Contributories, Calls and the Conduct of a Winding Up

The proviso: where it appears that it would not be necessary to make calls on or adjust the rights of contributories, the Tribunal may dispense with settling a list at all. In a company whose shares are fully paid and whose assets exceed its debts, the list would serve no purpose.

Section 285(2). In settling the list the Tribunal shall distinguish between those who are contributories in their own right and those who are contributories as representatives of, or liable for the debts of, others.

That distinction matters because a representative, such as the legal representative of a deceased member, contributes out of the estate he represents and not out of his own pocket.

Who is liable, and how far: section 285(3)

The Tribunal shall include every person who is or has been a member, liable to contribute an amount sufficient for payment of the debts and liabilities, the costs, charges and expenses of winding up, and the adjustment of the rights of contributories among themselves, subject to five conditions.

• (a) a past member is not liable if he ceased to be a member for one year or more before the commencement of the winding up;
• (b) a past member is not liable in respect of any debt or liability contracted after he ceased to be a member;
• (c) no past member is liable unless it appears to the Tribunal that the present members are unable to satisfy the contributions required of them;
• (d) in a company limited by shares, no contribution is required from any present or past member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a member; and
• (e) in a company limited by guarantee, no contribution is required exceeding the amount he undertook to contribute in the event of winding up; but if such a company has a share capital, he is also liable to the extent of any sum unpaid on his shares as if the company were limited by shares.

Read (a), (b) and (c) together as the past member's three shields, and (d) and (e) as the ceiling that applies to everybody.

And note what clause (c) means in practice. The liquidator must exhaust the present members first. Only when their contributions are insufficient does the past members' list, called in older books the B list, come into play.

Directors with unlimited liability: section 286

In the case of a limited company, a person who is or has been a director or manager whose liability is unlimited under the Act shall, in addition to his liability to contribute as an ordinary member, be liable to make a further contribution as if he were, at the commencement of the winding up, a member of an unlimited company.

The three provisos mirror section 285(3).

• (a) he is not liable if he ceased to hold office for a year or upwards before the commencement of the winding up;
• (b) he is not liable in respect of a debt or liability contracted after he ceased to hold office; and
• (c) subject to the articles, he is not liable unless the Tribunal deems the contribution necessary to satisfy the company's debts and liabilities and the costs, charges and expenses of the winding up.

This is the counterpart of section 4(1)(d), under which a company may provide by its memorandum that the liability of its directors or manager is unlimited.

Payment and set-off: section 295

Section 295(1). The Tribunal may, at any time after the winding up order, order any contributory on the list to pay any money due to the company from him or from the estate of the person he represents, exclusive of any money payable by virtue of a call.

Section 295(2): who gets a set-off. In making that order the Tribunal may:

• (a) in the case of an unlimited company, allow the contributory a set-off of any money due to him or to the estate he represents from the company on any independent dealing or contract, but not money due to him as a member in respect of any dividend or profit; and
• (b) in the case of a limited company, allow such a set-off to a director or manager whose liability is unlimited, or to his estate.

So an ordinary member of a limited company gets no set-off, and that is deliberate: his unpaid capital is the creditors' fund, and letting him deduct his own claim would prefer him to them.

Section 295(3): the exception. In any company, limited or unlimited, when all the creditors have been paid in full, any money due on any account whatever to a contributory from the company may be allowed to him by way of set-off against any subsequent call. Once the creditors are paid there is nobody left to prefer.

Calls: section 296

The Tribunal may, at any time after the winding up order and either before or after ascertaining the sufficiency of the assets:

• (a) make calls on all or any of the contributories on the list, to the extent of their liability, for payment of money it considers necessary to satisfy the debts and liabilities, the costs, charges and expenses of winding up, and the adjustment of the rights of contributories among themselves; and
• (b) make an order for payment of the calls so made.

Note the words "either before or after it has ascertained the sufficiency of the assets". The Tribunal need not wait until the realisation is complete.

