UNIT 5 COMPANY LAW

UNIT 5 QUESTIONS
AMALGAMATION
1. Explain the duties and powers of Tribunal with respect to amalgamation.
(April2021)
(http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/
16._compromises,_arrangements,_reconstruction,_amalgamation_and_mergers_of_
companies_/et/5676_et_16_et.pdf

Mergers, amalgamations, acquisitions, compromises, arrangement or

reconstruction are all different forms of corporate restructuring exercises in the
corporate world. All these activities are governed by regulations in different
countries. Corporate restructuring is a collective term for a variety of different
business transactions. The companies are required to take approval from various
regulatory authorities and adhere to various legal provisions. Considering various
issues involved in the cross-border mergers & acquisitions, it becomes tedious and
difficult to get the approval under every regulation and under every Act. Corporate
Restructuring in any form has become a mandatory activity if corporate houses have
to survive. Corporate restructuring might result in change generally like change in
share capital or capital structure, change of shareholders, change of control, removal
of a minority, change of business, change of operating entities etc.

Meaning of Compromise, Arrangement, Merger and Amalgamation Compromise and

Arrangement The term arrangement has been given a wide scope under the
Companies Act 2013. According to section 230 of the Companies Act 2013, an
arrangement includes a reorganization of the company’s share capital by the
consolidation of shares of different classes or by the division of shares into shares of
different classes, or by both the methods. The Act enunciates two possibilities of
scheme of arrangement. They are (a) between a company and its creditors and (b)
between a company and its members. Despite the tenuous difference, a scheme of
arrangement with members (for amalgamation and mergers) is clearly
distinguishable from a mere scheme of compromise with creditors. The primary
difference between a compromise and an arrangement is that whereas an
arrangement is between a company and its members or class of members, a
compromise is between a company and its creditors or class of creditors. Another
distinguishable feature is that in case of a compromise, there is an element of
dispute present as it is done between a company and its creditors. But in case of an
arrangement, there is no such element of dispute present.
Merger Merger is the combination of two or more companies into a single company
where one survives and the others lose their corporate existence. The survivor
acquires the assets as well as liabilities of the merged company or companies.
Generally, the company which survives is the buyer which retains its identity and the
seller company is extinguished. Merger is the fusion of two or more existing
companies. The company whose assets & liabilities are transferred is known as the
transferor company where as the company to whom those assets, liabilities are
transferred is known as the transferee company. All assets, liabilities and stick of one
company stand transferred to Transferee Company in consideration of payment in
the form of equity shares or debentures or a mix of the two or three modes.

Amalgamation Generally, merger and amalgamation are considered to be

synonymous with each other Amalgamation is a blending of two or more existing
 UNIT 5 COMPANY LAW

undertakings into one undertaking, the shareholders of each blending company

becoming substantially the shareholders in the company which is to carry on the
blended undertaking. There may be amalgamation either by transfer of two or more
undertakings to a new company or by the transfer of one of more undertakings to an
existing company".
M.A. Weinberg defines the term “amalgamation" as an arrangement whereby the
assets of two or more companies become vested in, or under the control of, one
company which may or may not be one of the original two or more companies. The
shareholding in the combined enterprise will be spread among the shareholders of
the two or more original companies.
Mergers and Amalgamations under the Companies Act
Mergers and amalgamations have been dealt widely under the Companies Act 2013.
Section 230-240 of the Companies Act, 2013 ("the Act") provide us with a
mechanism where in a scheme of arrangement may be entered into between a
company, its creditors or and its members. The mechanism envisages a mandatory
approval of the Tribunal which has replaced the High Court. Let us analyse the legal
provisions under the Companies Act 2013:
Power to Compromise and make arrangements with Creditors and Members
The power to compromise or make arrangements with creditors and members
provided under section 230 of the Companies Act 2013 is a statutory power of the
company conferred by the Companies Act. The section empowers the Tribunal to
order a meeting of the creditors or members or their classes thereof, if an application
has been filed by the company. The application can also be filed by the liquidator if
the company is being wound up. The meeting is required to be called, held or
conducted in such manner as the Tribunal directs. As the companies Act 2013
focuses on the principles of transparency, corporate democracy and accountability,
there are certain procedural requirements to be followed by the company for this
purpose. The company is required to disclose the following information to the
Tribunal:
(a) all material facts relating to the company, such as the latest financial position
of the company, the latest auditor’s report on the accounts of the company
and the pendency of any investigation or proceedings against the company;
(b) reduction of share capital of the company, if any, included in the compromise
or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than
seventy-five per cent of the secured creditors in value

Another important requirement is that the notice of such meeting as proposed to be

called under this section shall be sent individually to all the creditors or and the
members and their classes thereof and also to the debenture-holders of the
company.
These notices are required to be accompanied by a statement disclosing the details
of the compromise or arrangement, a copy of the valuation report, if any, and
explaining their effect on creditors, key managerial personnel, promoters and non-
promoter members, and the debenture-holders and the effect of the compromise or
arrangement on any material interests of the directors of the company or the
debenture trustees. This requirement of sending individual notice is ensure more
transparency and better corporate governance in the entire procedure.
Another step which has been mandated by the Companies Act 2013 is that such
notice and other documents should be placed on the website of the company. If the
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company is a listed company, these documents shall also be notified to the

Securities and Exchange Board and stock exchange where the securities of the
companies are listed and shall also be published in newspapers in the prescribed
manner.
The Companies Act 2013 allows voting to be done in person, through proxies as well
as through postal ballot. Another important feature of the section is that any objection
to the compromise or arrangement can be made only by persons holding not less
than ten per cent of the shareholding or five percent of the outstanding debt as per
the latest audited financial statement.
Another step towards strengthening transparency and accountability under the
Companies Act 2013 which was not present in the previous Act is that notice along
with all the documents is required to be sent all the regulatory authorities including
the Central Government, the income-tax authorities, the Reserve Bank of India, the
Securities and Exchange Board, the Registrar, the respective stock exchanges, the
Official Liquidator, the Competition Commission of India and such other sectoral
regulators or authorities which are likely to be affected by the compromise or
arrangement. The purpose of this requirement is that merger or amalgamation of two
or more companies affects the economy at large and therefore all the authorities and
regulators must be given an opportunity to make representation. The time period of
making a representation is within a period of thirty days from the date of receipt of
such notice, failing which, it shall be presumed that they have no representations to
make on the proposals. Although this step will make the process time consuming but
it ensures the implementation of democratic principles in the corporate functioning.
The Tribunal has to consider the scheme of compromise or arrangement on various
grounds such as whether it is just, fair, reasonable, not against public interest or
against the interest of the minority. The Tribunal before sanctioning the scheme must
ensure that majority of persons representing three-fourths in value of the creditors, or
members or their classes thereof, voting in person or by proxy or by postal ballot
have agreed to the scheme of compromise or arrangement. If such compromise or
arrangement is sanctioned by the Tribunal by an order, the same shall be binding on
the company, all the creditors, or members or their classes, or, in case of a company
being wound up, on the liquidator and the contributories of the company. It shall
have the same binding effect as the order of a High Court.
The Tribunal has to satisfy itself on various grounds before sanctioning the scheme.
No scheme shall be sanctioned unless a certificate by the company’s auditor has
been filed with the Tribunal to the effect that the accounting treatment is in
conformity with the accounting standards.
The Act also specifies that any compromise or arrangement may include takeover
offer made in the such prescribed manner, provided that in case of listed companies,
takeover offer shall be as per the SEBI (Takeover Code) 2011.
Thus Section 230 of the Companies Act 2013 is very comprehensive and widely
worded and covers almost every aspect of compromise or arrangement which
includes mergers and amalgamations.
Power of Tribunal to enforce Compromise or Arrangement
Section 231 is a distinct provision and is similar to section 392 of the Companies Act
1956. The role of the Tribunal (earlier the High Court) is not only inquisitorial or
supervisory role but also a pragmatic role which required forming of an independent
judgement so as to ensure proper working of the scheme.
The legislative purpose behind conferring power of the widest amplitude on the High
Court under sec 392 of the previous Act was not only to give directions but to make
 UNIT 5 COMPANY LAW

such modification in the compromise and/or arrangement as the court may consider
necessary, the only limit on the power of the court being that such directions can be
given and modifications can be made for the proper working of the compromise
and/or arrangement. The purpose underlying this is to provide for the effective
working of the compromise and/or arrangement.
The Tribunal similar to the High Court has the power to implement the order of
compromise or arrangement. It may, at the time of making such order or at any time
thereafter, give such directions in regard to any matter or make such modifications in
the compromise or arrangement as it may consider necessary for the proper
implementation of the compromise or arrangement. The Tribunal has also been
given power to order winding up of the company if it is satisfied that the compromise
or arrangement sanctioned under section 230 cannot be implemented satisfactorily
with or without modifications, and the company is unable to pay its debts as per the
scheme. Such an order shall be deemed to be an order made under section 273.

