by the Director to Registrar before date of passing of resolution. On appointment of Liquidator all the powers of Board of Directors cease except: Company in general meeting sanction some powers, or Liquidator has sanctioned some powers. Notice on appointment- Company must give notice to the Registrar regarding the appointment of Liquidator within period of 10 days of his appointment. Liquidator shall give notice of his appointment within 30 days to income-tax Office. Income tax officer shall intimate amount of tax within 3 months. Liquidator shall give notice of appointment to Registrar. The Liquidator must also inform ROC within 30 days of appointment and publish notice in Official Gazette. The resolution passed shall be advertised within 14 days, in Official Gazette and in newspaper of district where registered office is situated. Vacancy occurs by death in office of Liquidator, company in general meeting subject to arrangement with directors can fill vacancy. Duty of Liquidator to call meeting Sections 495, 496 & 498 Liquidator may transfer whole or part of company's business to another company with special resolution. If Liquidator is of the opinion that company will not be able to pay its debt in full within specified period as per declaration of solvency, he should call meeting of creditors and lay before meeting statement of assets and liabilities. Thereafter Liquidator should proceed if it was creditor's voluntary winding-up. If winding-up continue for more than 1 year, Liquidator is required to call general meeting at end of first year within period of 3 months from the end of year and lay before the meeting the accounts. Final meeting - Section 497 As soon as affairs of company are fully wound-up, Liquidator has to make an account of winding-up showing how the winding-up has been conducted and the property of company has been disposed. Within one week after meeting, Liquidator must send to Registrar & Official Liquidator copy of account and return regarding the meeting. On receipt of accounts and return, Official Liquidator makes scrutiny of books and report to Court. Report of Official Liquidator to Court may suggest : o That the affairs of company have not been conducted in manner prejudicial to interest of its members or to public interest and company should be dissolved. o That the affairs of company have been conducted in manner prejudicial to interest of its members or to public interest, Court may direct further investigation by Liquidator. If any property of the company still remains at point of dissolution, such property will vest in the Government immediately on dissolution. Q.16 What do you mean by declaration of Solvency - Section 488 of Companies Act, 1956 Where it is proposed to wind up company voluntarily, its directors should have made a full inquiry into the affairs of the company. If after inquiry, they have formed opinion that the company has no debts or that it is able to satisfy its debts in full within period not exceeding the 3 years from the commencement of winding-up, they should made declaration of solvency. It shall be verified by an affidavit. It shall be made by a majority of the directors (Jr all directors if there are only 2 directors. Declaration of solvency can't be passed by circular resolution. t must be made within 5 weeks immediately preceding the date of passing of winding-up by resolution by the members. It shall be filed with the Registrar for before passing resolution for winding-up. It shall be accompanied by copy of report of the auditors of the company on the profit and loss account prepared since the date of the last Twisting 25 on Winding Up company law with Aseem Page 8

9 such account to date immediately preceding the declaration as may be possible. Where the declaration of solvency is not made in accordance with law, resolution and winding-up will be void. For any wrong declaration without having reasonable ground, Director shall be punish-able with imprisonment for 6 months or fine up to Rs. 50,000 or both. Q.17 What is Creditors Voluntary Winding-Up (Sections ) Creditors' voluntary winding up is based on the assumption that company is insolvent. When declaration of solvency is not made by directors, it is called as creditors' voluntary winding-up. 1. Meeting :- Company must call meeting of members by serving individual notice. On same day or next day meeting of its creditors are held. Notice of creditors' meeting should be advertised in Official Gazette and two newspapers. Appointed director is required to present at the meeting of creditors and preside over meeting. Directors of company have to prepare full statement of the position of company affair together with list of creditors. Board of directors shall lay of statement of company's affair at creditors meeting. Notice of resolution passed at creditors meeting must be given by company to R.O.C. within 10 days. 2. Appointment of Liquidator :- The creditors and members at their respective meeting may each nominate person to be Liquidator. If Liquidator appointed by creditors is different than person nominated by creditors shall become Liquidator. Notice of appointment of Liquidator shall be