Adjustment and costs: sections 297 and 298

Section 297. The Tribunal shall adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it.

Section 298. Where the assets are insufficient to satisfy the liabilities, the Tribunal may order payment out of the assets of the costs, charges and expenses incurred in the winding up, in such order of priority among themselves as it thinks just and proper.

Compare section 327, which fixes the preferential payments, and section 326, the workmen's dues. Section 298 is only about the expenses of the winding up itself.

Summoning those who hold the company's property: section 299

Section 299(1). At any time after the appointment of a provisional liquidator or the winding up order, the Tribunal may summon before it:

• any officer of the company;
• any person known or suspected to have in his possession any property, books or papers of the company;
• any person known or suspected to be indebted to the company; or
• any person the Tribunal thinks capable of giving information concerning the promotion, formation, trade, dealings, property, books or papers, or affairs of the company.

Section 299(2). The Tribunal may examine him on oath, by word of mouth, on written interrogatories or on affidavit, and in the first case may reduce his answers to writing and require him to sign them.

Section 299(3): the lien. The Tribunal may require production of books and papers in his custody or power; but where he claims a lien, the production is without prejudice to the lien, and the Tribunal has power to determine all questions relating to it.

Section 299(4). The Tribunal may direct the liquidator to file a report on debts or property of the company in the possession of other persons.

Section 299(5): the orders. If the Tribunal finds that a person is indebted, it may order him to pay the liquidator at such time and in such manner as it thinks just, in whole or in part, with or without the costs of the examination; and if it finds him in possession of property belonging to the company, it may order him to deliver it on such terms as it thinks just.

Section 299(6), (7) and (8). Failure to appear without reasonable cause may attract an appropriate cost; orders under sub-section (5) are executed as decrees for the payment of money or delivery of property under the Code of Civil Procedure, 1908; and a person making payment or delivery under such an order is, unless the order directs otherwise, discharged from all liability in respect of that debt or property.

Examination on a report of fraud: section 300

Section 300(1). Where a winding up order has been made and the Company Liquidator has reported that in his opinion a fraud has been committed by any person in the promotion, formation, business or conduct of affairs of the company since its formation, the Tribunal may, after considering the report, direct that person or officer to attend on a day appointed and be examined as to the promotion or formation or the conduct of the business, or as to his conduct and dealings as an officer.

Section 300(2) and (3). The Company Liquidator shall take part in the examination and may, if specially authorised, employ legal assistance sanctioned by the Tribunal; and the person shall be examined on oath and shall answer all questions the Tribunal puts or allows.

Section 300(4): the safeguards for the person examined. He shall, before his examination, be furnished at his own cost with a copy of the liquidator's report; and he may at his own cost employ chartered accountants, company secretaries, cost accountants or legal practitioners entitled to appear before the Tribunal under section 432, who may put such questions as the Tribunal considers just to enable him to explain or qualify any answers he has given.

Section 300(5) and (6): exculpation. If he applies to be exculpated from any charges made or suggested against him, it is the duty of the Company Liquidator to appear and call the Tribunal's attention to any relevant matters; and if the Tribunal allows the application, it may order payment to him of such costs as it thinks fit.

Section 300(7). Notes of the examination shall be taken down in writing, read over to or by and signed by the person examined, a copy supplied to him, and may thereafter be used in evidence against him; and they are open to inspection by any creditor or contributory at all reasonable times.

Section 300(8), (9) and (10). The examination may be adjourned; it may be held before any person or authority the Tribunal authorises; and that person may exercise the Tribunal's powers as to the conduct of the examination but not as to costs.

Arrest of an absconder: section 301

At any time before or after the winding up order, if the Tribunal is satisfied that a contributory, or a person having property, accounts or papers of the company in his possession, is about to leave India or otherwise to abscond, or is about to remove or conceal any of his property, for the purpose of evading payment of calls or avoiding examination respecting the affairs of the company, the Tribunal may cause:

• (a) the contributory to be detained until such time as the Tribunal may order; and
• (b) his books and papers and movable property to be seized and safely kept until such time as the Tribunal may order.