Mergers and Amalgamations of Companies

The Companies Act for the first time explains the term and the procedure for merger
and amalgamation. Section 232 facilitates and discusses clearly the procedure when
two or more than two companies merge or amalgamate. It states that where an
application is made to the Tribunal for the sanctioning of a compromise or an
arrangement and it is shown to the Tribunal—
a) that the compromise or arrangement has been proposed for the purposes of
reconstruction of the company or companies involving merger or the
amalgamation; and
b) that under the scheme, the whole or any part of the undertaking, property or
liabilities of the transferor company is required to be transferred to the
transferee company.
On receiving such application, the Tribunal may order a meeting of the creditors or
members or their classes separately, as the case may be, to be called, held and
conducted in such manner as the Tribunal may direct.
The Tribunal, after being satisfied that all the statutory requirements have been
complied with, may, by order, sanction the compromise or arrangement or by a
subsequent order, make provision for the following matters, namely: —
a) the transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of the transferor company from a date to be
determined by the parties unless the Tribunal, for reasons to be recorded by it
in writing, decides otherwise;
b) the allotment or appropriation by the transferee company of any shares,
debentures, policies or other like instruments in the company which, under the
compromise or arrangement, are to be allotted or appropriated by that
company to or for any person. As a result of compromise or arrangement, a
transferee company shall not hold any shares in its own name or in the name
of any trust whether on its behalf or on behalf of any of its subsidiary or
associate companies and any such shares shall be cancelled or extinguished;
c) the continuation by or against the transferee company of any legal
proceedings pending by or against any transferor company on the date of
transfer;
d) dissolution, without winding-up, of any transferor company;
e) the provision to be made for any persons who, within such time and in such
manner as the Tribunal directs, dissent from the compromise or arrangement;
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f) where share capital is held by any non-resident shareholder under the foreign
direct investment norms or guidelines specified by the Central Government or
in accordance with any law for the time being in force, the allotment of shares
of the transferee company to such shareholder shall be in the manner
specified in the order;
g) the transfer of the employees of the transferor company to the transferee
company;
h) where the transferor company is a listed company and the transferee
company is an unlisted company, the transferee company shall remain an
unlisted company until it becomes a listed company;
i) where the transferor company is dissolved, the fee, if any, paid by the
transferor company on its authorized capital shall be set-off against any fees
payable by the transferee company on its authorized capital subsequent to
the amalgamation; and
j) such incidental, consequential and supplemental matters as are deemed
necessary to secure that the merger or amalgamation is fully and effectively
carried out.
Thus, from the appointed date which the Tribunal sanctions, the assets, liabilities
and shareholders of the transferor company stands to be transferred to the
transferee company. Section 232 of the Companies Act 2013 is a facilitating
provision similar to section 394 of the previous Companies Act, 1956

Merger or amalgamation of company with foreign company

This unique provision of the companies Act 2013 allows two-way cross border
merger unlike the previous Act of 1956, which allowed only a foreign company to
merger with an Indian company and not vice versa. Now, the new Act allows both an
Indian company as well as a foreign company to merge with each other subject to
the approval of the Reserve Bank of India.
It provides under section 234 that the Central Government may make rules, in
consultation with the Reserve Bank of India, in connection with mergers and
amalgamations provided under this section. It also states that Subject to the
provisions of any other law for the time being in force, a foreign company, may with
the prior approval of the Reserve Bank of India, merge into a company registered
under this Act or vice versa and the terms and conditions of the scheme of merger
may provide, among other things, for the payment of consideration to the
shareholders of the merging company in cash, or in Depository Receipts, or partly in
cash and partly in Depository Receipts, as the case may be, as per the scheme to be
drawn up for the purpose.
A foreign company for the purpose of this section means any company or body
corporate incorporated outside India whether having a place of business in India or
not.
Power to acquire shares of dissenting shareholders
Section 235 provides for the power to acquire shares of shareholders dissenting
from scheme or contract approved by majority. The section is analogous to section
395 of the previous Act. It states the following:
(1) where a scheme or contract involving the transfer of shares by the transferor
company to the transferee company has, within four months after making of
an offer in that behalf by the transferee company, been approved by the
holders of not less than nine-tenths in value of the shares whose transfer is
involved, other than shares already held at the date of the offer by, or by a
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nominee of the transferee company or its subsidiary companies, the

transferee company may, at any time within two months after the expiry of the
said four months, give notice in the prescribed manner to any dissenting
shareholder that it desires to acquire his shares.
(2) On serving such a notice, the transferee company shall, unless on an
application made by the dissenting shareholder to the Tribunal, within one
month from the date on which the notice was given and the Tribunal thinks fit
to order merger or amalgamation of company with foreign company
otherwise, be entitled to and bound to acquire those shares on the terms on
which, under the scheme or contract, the shares of the approving
shareholders are to be transferred to the transferee company.
(3) Where a notice has been given by the transferee company and the Tribunal
has not, on an application made by the dissenting shareholder, made an
order to the contrary, the transferee company shall, on the expiry of one
month from the date on which the notice has been given, or, if an application
to the Tribunal by the dissenting shareholder is then pending, after that
application has been disposed of, send a copy of the notice to the transferor
company together with an instrument of transfer, to be executed on behalf of
the shareholder by any person appointed by the transferor company and on
its own behalf by the transferee company, and pay or transfer to the
transferor company the amount or other consideration representing the price
payable by the transferee company for the shares which, by virtue of this
section, that company is entitled to acquire, and the transferor company shall
—
(a) thereupon register the transferee company as the holder of those shares; and
(b) within one month of the date of such registration, inform the dissenting
shareholders of the fact of such registration and of the receipt of the amount
or other consideration representing the price payable to them by the
transferee company.
Purchase of Minority Shareholding
The Companies Act 2013 also offers an option to purchase the minority shareholding
under section 236 if otherwise the scheme has attained majority of ninety percent or
more of the issued equity share capital of a company. In such the case, the acquirer
or the transferee company is required to notify the company of their intention to buy
the remaining equity shares. The price of the shares shall be determined on the
basis of a fair valuation done by a registered valuer.

OR

(https://www.ukca.in/2017/01/24/merger-and-amalgamation-under-companies-act-
2013-dispensation-of-meeting-of-members-by-national-company-law-tribunal-nclt-
grey-area-but-not-a-grave-area/)

Merger and Amalgamation has been recognized as one of the many ways of
corporate restructuring and used by corporates for ages as an important corporate
strategic weapon, in the hands of internal management, namely
shareholders/members and the Board of Directors appointed by them. Therefore, the
provisions of compromise and arrangements (including mergers and amalgamation)
under Companies Act, 1956 came under the scanner of many High Courts as well as
of the Supreme Court of India and as a result of the same, many substantive and
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procedural aspects of this corporate jurisdiction are now well settled and enshrined
in the company jurisprudence.
However, while drafting the provisions of Companies Act, 2013, the law makers on
the one hand tried to cover some of the grey areas of compromise and
arrangements and also tried to provide more clarity on various aspects of
compromise or arrangement, but on the other hand ignored the well settled
principles of law. The new provisions of compromises, arrangements or
amalgamations leave many grey areas and rules of interpretations and also have
given rise to various new issues in this regard. One such issue is whether the
National Company Law Tribunal (the Tribunal) has the power to dispense with the
meeting of members or class of members? The question becomes highly debatable
due to the provisions of section 230(9) which expressly provides for dispensation of
meeting of creditors, but no such express provisions are there for dispensation of
meeting of shareholders, as interpreted by the Tribunal, recently while considering a
case of amalgamation as mentioned above. The Tribunal reached a conclusion that
it is not clothed with the power to dispense with the meeting of members or class of
members. Let us examine whether is it truly so?

Compromises, Arrangements and Amalgamations

Provisions relating to compromises, arrangements and amalgamations are covered
under Chapter XV of the Companies Act, 2013 and under the Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016. The said provisions
of the Act came into force w.e.f. 15th December, 2016 vide notification S.O. 3677(E)
dated 7th December, 2016.
Power of the Tribunal to order the meetings in compromise or arrangements with
creditors and members [Section 230(1)]
Pursuant to Section 230 (1) of the Companies Act, 2013, where a compromise or
arrangement is proposed between a company and its creditors or class of creditors;
or between a company and its members or any class of members, the Tribunal may,
on the application of the company or of any creditor or member of the company, or in
the case of a company which is being wound up, of the liquidator, order a meeting of
the creditors or class of creditors, or of the members or class of members, as the
case may be, to be called, held and conducted in such manner as the Tribunal
directs.