published in Official Gazette and deliver to ROC in 30 days.the remuneration to be paid to Liquidator has to be fixed by the committee of inspection or if there is no such committee by the creditors. Where remuneration is not fixed, it mii1 be fixed by the Court. Remuneration once fixed can't be increased. Liquidator to give notice to income-tax officer within 30 days of his appointment. Income_ tax officer will estimate the tax liability in 3 months. Vacancy occurs in the office of Liquidator should be filled by creditors. On appointment of Liquidator, all powers of Board of Directors cease except creditors or committee of inspection has sanctioned the continuation of power. The creditors at their first or any subsequent meeting may appoint committee of inspection of not more than 5 persons. Where winding-up continue for more than 1 year, Liquidator shall call AGM within 3 months from end of first year. 3. Meeting for dissolution As soon as affairs of company are fully wound up Liquidator shall make account of winding-up and call general meeting of company and meeting of creditors for purpose of laying accounts before meetings. Each such meeting must be called by advertisement published at least one month before meeting in Official Gazette and also in newspaper. Within one week after the date of creditors' meeting, liquidator shall send to the Registrar and Official Liquidator a copy of account and return of meeting held. If quorum is not present at meeting, Liquidator shall note this matter in his report. If the quorum is not present at either meeting, Liquidator should make note of that in lieu of return.official Liquidator should scrutinize final accounts and return filed by Liquidator. After the scrutiny, Official Liquidator may report to Court: 1. That the affairs of company have not been conducted in manner prejudicial to interest of its members or to public interest and company should be dissolved. 2. That the affairs of company have been conducted in manner prejudicial to interest of its members or to public interest, Court may direct further investigation by Liquidator. 4. Committee of Inspection under Creditors Voluntary Winding-Up -Section 503 of Companies Act, 1956 Creditors may appoint committee of inspection not more than 5 persons at general meeting. Creditor can object to the persons appointed by members of company and may nominate persons of their choice to be members of committee. The committee should meet at such times as it may from time to time. Liquidator or member may call meeting of committee. Decision of committee shall be by majority. Quorum for- meeting should be 1 /3rd of total members or 2 members, whichever is higher.committee has right to inspect accounts of Liquidator. Person ceases to be member of committee where he: 1. Resign by notice in writing to Liquidator 2. Is declared as insolvent or compound with his creditors. 3. Remain absent from 5 consecutive meetings of committee without leave of absence. 4. Is removed from committee by giving 7 days' notice. Liquidator should call meeting of committee to fill vacancy occurred in the committee. The meeting may reappoint the same or other person. Alternatively liquidator may decide not to fill vacancy. Twisting 25 on Winding Up company law with Aseem Page 9

10 Q.18 What is difference between Members and creditors winding up? Members Voluntary winding-up Creditors Voluntary winding-up Resorted to by solvent company and requires filing of Insolvent company. declaration of solvency. No need to have creditors meeting Meeting of creditors is called immediately after meeting of members. Liquidator is appointed by members. If creditor nominate person he should be appointed as liquidator. No provision of such committee. If creditor wish committee of inspection may be appointed. Remuneration of Liquidator is fixed by member. Fixed by creditors or committee of inspections. Q.19 What is Order of Priority in Repayment during Winding-Up or Preferential Payments - Sections of Companies Act, 1956 During the course of winding up, payment out of fund available to liquidator should be made in following order: 1. Overriding preferential payment - Section 529A 2. Cost and expenses of winding up. 3. Preferential debts under Section Payment due under floating charges. 5. Unsecured creditors. 6. Preference shareholders. 7. Equity shareholders. 8. Deferred equity shareholders Q. 20 What do you mean by Overriding preferential payment? As per Section 529A, following debts shall be paid in priority to all other debts: 1. Workmen's due. 2. Secured creditors subject to pari passu charge in favour of workmen's due. These debts shall be paid in full unless the assets are insufficient to meet them, in which case they shall divide in equal proportion. Workmen's due includes, all wages, salary, commission, compensation payable under Industrial Disputes Act, accrued holiday remuneration, Provident fund, pension fund, Gratuity etc. Provisions of Section 529A are having over-riding effect to the provisions of Companies Act and other act. Q.21 What do you mean by preferential payments? ( Section 530 ) In event of winding up certain payments are to rank in priority to others. The payments to be so made first are called preferential payments. Remember preferential payment under Section 530 is subject to provisions of Section 529A. The following unsecured debts shall be paid in priority of other unsecured debts: 1. Revenue, taxes, cases due to government, local authority. The amount should have become due and payable within 12 months before date of commencement of winding-up. 2. Wages, salary of employee in respect of services rendered to company and due for period of not exceeding 4 months within 12 months before date of commencement of winding up. The amount shall not exceed such sum as may be notified by the Central Government for one claimant. It is Rs at present. Bonus is included in expression wages. 