Note the two limbs of purpose. Evading calls, or avoiding examination. And note that the power exists before the winding up order as well.

Dissolution: section 302

Section 302(1). When the affairs have been completely wound up, the Company Liquidator shall apply to the Tribunal for dissolution.

Section 302(2). The Tribunal shall, on that application, or when it is of opinion that it is just and reasonable in the circumstances that an order for dissolution should be made, order that the company be dissolved from the date of the order, and it shall be dissolved accordingly.

Section 302(3). The Tribunal shall, within thirty days from the date of the order, forward a copy to the Registrar, who shall record a minute of the dissolution in the register relating to the company, and direct the Company Liquidator to forward a copy to the Registrar, who shall likewise record it.

Note that the Tribunal may dissolve on its own opinion, and not only on the liquidator's application.

Section 303

Nothing in this Chapter affects the operation or enforcement of any order made by any Court in winding up proceedings immediately before the commencement of this Act, and an appeal against such an order shall be filed before the authority competent to hear such appeals before the commencement.

A worked example

Panvel Rolling Mills Limited, a company limited by shares, is wound up. Its debts exceed its assets by two crore rupees.

The list. The Tribunal settles a list of contributories, rectifies the register of members where required, and applies the assets to the liabilities: section 285(1). It distinguishes those liable in their own right from those liable as representatives, so the son who holds his late father's shares as legal representative is listed as such.

A fully paid member. Mr Naik holds fully paid shares. By the Explanation to section 2(26) he is a contributory and keeps a contributory's rights, but has no liabilities as one, and by section 285(3)(d) nothing can be required of him beyond the unpaid amount, which is nil.

A partly paid member. Mrs Shaikh holds one thousand shares of one hundred rupees each, sixty rupees paid. Her maximum contribution is forty rupees a share, that is forty thousand rupees, and no more, whatever the deficiency: section 285(3)(d). The Tribunal may make a call on her to that extent and order payment: section 296.

A past member. Mr Kulkarni sold the same kind of holding eight months before the commencement of the winding up. He is within the year, so clause (a) does not save him; but he is liable only for debts contracted while he was a member (clause (b)), and only if the present members cannot satisfy their contributions (clause (c)), and only up to the amount unpaid on his shares (clause (d)).

Had he sold fourteen months before, clause (a) would have taken him out altogether.

A company limited by guarantee. Suppose instead the company were limited by guarantee, each member having undertaken to contribute five thousand rupees. No more than that may be required of him; but if it also has a share capital, he is liable in addition to the extent of any sum unpaid on his shares as if the company were limited by shares: section 285(3)(e).

A director with unlimited liability. The memorandum makes the liability of the managing director unlimited. He must contribute as an ordinary member and, in addition, as if he were a member of an unlimited company at the commencement of the winding up, unless he ceased to hold office a year or more before it, or the debt was contracted after he ceased to hold office, or the Tribunal does not deem the further contribution necessary to satisfy the debts and the costs of the winding up: section 286.

Set-off. Mrs Shaikh says the company owes her thirty thousand rupees for goods she supplied, and asks to set it off against the call. The company being limited, she gets no set-off under section 295(2); only an unlimited company's contributory, or a director or manager of a limited company whose liability is unlimited, may set off an independent dealing. But if, later, all the creditors are paid in full, she may set off what is due to her against any subsequent call: section 295(3).

Property in other hands. The liquidator suspects a former storekeeper holds the company's machinery and a customer owes it money. The Tribunal may summon both, and any person capable of giving information about the company's promotion, trade, dealings, property, books or affairs, and examine them on oath, requiring production of books and papers; where the storekeeper claims a lien on the books, production is without prejudice to the lien, which the Tribunal itself determines. Finding the customer indebted, it may order him to pay the liquidator; finding the storekeeper in possession, it may order delivery. Those orders are executed as decrees under the Code of Civil Procedure, 1908, and a person who pays or delivers under them is discharged from all liability in respect of that debt or property: section 299.