Power of the Tribunal to order the meetings in merger and amalgamation of

companies [Section 232(1)]
Pursuant to section 232(1) of the aforesaid Act, where an application is made to the
Tribunal under section 230 for sanctioning of compromise or arrangement proposed
between a company and any such persons as are mentioned in that section, and it is
shown to the Tribunal that the compromise or arrangement has been proposed for
the purpose of or in connection with merger or amalgamation of any two or more
companies, the Tribunal may, on such application, order a meeting of the creditors or
class of creditors or the members or class of members, as the case may be, to be
called, held and conducted in such manner as the Tribunal may direct. Further it has
also been provided that in case the meeting has been ordered by the Tribunal then
the provisions of section 230(3) to (5) shall apply mutatis mutandis to such meetings
which basically provide the manner of giving of notices to such members, creditors
and other statutory authorities and further the calling, holding and conducting of
meeting(s) of such creditors and members.
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ANALYSIS OF SECTION 230 (1) AND 232(1)

On perusal of the language of the aforesaid provisions, it seems in the first instance
that it is the discretion of the Tribunal whether to call the meeting of the creditors or
class of creditors or the members or the class of members, as the case may be, or to
dispense with the requirement of the same in certain circumstances of each case as
may be considered just and fair. The use of the word ‘may’ in section 230(1) itself is
significant and needs careful examination for its impact on the powers of the
Tribunal. In this regard, reference be made to the observations in the treatise of ‘The
Guide to Companies Act’ 17 Edition; Page 4669 where it is commented as under:

“The word ‘may’ is used only to indicate the discretionary power to be exercised by
the court in respect of matters under this section.”

WHAT IS TRUE FOR ‘COURT’ IS EQUALLY TRUE TO ‘THE TRIBUNAL’.

However, section 230(9) of the Companies Act, 2013 is considered by the Tribunal
as a limitation on the aforesaid power of the Tribunal of dispensing with the meeting
of members as it specifically provides that the Tribunal may dispense with the calling
of meeting of creditors or class of creditors, where such creditors or class of
creditors, having at least 90% value, agree and confirm, by way of affidavit, to the
scheme of compromise or arrangement and this specifically clothes the Tribunal with
the power of dispensation in respect of creditors, but no such subsection is framed
for dispensation of members’ meeting. It is pertinent to mention here that in case the
meeting, as aforesaid, has been ordered by the Tribunal, then at such meeting, the
scheme is required to be approved by majority of persons representing three fourths
in value of the creditors or class of creditors or members or class of members, as the
case may be. Does that necessarily mean that Tribunal has no power to dispense
with the meeting of members or class of members specially where the requisite
consent of three fourths majority or 100% is obtained in writing prior to the filing of
the petition under section 230(1) of the present Act?

AREA OF CONSIDERATION
Therefore, the important issue in relation to a scheme of merger or amalgamation
faced by the corporates at present is whether the Tribunal has the power to dispense
with the meeting of members in case consent by requisite majority of members i.e.
anywhere between 76% to 100% is given in writing, before filing the scheme of
amalgamation, as there is no specific provision in this regard under the present Act,
unlike the specific provisions that has been incorporated in relation to the dispensing
of the meeting of creditors or any class of creditors, as the case may under the
present Act? The confusion is compounded by the language of Rule 5 of the
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, which
provides for the directions to be given at the hearing of the application under section
230(1) of the said Act. Rule 5(1) of the said rules provides that upon hearing of
application under section 230(1) of the Act, the Tribunal shall, unless it thinks fit for
any reason to dismiss the application, give such directions as it may think necessary
in respect of the matters provided in the said rule. Clause (a) of the said rule reads
that the Tribunal shall determine the class or classes of creditors or of members
whose meeting or meetings have to be held for considering the proposed
compromise or arrangement; or dispensing with the meeting or meetings for any
class or classes of creditors in terms of section 230(9) of the said Act. The answer to
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the issue in question lies in the various judgements under the relevant provisions of
the Companies Act, 1956, from many High Courts and Supreme Court of India, as
examined hereinafter.

POSITION UNDER THE COMPANIES ACT, 1956

Under the earlier the Companies Act, 1956, section 391-394 read with Companies
(Court) Rules, 1959 contained the provisions with regards to compromise and
arrangements and amalgamation. It may be noted that, (i) there was no specific
provisions for dispensation of meeting of shareholders/members and even of
creditors under the earlier Act or rules, and (ii) the High Courts (which means
company court so designated) like the Tribunal, are also the creation of the statute,
but the High Court used to dispense with the requirement of convening of meeting of
members or creditors upon production of written consent of requisite majority of such
members or creditors, particularly when consent was 100% or close to 100%.

Ordinarily, the convening of meetings of members and creditors is a must. But it has
been established through various judicial pronouncements over the years that
meetings may be dispensed with by the High Court not as a matter of right but at the
discretion of the court, not based on the power of the court, clothing it by the
provisions of the Act, but on the principles of just and fair, and principles and doctrine
of acquiescence. It has also been held that such discretion under exceptional
circumstances, must be exercised in favour of the applicants. In this regard
reference be made to the decision of B.V. Gupta v. Bangalore Plastics, CA No.
1676/1981 (unreported) (Karnataka) applied in S.M. Holding Finance P. Ltd. v.
Mysore Machinery Manufacturers Ltd., (1993) 78 Com Cases 432 (Kar.).

The most important part in the said decision of B.V. Gupta, is the reliance upon the
doctrine of acquiescence to cloth the court with the power of dispensation, in
absence of any specific power of the court, under the Companies Act. It was thus
observed: “A third exception to the rule that all the shareholders of a company must
cast their votes in a formally called meeting is made by the doctrine of acquiescence.
If all the shareholders acquiesce in a certain arrangement, the question of a meeting
having been called does not arise at all.”

In law, the doctrine of acquiescence occurs when a person knowingly stands by

without raising any objection to the waiver of their rights, while someone else
unknowingly and without malice and as an aforethought makes a claim on their
rights.

The aforesaid doctrine of acquiescence has also been recognized by the Hon’ble
High Court of Delhi in the case of Mazda Theatres Pvt. Ltd. and Anr. Vs. New Bank
of India Ltd. and Ors. (1975) ILR 1 Delhi on the same line as above. What comes out
from the said judgement is that the written consent given by shareholders is
sufficient for dispensation of their meeting.

There are various judicial pronouncements and numerous orders from the High
Courts as a Company Court, under the earlier Act of 1956, which provides the
dispensation of meeting of shareholders under the earlier Act in absence of any
specific power to do so under the provisions of the Act, when the written consent of
requisite majority or 100% with regard to the same has been obtained by the
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company from its members. In this regard, reference be made to the decision of
Bharat Explosive Ltd. (2005) 58 SCL 370 (All); In Re Dabur Foods Ltd. (2008) 144

Thus, it seems that it is the ‘doctrine of acquiescence’ which clothed the High
Court(s) with the power to dispense with the meetings of shareholders under the
earlier Act in the absence of any specific power to do so, and the said ‘doctrine of
acquiescence’ also clothes the Tribunal under the Companies Act, 2013 with the
power to dispense with the meeting of members under the present Act. It will be very
appropriate in law to say that the ‘doctrine of acquiescence’ is the sufficient clothing
power, based on which the Tribunal may grant the dispensation of meeting of
members, when written consent of all or requisite majority of members has been
obtained. It is irrelevant to call the meetings of those members again which have
already consented to the scheme. Further calling of meeting will only burdened the
company with extra costs and extra time and will result into duplication of same work
with no attendant benefits. Moreover, the word ‘may’ used in section 230(1) and
section 232(1) itself shows the discretionary powers of the Tribunal. In this regard,
the observation of the Hon’ble Supreme Court of India in the case of Mihir H.
Mafatlal vs. Mafatlal Industries Ltd. [1996] 87 Com Cases 792, followed in Gujrat
Ambuja Exports Ltd. [2004] 118 Com Cases 2

