Just and Equitable Grounds for Winding Up by Snigdha Mohapatra at LexCliq

Section 271(e) of the Companies Act provides that The Tribunal may also order for the winding up of a company if it is of the opinion that it is just and equitable that the company should be wound up. This is a separate and independent ground for a winding-up order. The relief based on the just and equitable clause is in the nature of the last resort when the other remedies are not efficacious enough to protect the general interests of the company. The winding-up must be just and equitable not only to the persons applying but also to the company and to all its shareholders. Few examples of ‘just and equitable’ ground on the basis of which the Tribunal may order the winding up are given below:

  1. Disappearance of substratum – A company’s substratum is the purpose or group of purposes which it was formed to achieve (in other words, its main objects). If the company has abandoned all of its main objects and not merely some of them, or if it cannot achieve any of its main objects, its substratum is gone, and it will be wound up. In re, Kaithal and General Mills Co. Ltd. the Court laid down the following tests to determine as to whether the substratum of the company has disappeared :
    (a) where the subject matter of the company has gone; or
    (b) the object for which it was incorporated has substantially failed; or
    (c) it is impossible to carry on the business of the company except at a loss which
    means that there is no reasonable hope that the object of trading at a profit
    can be attained; or
    (d) the existing or probable assets are insufficient to meet the existing liabilities.
  2. Illegality of Objects and Fraud – If any of a company’s objects are illegal, or apparently, if they become illegal by a change in the law, the Tribunal will order the company to be wound up on the ground that it is just and equitable to do so. Similarly, if a company is promoted in order to perpetrate a serious fraud or deception on the persons who are invited to subscribe for its shares, the Tribunal will wind it up. Thus, a winding up order can be made when the company’s prospectus
    stated that it had agreed to purchase the business of an existing firm, together with the right to use the firm’s name, for a very substantial sum, and subscribers for the company’s shares were intentionally misled by the name and the amount of the purchase price into thinking that the firm was a different and reputable concern, whose business name the vendor firm had, in fact, successfully but illegally imitated for a number of years. Again, a winding up order can be made against a company whose promoters sold a business to them at a gross overvalue, and when the
    deception was discovered, bought up at a very low price most of the shares subscribed for by the public, so as to prevent the company from suing them for their misfeasance, and so as to wind the company up voluntarily and distribute its assets among themselves.
  3. Deadlock in management – If it becomes impossible to manage a company’s affairs because the voting power at board and general meetings is divided between two dissenting groups, the court (now Tribunal) will resolve the deadlock by making a winding up order. The most obvious kind of deadlock is where the company has two directors who are its only shareholders and who hold an equal number of voting shares, if they disagree on major questions in respect of the management of the company, their disagreement cannot be resolved at a board meeting or by a general
    meeting, and management decisions will cease to be made. In this situation the Tribunal will make a winding up order, even though there is a provision in the company’s articles that one director shall have a casting vote at board meetings, or that disputes shall be settled by arbitration.
  4. When the company is a ‘bubble’ i.e. it never had any real business – This was held as valid ground for Winding up in Re London and County Coal Co. Such companies are commonly called as ‘fly-by-night’ companies.
  5. Oppression – A winding up order will be made if the persons who control the company have been
    guilty of oppression toward the minority shareholders, whether in their capacity of shareholders or in some other capacity (e.g., as director). In R. Sabapathy Rao v. Sabapathy Press Ltd. it was held a winding up petition may lie where the principal shareholders have adopted an aggressive or oppressive policy towards the minority.
  6. Grounds Analogous to Dissolution of Partnerships – If the company is a private one and its share capital is held wholly or mainly by its directors, it is in substance a partnership in corporate form, and the Tribunal may will order its winding up in the same situations as it would order the dissolution of a partnership on the ground that it is just and equitable to do so.
  7. Requirements for investigation – Where directors are making allegations of dishonesty against each other in respect of defalcations of the funds of the company, the company maybe ordered to be wound up on the ground that it was a case in which the conduct of some of the officers of the company required an investigation which could only be obtained in a winding up by the Tribunal. This was laid down in Re Varieties Ltd. case.
  8. Broad democratic legal principles of fairness – In considering a petition on just and
    equitable ground, the Tribunal will have regard to broad democratic
    legal principles/
  9. Company lacking in commercial morality or incapable of maintaining or producing
    relevant records –  This was held in the case In Howrah Mills Co. Ltd. and Jardine Henderson Ltd., In re wherein it was held this may be a valid ground for winding up for being just and equitable.

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