Fraud. The liquidator reports that in his opinion the promoters committed a fraud in the formation of the company. The Tribunal may direct them to attend and be examined on oath about the promotion and the conduct of the business. Each is furnished with a copy of the report at his own cost before the examination, and may at his own cost employ a chartered accountant, company secretary, cost accountant or legal practitioner entitled to appear under section 432 to put questions enabling him to explain or qualify his answers. If one applies to be exculpated, the liquidator must appear and place the relevant matters before the Tribunal, and if the application is allowed the Tribunal may order his costs. The notes are signed by him, copied to him, usable in evidence against him, and open to inspection by any creditor or contributory: section 300.

An absconder. One promoter books a flight out of India and begins moving his furniture. The Tribunal, satisfied that he is about to leave India or remove his property to evade calls or avoid examination, may detain him and seize and safely keep his books, papers and movable property until it orders otherwise: section 301.

The end. When the affairs are completely wound up, the liquidator applies for dissolution; the Tribunal orders that the company be dissolved from the date of the order, and within thirty days forwards a copy to the Registrar and directs the liquidator to do the same, the Registrar recording a minute of the dissolution: section 302.

And the costs. The assets being insufficient, the Tribunal orders payment out of the assets of the costs, charges and expenses of the winding up, in such order of priority among themselves as it thinks just and proper: section 298. What surplus there is, if any, is distributed after the Tribunal adjusts the rights of the contributories among themselves: section 297.

Distinctions that carry marks

What this does NOT mean

It does not mean a fully paid shareholder must contribute. By the Explanation to section 2(26) he is a contributory with a contributory's rights but no liabilities, and section 285(3)(d) caps the contribution at the unpaid amount.

It does not mean a past member is safe merely because he sold his shares. He escapes only if he ceased to be a member a year or more before the commencement, or the debt was contracted after he left, or the present members can pay.

It does not mean every contributory may set off what the company owes him. In a limited company only a director or manager with unlimited liability may, until all creditors are paid in full.

It does not mean the Tribunal must wait for the realisation before making calls. It may make them before or after ascertaining the sufficiency of the assets.

It does not mean a person examined under section 300 is defenceless. He gets the report in advance, may employ professionals to put questions, may apply to be exculpated with costs, and the notes are read to him and signed by him.

It does not mean dissolution needs the liquidator's application. The Tribunal may order it where it is of opinion that it is just and reasonable in the circumstances.