CONCLUSION
It is evident from the above discussion that the powers of Tribunal prescribed under
the present Act is similar to the powers of High Court under the earlier Act. Section
230(9) provides some additional provisions for allowing dispensation of meeting of
creditors and should, therefore, not be interpreted in restrictive way, because it is
translating the power already exercised by the High Court, in the statute itself.
Further the Rule 5 of the Companies (Compromises, Arrangements and
Amalgamations) Rules, 2016 is just repetition of the corresponding provision of
Companies (Court) Rules, 1959 and the Act of 2013 and the provision relating to
section 230(9) as already stated has been additionally inserted. It is the “doctrine of
acquiescence” which clothes the Tribunal under the Companies Act, 2013 with the
power to dispense with the meeting of members, in case the written consent of all or
requisite majority of members, has been obtained in this regard. Accordingly, the
Tribunal has all the powers to allow dispensation of the meeting of members of the
companies under present Act also and it will be appropriate to take a legal view that
Tribunal has same power as that of the High Court under the Act of 1956. However,
it is up to the Tribunal to exercise such discretion. Even Section 230(9) also uses the
word ‘may’ which again cast the discretion on the Tribunal and not confines the
Tribunal in any way and does not render the Tribunal powerless in this regard
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2. Describe the powers of the Central Government to provide for the

amalgamation of the companies in public interest. (June2017)

Power of the central government to provide for amalgamation of companies in

public interest

Power of Central Government to provide for amalgamation of Companies

Section 237(1) states that when the Central Government is satisfied that it is
essential in the public interest that two or more companies should amalgamate, the
Central Government may, by order notified in the Official Gazette, provide for the
amalgamation of those companies into a single company with such constitution, with
such property, powers, rights, interests, authorities and privileges, and with such
liabilities, duties and obligations, as may be specified in the order.
Continuation of legal proceedings
Section 237(2) states that the order under sub-section (1) may also provide for the
continuation by or against the transferee company of any legal proceedings pending
by or against any transferor company and such consequential, incidental and
supplemental provisions as may, in the opinion of the Central Government, be
necessary to give effect to the amalgamation.
Interest or rights of members, creditors, debenture holders not to be affected.
As per Section 237(3), every member or creditor, including a debenture holder, of
each of the transferor companies before the amalgamation shall have, as nearly as
may be, the same interest in or rights against the transferee company as he had in
the company of which he was originally a member or creditor, and in case the
interest or rights of such member or creditor in or against the transferee company
are less than his interest in or rights against the original company, he shall be
entitled to compensation to that extent, which shall be assessed by such authority as
may be prescribed and every such assessment shall be published in the Official
Gazette, and the compensation so assessed shall be paid to the member or creditor
concerned by the transferee company.
Appeal to Tribunal
As per Section 237(4), any person aggrieved by any assessment of compensation
made by the prescribed authority under sub-section (3) may, within a period of thirty
days from the date of publication of such assessment in the Official Gazette, prefer
an appeal to the Tribunal and thereupon the assessment of the compensation shall
be made by the Tribunal.
Conditions for order under Section 237
As per Section 237(5), no order shall be made under this section unless—
(a) a copy of the proposed order has been sent in draft to each of the companies
concerned;
 UNIT 5 COMPANY LAW

(b) the time for preferring an appeal under sub-section (4) has expired, or where
any such appeal has been preferred, the appeal has been finally disposed
off; and
(c) the Central Government has considered, and made such modifications, if
any, in the draft order as it may deem fit in the light of suggestions and
objections which may be received by it from any such company within such
period as the Central Government may fix in that behalf, not being less than
two months from the date on which the copy aforesaid is received by that
company, or from any class of shareholders therein, or from any creditors or
any class of creditors thereof.
Copies of order to be laid before each house of Parliament
As per Section 237(6), the copies of every order made under this section shall, as
soon as may be after it has been made, be laid before each House of Parliament.

Registration of offer of schemes involving transfer of shares

Section 238(1) states that in relation to every offer of a scheme or contract involving
the transfer of shares or any class of shares in the transferor company to the
transferee company under section 235, —
(a) every circular containing such offer and recommendation to the members of
the transferor company by its directors to accept such offer shall be
accompanied by such information and in such manner as may be prescribed;
(b) every such offer shall contain a statement by or on behalf of the transferee
company, disclosing the steps it has taken to ensure that necessary cash will
be available; and
(c) every such circular shall be presented to the Registrar for registration and no
such circular shall be issued until it is so registered: Provided that the
Registrar may refuse, for reasons to be recorded in writing, to register any
such circular which does not contain the information required to be given
under clause (a) or which sets out such information in a manner likely to give
a false impression, and communicate such refusal to the parties within thirty
days of the application.
Section 238(2) states that an appeal shall lie to the Tribunal against an order of the
Registrar refusing to register any circular under sub-section (1).
Section 238(3) states that the director who issues a circular which has not been
presented for registration and registered under clause (c) of sub-section (1), shall be
punishable with fine which shall not be less than twenty-five thousand rupees but
which may extend to five lakh rupees.
Preservation of books and papers of amalgamated company
As per section 239, the books and papers of a company which has been
amalgamated with, or whose shares have been acquired by, another company
under this Chapter shall not be disposed of without the prior permission of the
Central Government and before granting such permission, that Government may
appoint a person to examine the books and papers or any of them for the purpose of
ascertaining whether they contain any evidence of the commission of an offence in
connection with the promotion or formation, or the management of the affairs, of the
transferor company or its amalgamation or the acquisition of its shares.
Liability of officers in respect of offences committed prior to amalgamation
As per Section 240, notwithstanding anything in any other law for the time being in
force, the liability in respect of offences committed under this Act by the officers in
 UNIT 5 COMPANY LAW

default, of the transferor company prior to its merger, amalgamation or acquisition

shall continue after such merger, amalgamation or acquisition.

Summary:
Subject to the satisfaction of the central government, Section 237 provides for
amalgamation of two companies into a single company with such constitution,
powers, rights, interests, authorities and privileges and with such liabilities, duties
and obligations, as may be specified in the order. The order may also provide for
continuation of legal proceedings by or against the transferee company of any legal
proceedings pending by or against any transferor company and for such
consequential, supplemental or incidental provisions as may be necessary to give
effect to the amalgamation, in the opinion of the central government. Every member,
creditor and debenture holder of the transferor company before the amalgamation
shall have the same interest in or rights against the transferee company as he had in
the company of which he was originally a member, creditor or debenture holder.

Thus, Section 237 provides for a faster process of amalgamation of companies,

provided vested under this section to the Central Government are all spelt out in this
section. Readers will also note the redressal mechanism for the dissentient
shareholder/creditor in case there is a reduction in his interest after the
amalgamation as compared to what his interests were before. And the
compensation to be paid (in case there is any reduction of interest), if considered
inadequate, can be agitated to before Tribunal. The provision states that any person
aggrieved by any assessment of compensation made by the prescribed authority
may within a period of thirty days from the date of publication of such assessment
prefer an appeal to the Tribunal and thereupon the assessment of compensation
shall be made by the Tribunal. This section is similar to section 396 of the previous
Act
Role of Judiciary
The Merger Provisions under the Companies Act constitute a comprehensive code in
themselves, and under these provisions earlier the Courts and now the Tribunal has
full power to sanction any alterations in the corporate structure of a company that
may be necessary to effect the corporate restructuring that is proposed. The judiciary
has very clearly laid out the parameters within which such schemes of arrangement
may be initiated, approved by shareholders and creditors and then accorded the
sanction of the court. Miheer Mafatlal and Hindustan Lever are landmark decisions of
the Supreme Court in that behalf. Under the new Companies Act 2013, the High
Court has been replaced by the Tribunal. But so far, Judiciary has played a pivotal
role in the corporate restructuring activities in India as any scheme of arrangement or
compromise falling under section 391-394 of the previous Act and now under the
new provisions of the Act of 2013, essentially requires approval by the National
Company Law Tribunal. The court/Tribunal has the following powers under the
provisions of the Companies Act:
1. Power of the Court to sanction the Scheme
2. Power of the Court to stay proceedings
3. Power of the Court to reject or modify the scheme
4. Power of the Court to order winding up of the company or companies
In Saraswathi Industrial Syndicate v. CIT, Haryana, the Supreme Court ruled that in
an amalgamation two or more companies are fused into one by merger or by one
 UNIT 5 COMPANY LAW

taking over the other. When two companies are merged and are so joined as to form
a third company or one is absorbed into the other or blended with another the
amalgamating company loses its identity. There may be amalgamation either
by transfer of two or more undertakings to an existing company.
In the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd, the apex court gave a
landmark decision and laid down the following principles:
 The merits of the compromise or arrangement have to be judged by the
parties who as sui juris with their open eyes and fully informed about the pros
and cons of the scheme arrive at their own reasoned judgment and agree to
be bound by such compromise or arrangement.
 The court has neither the expertise nor the jurisdiction to delve deep into the
commercial wisdom exercised by the creditors and members of the company
who have ratified the scheme by the requisite majority.