3. All amount due in respect of contributions payable during the 12 months before the winding up under the Employees' State Insurance or any other law. 4. Any workmen's compensation under Employees' Compensation Act, All sums due to any employee from Provident Fund, pension fund, gratuity fund and all other fund. 6. The expenses of investigation. Q. 22 What do you mean by Fraudulent Preference? Section 531 It means giving an improper benefit or favorable treatment to some creditors. Fraudulent preference leads to inequality between them. With reference to winding up, fraudulent preference means transfer of property or payment made by a person who is unable to pay his debts in favor of creditors with a view to giving him preference over other creditors. To establish a case of fraudulent preference two conditions must be satisfied: Twisting 25 on Winding Up company law with Aseem Page 10

11 1. That transaction took place within 6 months before the commencement of the winding up. 2. That transaction was with motive to prefer one creditor in preference to other creditors. 3. It was voluntary act relating to transfer of property, money, delivery of goods etc. 4. According to Section 531A any transfer of property movable or immovable or any delivery of goods made by company within period of one year before the commencement of its winding up shall be void against the Liquidator. But the following are not included: a. Transfer of property or delivery of goods made in ordinary course of business. b. Transfer of property or delivery of goods in favor of purchaser or charge holders in good faith and for consideration. Q. 23 What is Liability for fraudulent preference For fraudulent preference the person responsible for transfer would he personally liable as surety for debts. Any transfer of all its property to trustees for the benefit of all its creditors shall be void. Creditors to whom fraudulent preference is given shall refund the money or property to liquidator. Q.24What is Liability for Fraudulent Conduct of Business? Section 542 of Companies Act, 1956 During the course of winding up if business of company has been carried on with intent to defraud creditors of company or any other persons or for any fraudulent purpose in such case Court on application of the Liquidator or creditor or contributory may order that persons who were parties to such business shall be personally liable for such debts of the company. Every person who is knowingly a party to the fraudulent carrying on of the business shall be punishable with imprisonment for term which may extend to 2 years or fine which may extend to Rs or with both. Liability under Section 542 arises only when the company is in winding up and for offences committed before or during winding up. Q.25 What is Liability for Misfeasance Proceedings or Action against Delinquent Officer? Section 543 of Companies Act, 1956 Misfeasance means an act in the nature of breach of trust and which result in loss to the company. It includes improper exercise of authority. It involves dishonesty or fraud in any conduct.court may take action for misfeasance if during the course of winding up it comes to the notice that any person who has taken any part in the formation or promotion of company or any past or present directors or liquidator of company has misapplied or retained the property of company or has been guilty of any misfeasance. An application can be made by: 1. Liquidator. 2. Creditor or contributory Application for this purpose shall be made within period of 5 years from the date of the order for winding up or the first appointment of liquidator or of misapplication whichever is longer. Any action for misfeasance against deceased director would survive even after his death and assets of the deceased director were liable in the hands of his legal representative. Liabilities of directors under Section 543 are joint and several. It has been held that Court can pass order against the director who is resident abroad for misfeasance proceeding. If director has assets in India then decree can be enforced in India. Burden of proof of misfeasance of directors is on liquidator. Examples: 1. Acceptance of shares by way of gift to qualify oneself as director. 2. Payment of dividends otherwise from distributable profits. 3. Failure to take an action for realization of certain debts. Twisting 25 on Winding Up company law with Aseem Page 11