Quick revision

• 285: the Tribunal settles the list of contributories, rectifies the register and applies the assets, and may dispense with the list where no calls or adjustment are needed; it distinguishes those liable in their own right from representatives; and every present or past member contributes enough for the debts, the costs of winding up and the adjustment of rights, subject to: (a) a past member who left a year or more before commencement is not liable; (b) he is not liable for debts contracted after he left; (c) he is liable only if the present members cannot pay; (d) in a company limited by shares, nothing beyond the unpaid amount on his shares; (e) in a company limited by guarantee, nothing beyond the guaranteed sum, plus any unpaid amount on shares if it has a share capital.
• 286: a director or manager whose liability is unlimited contributes further as if a member of an unlimited company, unless he left office a year or more before commencement, the debt was contracted after he left, or the Tribunal does not deem it necessary.
• 295: the Tribunal may order a contributory to pay money due to the company apart from calls; set-off is allowed to a contributory of an unlimited company on an independent dealing but not for dividend or profit, and to a director or manager of a limited company with unlimited liability; and in any company, once all creditors are paid in full, money due to a contributory may be set off against a subsequent call.
• 296: the Tribunal may, before or after ascertaining the sufficiency of the assets, make calls to the extent of the contributories' liability and order payment.
• 297 and 298: the Tribunal adjusts the rights of contributories and distributes any surplus; and where the assets are insufficient it may order the costs, charges and expenses of the winding up to be paid out of the assets in such order of priority as it thinks just and proper.
• 299: power to summon officers, persons holding the company's property, books or papers, persons indebted, and persons able to give information; examination on oath by word of mouth, interrogatories or affidavit; production of books without prejudice to a lien, the Tribunal deciding lien questions; orders to pay or deliver, executed as decrees under the Code of Civil Procedure, 1908; costs for non-appearance; and discharge from liability for one who pays or delivers under the order.
• 300: on the liquidator's report of fraud in the promotion, formation, business or conduct of the affairs, the Tribunal may direct examination on oath; the liquidator takes part, with sanctioned legal assistance; the person gets the report in advance at his own cost and may employ professionals entitled to appear under section 432 to put clarifying questions; he may seek exculpation, on which the liquidator must appear, and may be awarded costs; the notes are signed, copied to him, usable in evidence and open to creditors and contributories; the examination may be adjourned or held before an authorised person, who has the Tribunal's powers as to conduct but not costs.
• 301: the Tribunal may detain a contributory and seize his books, papers and movable property where he is about to leave India, abscond, or remove or conceal property to evade calls or avoid examination, before or after the winding up order.
• 302: on the affairs being completely wound up, the liquidator applies for dissolution; the Tribunal orders dissolution from the date of the order, on that application or on its own opinion that it is just and reasonable; and within thirty days it forwards a copy to the Registrar and directs the liquidator to do so, the Registrar recording a minute of the dissolution.
• 303: the Chapter does not affect orders made by any Court before the commencement of the Act, appeals against which lie to the authority competent before the commencement.

Test yourself

1. Who is included in the list of contributories, and subject to what conditions? Every person who is or has been a member, liable to contribute enough for the debts and liabilities, the costs, charges and expenses of winding up, and the adjustment of the rights of contributories among themselves, subject to: no liability for a person who ceased to be a member one year or more before the commencement; none for debts contracted after he ceased to be a member; none unless the present members are unable to satisfy their contributions; a ceiling of the amount unpaid on his shares in a company limited by shares; and a ceiling of the amount undertaken in a company limited by guarantee, with any unpaid amount on shares in addition where it has a share capital: section 285(3).

2. When may a contributory set off what the company owes him? In an unlimited company, against money due on an independent dealing or contract, but not money due to him as a member by way of dividend or profit; in a limited company, only where he is a director or manager whose liability is unlimited; and in any company, after all creditors have been paid in full, any money due to him against a subsequent call: section 295.

3. When may the Tribunal make calls? At any time after the passing of the winding up order, and either before or after it has ascertained the sufficiency of the assets, on all or any of the contributories to the extent of their liability, for what it considers necessary to satisfy the debts and liabilities, the costs of winding up, and the adjustment of the rights of contributories: section 296.

4. Whom may the Tribunal summon under section 299? Any officer of the company; any person known or suspected to have in his possession any property, books or papers of the company; any person known or suspected to be indebted to the company; and any person the Tribunal thinks capable of giving information concerning the promotion, formation, trade, dealings, property, books or papers, or affairs of the company.

5. What protection has a person examined under section 300? He must be furnished with a copy of the Company Liquidator's report before his examination, at his own cost; he may at his own cost employ chartered accountants, company secretaries, cost accountants or legal practitioners entitled to appear under section 432 to put questions enabling him to explain or qualify his answers; he may apply to be exculpated, on which the liquidator must appear and place the relevant matters before the Tribunal, and if allowed he may be awarded costs; and the notes are read over to and signed by him and copied to him.

6. When may a contributory be detained? Where the Tribunal is satisfied, before or after the winding up order, that a contributory, or a person having the company's property, accounts or papers, is about to leave India or otherwise abscond, or to remove or conceal his property, for the purpose of evading payment of calls or avoiding examination respecting the affairs of the company; his books, papers and movable property may also be seized and safely kept: section 301.