The court cannot, therefore, undertake the exercise of scrutinising the scheme
placed for its sanction with a view to finding out whether a better scheme could have
been adopted by the parties.

Principles laid down by the Supreme Court in Miheer H. Mafatlal v. Mafatlal

Industries Ltd.
 That the provisions of the statute have been complied with.
 That the class was fairly represented by those who attended the meeting and
that the statutory majority are the meeting and that the statutory majority are
acting bona fide.
 That the arrangement is such as a man of business would reasonably
approve.
 There should not be any lack of good faith on the part of the majority.
 Scheme not contrary to public interest or any other law.
Conclusion
The Companies Act 1956 was required to be replaced with a new legislation due to
the changes in the needs of the corporate sector. The Act of 2013 is a broad and
widely worded piece of legislation which ensures shareholders’ protection as well as
growth of the company. It also introduces the concept of fastrack mergers or out of
court approach which used to be a very tedious and cumbersome exercise for the
companies. This is a move to encourage small sized companies to restructure
themselves via the merger route. The four pillars holding the foundation of the
Companies Act 2013 are accountability, procedural simplification, disclosure and
unification across various regulatory authorities. The simple process of submitting
documents before the court registrar is now a multi-party affair with a series of
documents. Corporate houses will now necessarily have to deal with multiple
authorities – income tax, RBI, SEBI, central government and CCI – as opposed to
single-window clearance.
There is a need to strike the right balance between proper regulation and over-
regulation and adhere to the principles of corporate governance and corporate
democracy
 UNIT 5 COMPANY LAW

LIQUIDATOR
3. Explain the appointment, powers and functions of liquidator. (Refer
Page No. 650) (June2014)

COMPANY LIQUIDATOR AND THEIR APPOINTMENTS (SECTION 275):

For the purposes of winding up of a company by the Tribunal, the Tribunal at the
time of passing of the order of winding up shall appoint an Official Liquidator or a
liquidator from the panel maintained as the Company Liquidator.
Provisional liquidator shall have same powers as a liquidator unless the
Tribunal limit or restrict his power by an order.
The provisional liquidator or the Company Liquidator, shall be appointed from a
panel maintained by the Central Government consisting of the names of chartered
accountants, advocates, company secretaries, cost accountants or firms or bodies
corporate having such chartered accountants, advocates, company secretaries, cost
accountants and other professionals as may be notified by the Central Government
or from a firm or a body corporate of persons having a combination of such
professionals and having at least ten years’ experience in company matters. The
Central Government may remove the name of any person or firm or body corporate
form the penal on the grounds of misconduct, fraud, misfeasance, breach of duties
or professional incompetence. The Central Government shall give him or it a
reasonable opportunity of being heard before remove him or it from the panel. The
terms and conditions of appointment of a provisional liquidator or Company
Liquidator and the fee payable to him or it shall be specified by the Tribunal on the
basis of task required to be performed, experience, qualification of such liquidator
and size of the company. On appointment as provisional liquidator or Company
Liquidator, as the case may be, such liquidator shall file a declaration within seven
days from the date of appointment in the prescribed form disclosing conflict of
interest or lack of independence in respect of his appointment, if any, with the
Tribunal and such obligation shall continue throughout the term of his appointment.
While passing a winding 16

up order, the Tribunal may appoint a provisional liquidator, if any, as the Company
Liquidator for the conduct of the proceedings for the winding up of the company.
DUTIES OF LIQUIDATOR:
Followings are the duties of the official liquidator of a company:
1. Conduct Proceedings in Winding Up: The liquidator shall conduct the
proceedings in winding up the company and perform duties imposed by
the Tribunal.
 UNIT 5 COMPANY LAW

2. Report: The official liquidator shall as soon as possible prepare a report

of the statement of affairs of the company. The report shall contain the
particulars as to
a) The amount of the capital issued, subscribed and paid up, and the estimated
amount of assets and liabilities.
b) If the company has failed as to the cause of failure; and
c) Whether, in his opinion, further enquiry is desirable as to any matter relating
to the promotion, formation, or failure of the company, or the conduct of
business thereof.
d) Custody of Company Property: Where a winding up order has been made or
where a liquidator has been appointed, shall take into his custody all the
property, effect and actionable claims to which the company is entitled. So
long as there is no liquidator, all the property of the company shall be in the
custody of Tribunal.
e) Meetings of Creditors and Contributories: The liquidator may summon general
meetings of the creditors or contributories whenever he thinks fit for the
purpose of ascertaining their wishes.
f) Directions from the Tribunal: The liquidator may apply to the Tribunal for
directions in relation to any particular matter arising in winding up. He shall
also use his own discretion in the administration of the assets of the company
and in the distribution thereof among the creditors.
g) Proper Books: The liquidator shall keep proper books for making entries or
recording minutes of the proceedings at meetings and such other matters as
may be prescribed, any creditor or contributory may, subject to the control of
the Tribunal, inspect any such books personally or by his agent.
h) Audit of Accounts: The liquidator shall at such times as may be prescribed but
at least twice each year during his tenure of office, present to the Tribunal an
account of his receipts and payments as liquidator. The account shall be in
the prescribed form and shall be duly verified.
i) Appointment of Committee of Inspection: The Tribunal may at the time of
making an order for the winding up of a company or at any time thereafter,
direct that there shall be appointed a committee of inspection to act with the
liquidator.

POWERS OF LIQUIDATOR:
The liquidator shall exercise the following powers:
1. To institute or defend suits and other proceedings, civil, criminal in the name
of a company
2. To carry on the business of the company so far as may be necessary for the
beneficial winding up of the company.
3. To sell the immovable and movable properties with power to transfer the
whole or sell the same.
4. To raise money on the security of the company’s assets
5. To do all acts and to execute documents and deeds on behalf of the company
6. To inspect the records and returns of the company.
7. To take out in his name, letters of administration to any deceased contributory
and to do any other act necessary for obtaining payment of any money due
from a contributory.
8. To appoint an agent to do any business which he is unable to do himself.
REMOVAL AND REPLACEMENT OF LIQUIDATOR (SECTION 276):
 UNIT 5 COMPANY LAW

The Tribunal may, on a reasonable cause being shown and for reasons to be
recorded in writing, remove the provisional liquidator or the Company Liquidator on
any of the following grounds, namely:—
(a) misconduct;
(b) fraud or misfeasance;
(c) professional incompetence or failure to exercise due care and diligence in
performance of the powers and functions;
(d) inability to act as provisional liquidator or as the case may be, Company
Liquidator;
(e) conflict of interest or lack of independence during the term of his appointment
that would justify removal.
In the event of death, resignation or removal of the provisional liquidator or Company
Liquidator, the Tribunal may transfer the work assigned to him or it to another
Company Liquidator for reasons to be recorded in writing. Where the Tribunal is of
the opinion that any liquidator is responsible for causing any loss or damage to the
company due to fraud or misfeasance or failure to exercise due care and diligence in
the performance of his or its powers and functions, the Tribunal may recover or
cause to be recovered such loss or damage from the liquidator and pass such other
orders as it may think fit. The Tribunal shall, before passing any order under this
section, provide a reasonable opportunity of being heard to the provisional liquidator
or, as the case may be, Company Liquidator.
 UNIT 5 COMPANY LAW

WINDING
4. How voluntary winding up of a company is effected? Explain the provisions
relating to members voluntary winding up. (June2014) (Dec2016)

Winding up of a company is defined as a process by which the life of a company is

brought to an end and its property administered for the benefit of its members and
creditors. In words of Professor Gower, “Winding up of a company is the process
whereby its life is ended and its property is administered for the benefit of its
members & creditors. An Administrator, called a liquidator is appointed and he takes
control of the company, collects its assets, pays its debts and finally distributes any
surplus among the members in accordance with their rights.”
According to Halsbury’s Laws of England, “Winding up is a proceeding by means of
which the dissolution of a company is brought about & in the course of which its
assets are collected and realised; and applied in payment of its debts; and when
these are satisfied, the remaining amount is applied for returning to its members the
sums which they have contributed to the company in accordance with Articles of the
Company.” Winding up is a legal process.
Under the process, the life of the company is ended & its property is administered for
the benefits of the members & creditors. A liquidator is appointed to realise the
assets & properties of the company. After payments of the debts, is any surplus of
assets is left out they will be distributed among the members according to their
rights. Winding up does not necessarily mean that the company is insolvent. A
perfectly solvent company may be wound up by the approval of members in a
general meeting.
There are differences between winding up and dissolution. At the end of winding up,
the company will have no assets or liabilities. When the affairs of a company are
completely wound up, the dissolution of the company takes place. On dissolution,
the company's name is struck off the register of the companies and its legal
personality as a corporation comes to an end.
Legal provisions for Winding Up of Companies
Section 2(94A) of the Companies Act 2013 provides the following definition of
Winding up. Winding up" means winding up under this Act or liquidation under the
Insolvency and Bankruptcy Code, 2016, as applicable. Winding up" means winding
up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as
applicable.
The procedures for Winding up of companies are provided under Chapter XX of the
Companies Act, 2013 and Insolvency and Bankruptcy Code of India 2016.
 UNIT 5 COMPANY LAW

VOLUNTARY WINDING UP
Voluntary winding up means winding up by the members or creditors of a company
without interference by the Tribunal. The object of voluntary winding up is that the
company, i.e., the members as well as the creditors, are left free to settle their affairs
without going to the Tribunal they may however apply to the Tribunal for any
directions, if and when necessary. The Central Government came out with a
comprehensive regulatory legislation titled as “The Insolvency and Bankruptcy Code,
2016”. The Code is intended to regulate the conduct of the corporate insolvency
resolution process, liquidation process and provides fresh start to the bankruptcy
process. It abolishes Voluntary winding up of companies (Sections 304 to 323 of
Companies Act, 2013) and regulates liquidation process.
The Process of Voluntary Winding up of solvent company is now shifted from the
Companies Act, 2013 to Insolvency and Bankruptcy Code, 2016 w.e.f. 1st April,
2017. Some of the major differences as compared to earlier regime are as follows:
 Shifting of Powers from Official Liquidator to Insolvency Professional.
 Jurisdictional Authority has been shifted from High Court to National Company
Law Tribunal (NCLT)
 Governing sections and corresponding rules and regulations for Member’s
Voluntary Winding is now shifted to Section 59 of the Insolvency and Bankruptcy
Code, 2016 (IBC) read with Insolvency and Bankruptcy Board of India (Voluntary
Liquidation Process) Regulation, 2017.
 Timeline for carrying out the Voluntary Winding up process under the IBC is of 12
months, however in the event of Liquidation process continuing for more than 12
months, the Liquidator has to submit Annual Status Report indicating the progress of
such Liquidation.
Who may apply for voluntary liquidation?
A corporate person who intends to liquidate itself voluntarily which has not
committed any default may initiate voluntary liquidation proceedings under the
provisions of this Chapter. [Section 59(1)] So, Any Company or LLP which has not
defaulted in payment and have a full capacity to repay debt can apply for voluntary
liquidation.
Pre-Liquidation Process
 Declaration of Solvency

A declaration from majority of the directors of the company verified by an affidavit

stating that:
 They have made a full inquiry into the affairs of the company and they have
formed an opinion that either the company has no debt or that it will be able to
pay its debts in full from the proceeds of assets to be sold in the voluntary
liquidation; and
  The company is not being liquidated to defraud any person;

The above declaration shall be accompanied with the following documents:

  Audited financial statements and record of business operations of the
company for the previous 2 years or for the period since its incorporation,
whichever is later;
  A report of the valuation of the assets of the company, if any prepared by a
registered valuer;
  Members Approval
 UNIT 5 COMPANY LAW

A special resolution of the members of the company in a general meeting requiring

the company to be liquidated voluntarily and appointing an insolvency professional to
act as the liquidator must be passed within 4 weeks of declaration of solvency;
  Creditors Approval

If the company owes any debt to any person, Creditors representing two thirds in
value of the debt of the company shall approve the resolution passed for voluntary
liquidation within seven days of such resolution.
  Intimation to ROC and IBBI

The company shall notify the ROC and the IBBI about the resolution passed to
liquidate the company within 7 days of such resolution or the subsequent approval
by the creditors, as the case may be. [Section 59(4)]
 Voluntary Liquidation Commencement Date

The voluntary liquidation proceedings in respect of a company shall be deemed to

have commenced from the date of passing of the special resolution, subject to the
approval of the creditors. [Section 59(5)]
Voluntary Liquidation Process
 Public Announcement

Liquidator shall make public announcement within 5 working days of his

appointment to submit claims within 30 days. It must be published in one English
daily and one regional daily newspaper wherein registered office of the corporate
person is situated. It must also be posted in the website of corporate persons, if
having. It must be sent to the IBBI via e-mail [email protected] for posting it in
board’s website.

Public Announcement must contain the following:

 Liquidation commencement date;
 Name, Address, Contact number, Registration number of liquidator;
 Mode of submission of claim;
 Last date of submission of claim;

 Opening of Bank Account

A new bank account with scheduled bank must be opened with the word ‘In
Liquidation’ at last after the name of corporate person for receiving and paying
settlement amount. Each and every financial transaction must be settled through this
account.
 Collection and Verification of Claims
All claims must be made within 30 days of public announcement. Liquidator must
verify the correctness of each claim and prepare a list of stakeholders.
 Preparation of Preliminary Report
Based on claims received, liquidator needs to prepare Preliminary Report within 45
days from the date liquidation commencement date containing capital structure,
assets and liabilities, claims received etc.
 Distribution of Proceedings
Liquidator needs to sell all the assets by auction or through direct party, realize
amount from creditor and distribute proceedings among all the stakeholders.
 Submission of Final Report
 UNIT 5 COMPANY LAW

iquidator must prepare a final report containing liquidation proceedings and submit it
to the ROC, IBBI and NCLT. Based on final report and application for dissolution,
NCLT pass an order for dissolution of corporate entity.
 Filing of order with ROC
Copy of order received from NCLT needs to be filled with ROC in e-form INC-28 for
dissolution of a corporate entity.
Role of Adjudicating Authority i.e NCLT in whole Process
The Adjudicating Authority i.e NCLT is competent to declare the corporate person as
dissolved after due liquidation and distribution of its assets. The NCLT comes into
the picture only at the final stage of liquidation after application for Dissolution of
Corporate Person is made by Liquidator after distribution of Liquidation assets of the
Corporate Person by following the procedure stipulated under the Code.
Roles and Responsibilities of Liquidator in whole Process
Liquidator of corporate person is assigned with the following task
 To verify claims of all the creditors;
 To carry on the business of the corporate debtor for its beneficial liquidation
as he considers necessary;
 To value, sell, recover and realize all assets of and monies due to such
corporate person in a time bound manner;
 To open a bank account for the purpose of receiving all moneys due to the
corporate person;
 To pay and settle with the creditors of the corporate person;
 To obtain any professional assistance from any person or appoint any
professional, in discharge of his duties, obligations and responsibilities;
 To maintain registers specified under regulation 10 of schedule 2;
 To distribute proceeds to the stakeholders within a period of 6 (six) months of
receipt of the proceeds; and
 To preserve a physical or an electronic copy of the reports, registers and
books of account for at least 8 (eight) years after the dissolution of the
corporate person, either with himself or with an information utility.
Unclaimed Proceeds of Liquidation (Regulation 39)
The liquidator shall apply to the NCLT for an order to transfer into the Companies
Liquidation Account to the Public Account of India, any unclaimed proceeds of
liquidation or undistributed assets or any other balance payable to the stakeholders
on the date of the order of dissolution.
A person claiming to be entitled to any money paid into the Companies Liquidation
Account may apply to the Board for an order for payment of the money claimed;
which may, if satisfied that such person is entitled to the whole or any part of the
money claimed, make an order for the payment to that person of the sum due to him,
after taking such security from him as it may think fit.
Any money paid into the Companies Liquidation Account, which remains unclaimed
thereafter for a period of fifteen years shall be transferred to the general revenue
account of the Central Government.
 UNIT 5 COMPANY LAW

WINDING
5. Explain briefly the various methods of winding up of a company. (Refer Page
No. 632) (June2015) (Dec2017) (Dec2018) (June2018) (March2021)

Winding up of a company is defined as a process by which the life of a company is

brought to an end and its property administered for the benefit of its members and
creditors. In words of Professor Gower, “Winding up of a company is the process
whereby its life is ended and its property is administered for the benefit of its
members & creditors. An Administrator, called a liquidator is appointed and he takes
control of the company, collects its assets, pays its debts and finally distributes any
surplus among the members in accordance with their rights.”
According to Halsbury’s Laws of England, “Winding up is a proceeding by means of
which the dissolution of a company is brought about & in the course of which its
assets are collected and realised; and applied in payment of its debts; and when
these are satisfied, the remaining amount is applied for returning to its members the
sums which they have contributed to the company in accordance with Articles of the
Company.” Winding up is a legal process.
Under the process, the life of the company is ended & its property is administered for
the benefits of the members & creditors. A liquidator is appointed to realise the
assets & properties of the company. After payments of the debts, is any surplus of
assets is left out they will be distributed among the members according to their
rights. Winding up does not necessarily mean that the company is insolvent. A
perfectly solvent company may be wound up by the approval of members in a
general meeting.
There are differences between winding up and dissolution. At the end of winding up,
the company will have no assets or liabilities. When the affairs of a company are
completely wound up, the dissolution of the company takes place. On dissolution,
the company's name is struck off the register of the companies and its legal
personality as a corporation comes to an end.
Legal provisions for Winding Up of Companies
Section 2(94A) of the Companies Act 2013 provides the following definition of
Winding up. Winding up" means winding up under this Act or liquidation under the
Insolvency and Bankruptcy Code, 2016, as applicable. "Winding up" means winding
up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as
applicable.
The procedures for Winding up of companies are provided under Chapter XX of the
Companies Act, 2013and Insolvency and Bankruptcy Code of India 2016.
 UNIT 5 COMPANY LAW

WINDING
6. State the circumstances under which the tribunal can order for winding up of
the company. (June2016) (June2019) (Dec2020)
7. Under what circumstances the tribunal/court can order for compulsory winding
up of a company? (April2021)

ANS:

MEANING OF WINDING UP:

Winding up or liquidation of a company represents the last stage in its life. It means a
proceeding by which a company is dissolved. The assets of the company are
disposed of, the debts are paid off out of the released from the assets, and the
surplus, if any, is then distributed among the members in proportion to their holdings
in the company.
According to Prof. Gower, winding up of a company is a process whereby its life is
ended and its property administered for the benefit of its creditors and members.
An administrator called liquidator , is appointed and he takes control of the company,
collects its assets, pays its debt and finally distributes any surplus among the
members in accordance with their rights.
MODES OF WINDING – UP (SECTION 270):
There are two modes of winding up of a company, namely.,
1. Winding up by the Tribunal; or
2. Voluntary winding up.
I. WINDING UP BY THE TRIBUNAL
Winding up of a company under the order of a Tribunal is also called as “Compulsory
Winding Up”. It is initiated by an application by way of petition to the Tribunal for a
winding up order.
CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL (SECTION 271):
A company may be wound up by the Tribunal on a petition filed under Section 272 of
the Act.
The company may be wound up by Tribunal-
1. If the Company is Unable to Pay its Debts (sub – section 2 of Section 271):
A company may be wound up by the Tribunal if it is unable to pay its debts. In this
stage company has reached a stage where it is commercially insolvent, which
 UNIT 5 COMPANY LAW

means that the company is unable to pay its debts or liabilities as they arise in the
ordinary course of business.
A company shall be deemed to be unable to pay its debts, if the company has to pay
the sum within twenty – one days after the receipt of demand or to provide adequate
security or re – structure or compound the debt to the reasonable satisfaction of the
creditor
2. Special Resolution of the Company:
Winding up under this is not common because normally the members of the
company prefer to wind up the company voluntarily for in such a case they shall
have voice in its winding up. If the company has resolved by special resolution that
the company be wound up by the Tribunal.
3. Against the Sovereignty of India:
If the company has acted against the interests of the sovereignty and integrity of
India, its security of the State, friendly relations with foreign States, public order,
decency or morality then the Tribunal may order for the winding up of a company.
4. If a Company is Sick:
If the Tribunal has ordered the winding up of the company in case of a sick company.
5. If the Affairs of the Company is Fraudulent:
If, on application by the Registrar or the Government, the Tribunal is of the opinion
that the affairs of the company has been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purpose or the persons concerned
in the formation or management of its affairs have been guilty of fraud, misfeasance
or misconduct in connection therewith and that it is proper that the company be
wound up.
6. Default in Submitting the Financial Statements or Annual Returns with the
Registrar:
If the company has made a default in filing with the Registrar its financial statements
or annual returns for immediately preceding five consecutive financial years.
7. Just and Equitable Grounds:
If the Tribunal is of the opinion that it is just and equitable to wind up the company
then they can do so. The words ‘Just and Equitable’ are of the widest significance
and do not limit the jurisdiction of the Tribunal to any particular case. The principle of
Just and Equity must be rest with the judicial discretion of the Tribunal depending
upon the facts and circumstances of each case.
The Tribunal may order winding up under the ‘Just and Equitable’ clause in the
following circumstances:
1. 2. When the Substratum of the Company is Gone: The main purpose or
basis of a company can be said to have disappeared only when the object for
which it was incorporated has substantially failed, or when it is impossible to
carry on the business of the company except at a loss, or the existing and
possible assets are insufficient to meet the existing liabilities.
2. When the Management is carried on in Such a Way that the Minority
disregarded or Oppressed: Oppression of minority shareholders will be a
‘just and equitable’ ground where those who control the company abuse their
power to such an extent as to seriously prejudice the interest of minority
shareholders.
3. Where there is Deadlock in the Management of the Company: When the
shareholding is more or less equal and there is a case of complete deadlock
in the company on account of lack of probity in the management of the
company and there is no hope or possibility of smooth and efficient
 UNIT 5 COMPANY LAW

continuance of the company as a commercial concern, there may arise a case

for winding up on the ‘just and equitable’ ground.
4. Where the Public Interest is likely to be Prejudiced: Where the concept of
prejudice to public interest is introduced, it would appear that the Tribunal
winding up a company will have to take into consideration not only the interest
of shareholders and creditors but also public interest in the shape of need of
the community, interest of the employees, etc.

PROBLEMS
1. 'X' a minor was registered as a shareholder. After attaining majority, he
received dividend from the company. Subsequently company went into
liquidation X denies his liability. Decide (Dec2014) (June2015) (June2016)
(Dec2018) (March2021)

Under the English Law, a minor can be a member of the company because a
contract with a minor is voidable and not void. But under the Indian Law, a minor
being incompetent to contract can not become a member of a company because a
contract with a minor is absolutely void here. A minor in India may apply for and
receive an allotment of shares subject to a right to repudiate liability on them before
or within a reasonable time after attaining full age. In the case of Palaniappa Mudliar
v. Official Liquidator, Pasupathi Bank Ltd., A.I.R. (1942) Mad. 470., an application for
shares in a company was made by a father as a guardian of his minor daughter. The
company allotted the shares in the name of the daughter described as a minor.
Subsequently, the company went into liquidation and the liquidator placed the
father's name in the list of contributories. It was held that the transaction was void
ab-initio and neither the minor nor her guardian could be placed on the list of
contributories.

The Companies Act does not specifically lay down as to who can be a member of a
company. It also does not prescribe any disqualification for any person which would
debar him from becoming a member of a company. The Act simply provides that any
person who agrees in writing to become a member of a company can become a
member. A contract to purchase shares in a company is like any other contract.
Therefore, only such persons can become members of a company who are
competent to contract. However, as regards competency of a member, the
provisions of the Indian Contract Act shall apply. This means that minors, persons of
unsound mind and those who have been disqualified by law from contracting cannot
become members of a company.
Special types of members:
i) Minor: According to Section 11 of the Indian Contract Act, a minor is incompetent
to contract, therefore, he cannot become a member of the company. In Palaniappa
 UNIT 5 COMPANY LAW

vs. Official Liquidator, Pasupati Bank Ltd., an application was made by a father as
guardian of his minor daughter describing her as minor. The company went into
liquidation. It was held that the allotment was void and neither the minor nor her
guardian could be held liable as contributories. But, if in ignorance of the fact of
minority, a minor is allotted shares, the company can repudiate the allotment and
remove his name from the Register of Members. The minor may also rescind
the allotment any time during his minority. In either case, the company has to refund
all moneys received from minor in respect of the shares allotted to him. If neither
party epudiates allotment, the name of the minor shall continue to appear on the
Register of Members, but in that event a minor incurs no personal liability.
After the minor attains majority, he can still repudiate his liability even if he had
received dividends during his minority (Sadiq Ali v. Jai Kishori). But, he cannot
repudiate the same if he had received dividends after attaining majority and
intentionally permitted the company to believe him to be a shareholder (Fazalbhoy v.
The Credit Bank of India Ltd.). Thus, it is in the interest of the companies to allot only
fully paid shares to the minor because otherwise he will not be liable for the unpaid
amount of shares. There is nothing in the Act to bar a minor from becoming a
transferee of fully paid shares. In Miss Nandita Jain v. Bennet Coleman and
Company Ltd., the Company Law Board held that the contract entered into by a
minor for registration of transfer of fully paid shares through the natural guardian was
a valid and binding contract. In such a case the entry in the Register of Members will
be made as follows: “A (a minor) through ................................... guardian”.
If shares are transferred to a minor, the transferor will continue to remain liable for all
future calls on such shares even if he was ignorant of the minority of the transferee.
If the company is aware of the minority of the transferee at the time of transfer, it can
refuse to register the transfer in favour of a minor unless the shares are fully paid.

A company has suspended its business for more than one year due to labour
strike. Can a petition for winding up of the company be entertainable?
(June2017)
A transferred certain land to B on a condition that 'B' would never sell the land
to coloured persons. 'B' sold the land to a company composed exclusively of
Negros. 'A' took action for the annulment of the transfer on the ground that
property had passed to coloured persons. Will he succeed? (Dec2018)

'M' incorporated a company of which he was the Managing Director. In that

capacity he appointed himself as a pilot of the company. While on the
business of the company he died in a flying accident. His widow claims
compensation, will she succeed? (June2018)
CONCEPT OF SEPARATE LEGAL ENTITY
Companies act, 2013 mentions following features of a company incorporated under
the act:

1. Separate Legal Entity

2. Perpetual Succession
3. Limited Liability
4. Common Seal
5. Separate property
 UNIT 5 COMPANY LAW

As per Companies Act, 2013 Separate legal entity means that a company which is
registered under this act as Non-profit organization, private limited company, public
company , government company and chit fund company shall have legal identity of
its own and will have rights under law and will treated as separate entity from its
shareholder. It can own property in its own name and can enter into contracts with
other person and can represent itself in court of law through its representative.
Separate legal entity also act as veil between company and its member. Which
means that assets of the company shall be used only for the objective of the
company as set in Memorandum of association and its liabilities should be paid by
itself and not from personal asset of the member of the company.
FACTS OF THE CASE
In 1954 the appellant’s husband Lee formed the company named LEE’S AIR
FARMING LTD. for the purpose of carrying on the business of aerial top-dressing
with 3000 thousand shares of 1 euro each forming share capital of the company and
out of which 2999 shares were owned by Lee himself. Lee was also the director of
the company. He exercised unrestricted power to control the affairs of the company
and made all the decision relating to contracts of the company. Company entered
into various contract with insurance agencies for insurance of its employees and few
premiums of the policies were paid through company’s bank account for the personal
policies taken by Lee in its own name but it was debited in the account of lee in
company’s book. Lee apart from being the director of the company was also a pilot.
In March, 1956, Lee was killed while piloting the aircraft during the course of aerial
top-dressing. Lee’s wife who is appellant claimed worker compensation under New
Zealand Workers’ Compensation Act, 1922 as she claimed that Lee during work as
employee of the company. The New Zealand Court of Appeal declined the claim of
appellant as it refused to hold that Lee was a worker, holding that a man could not in
effect, employ himself.
ISSUE RAISED BY RESPONDENT
Respondent company claimed that Lee was owner of the company and had
maximum number of shares in the company so his wife is not entitled for workmen
compensation as he was not the employee of the company. Respondent claimed
that Mr. Lee couldn’t be the owner of the company as there is no master-servant
relation that exist between him and the company.
ADVICE BY PRIVY COUNCIL
Privy council in advised that claim of Mrs Lee is valid as Mr. lee can have a contract
with the company he owned as company is a separate legal entity. Lord Morris
quoted Lord Halsbury LC’s judgment in Salomon’s case, that company ‘was a real
thing’ and said that:
[“… Always assuming that the respondent company was not a sham, then the
capacity of the respondent company to make a contract could not be impugned
merely because the deceased was an agent of the respondent company in its
negotiation [of Mr Lee’s contract of service].”
CONCLUSION
This judgement is a very important with respect to U.K company law and Indian
Companies act as it lays the precedent that Company is separate legal entity and it
can enter into contract with its own member as both are separate legal entity.
Concept of separate legal entity was first introduced I Salmon vs Salmon co. ltd.
Separate legal entity is a double-sided sword as it can be used in bad faith also by
interested stake holder to hide behind corporate veil that it provides between the
company and its member.
 UNIT 5 COMPANY LAW

There has been case law where concept of separate legal entity has been refused
by court as in the case of Gilford Motor Co V Horne where court lifted the corporate
veil and treated the respondent and his company as one entity to assure the validity
of the contract that appellant had with respondent. Also, in case of insolvency the
concept of separate legal entity doesn’t apply and company and its member are
treated as one entity.
In opinion separate legal entity is important feature of companies act as it is separate
company’s identity with its member but it could also be used for fraud. Although our
legislation has formed and implemented many rules and regulation and judicial
system is vigilant so as to safeguard interest of the stakeholder.

SHORT NOTES
1. Take over and acquisition of minority interest. (Refer Page No. 570)
(June2014)
2. Duties of official liquidator. (June2017)

DUTIES OF LIQUIDATOR:
Followings are the duties of the official liquidator of a company:
1. Conduct Proceedings in Winding Up: The liquidator shall conduct the
proceedings in winding up the company and perform duties imposed by the
Tribunal.
2. Report: The official liquidator shall as soon as possible prepare a report of the
statement of affairs of the company. The report shall contain the particulars as
to
I. The amount of the capital issued, subscribed and paid up, and the
estimated amount of assets and liabilities.
II. If the company has failed as to the cause of failure; and
III. Whether, in his opinion, further enquiry is desirable as to any matter
relating to the promotion, formation, or failure of the company, or the
conduct of business thereof.
3. Custody of Company Property: Where a winding up order has been made or
where a liquidator has been appointed, shall take into his custody all the
property, effect and actionable claims to which the company is entitled. So
long as there is no liquidator, all the property of the company shall be in the
custody of Tribunal.
4. Meetings of Creditors and Contributories: The liquidator may summon general
meetings of the creditors or contributories whenever he thinks fit for the
purpose of ascertaining their wishes.
5. Directions from the Tribunal: The liquidator may apply to the Tribunal for
directions in relation to any particular matter arising in winding up. He shall
 UNIT 5 COMPANY LAW

also use his own discretion in the administration of the assets of the company
and in the distribution thereof among the creditors.
6. Proper Books: The liquidator shall keep proper books for making entries or
recording minutes of the proceedings at meetings and such other matters as
may be prescribed, any creditor or contributory may, subject to the control of
the Tribunal, inspect any such books personally or by his agent.
7. Audit of Accounts: The liquidator shall at such times as may be prescribed but
at least twice each year during his tenure of office, present to the Tribunal an
account of his receipts and payments as liquidator. The account shall be in
the prescribed form and shall be duly verified.
8. Appointment of Committee of Inspection: The Tribunal may at the time of
making an order for the winding up of a company or at any time thereafter,
direct that there shall be appointed a committee of inspection to act with the
liquidator.
Duties of Liquidator. —
The first and foremost duty of the liquidator on a winding up order or on his
appointment as a provisional liquidator is to take into his custody or under his
control all the property, effects, and actionable claims to which the company
is or appears to be entitled.
He may, for the purpose of taking into his custody, or under his control any property,
effects or actionable claims to which the company is or appears to be entitled, by
writing request the Chief Presidency Magistrate or the District Magistrate within
whose jurisdiction such property, effects or actionable claims or any books of
account or other documents of the company may be found to take possession
thereof, and the Chief Presidency Magistrate or the District Magistrate may
thereupon after notice take their possession and deliver them to the liquidator or the
provisional liquidator.
He shall conduct the proceedings in winding up the company and perform such
duties in reference thereto as the Tribunal may impose.
In the administration and distribution of assets of the company among its creditors,
the liquidator shall have regard to any direction which may be given by resolution of
the creditors or contributories at any general meeting or by the committee of
inspection. The liquidator may summon general meetings of the creditors or
contributories for the purpose of ascertaining their wishes. He shall also summon
such meetings at such times as the creditors or contributories may by resolution
direct or whenever requested in writing to do so by not less than one-tenth in value
of the creditors or contributories.
When a winding up order has been made it is the duty of the Official Liquidator to
submit to the Court a preliminary report within six months of the date of the winding
up order, giving the details required already discussed earlier.
It is his duty to keep proper books in which he shall cause entries or minutes to be
made of proceedings at meetings and of such other matters as may be prescribed.
It is his duty to submit to the Tribunal at suoh times as the Tribunal may direct but
not less than twice in each year an account of his receipts and payments made by
him as liquidator.

3. Write a note on preferential payment. (April2021)

 UNIT 5 COMPANY LAW

4. Compulsory winding up of a company. (June2014) (Dec2014) (June2015)

(April2021) see above Compulsory winding up by tribunal.