Winding Up of Unregistered Companies

Two features of that definition decide most questions.

The list is wide. A partnership firm, a limited liability partnership, a society, a co-operative society, an association and a company are all within it.

And the number is counted at the date of the petition. More than seven members at the time the petition is presented, not when the body was formed and not when the debt was incurred.

The three grounds: section 375(1) to (3)

Section 375(1). Any unregistered company may be wound up under this Act in such manner as may be prescribed, and all the provisions of this Act with respect to winding up shall apply, with the exceptions and additions in sub-sections (2) to (4).

Section 375(2): the prohibition. No unregistered company shall be wound up under this Act voluntarily.

The reason is structural. A voluntary winding up is a members' decision taken through the machinery of the company's own constitution, and an unregistered body has none the Act recognises. Since 2016 there is in any case no voluntary winding up left in the Companies Act at all.

Section 375(3): the grounds. An unregistered company may be wound up:

• (a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
• (b) if the company is unable to pay its debts; or
• (c) if the Tribunal is of opinion that it is just and equitable that it should be wound up.

Compare section 271. For a registered company there are five grounds and inability to pay debts is not among them. For an unregistered company there are three, and inability to pay debts is one. That contrast is the sharpest point in this chapter.

When it is deemed unable to pay its debts: section 375(4)

An unregistered company shall be deemed unable to pay its debts:

• (a) where a creditor, by assignment or otherwise, to whom it is indebted in a sum exceeding one lakh rupees then due, has served a demand under his hand requiring payment, by leaving it at the principal place of business, or delivering it to the secretary, or some director, manager or principal officer, or otherwise as the Tribunal approves or directs, and the company has, for three weeks after service, neglected to pay the sum or to secure or compound for it to the creditor's satisfaction;
• (b) where a suit or other legal proceeding has been instituted against any member for a debt or demand due, or claimed to be due, from the company or from him in his character as a member, and, notice in writing of the institution having been served on the company in the same ways, the company has not within ten days after service: (i) paid, secured or compounded for the debt or demand; (ii) procured the suit or proceeding to be stayed; or (iii) indemnified the defendant to his satisfaction against the suit and against all costs, damages and expenses;
• (c) where execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor against the company, or any member as such, or any person authorised to be sued as nominal defendant on its behalf, is returned unsatisfied in whole or in part; or
• (d) where it is otherwise proved to the satisfaction of the Tribunal that the company is unable to pay its debts.

Four routes, and the numbers matter. Clause (a): more than one lakh rupees, three weeks. Clause (b): ten days. Clause (c) needs no demand at all, only a return of execution unsatisfied. Clause (d) is the residual proof.

And note clause (b)'s subject. It looks at a suit against a member, which is how creditors of an unincorporated body usually sue, since there is no separate person to sue.

Dissolved foreign bodies: section 376

Where a body corporate incorporated outside India which has been carrying on business in India ceases to carry on business in India, it may be wound up as an unregistered company under this Part, notwithstanding that the body corporate has been dissolved or otherwise ceased to exist as such under or by virtue of the laws of the country under which it was incorporated.

Three conditions: the body was incorporated outside India; it has been carrying on business in India; and it has ceased to carry on business in India.

And the point of the section is in the last clause. Dissolution abroad is no answer. For the purposes of a winding up here, the body may still be wound up as an unregistered company.

The Part is additional: section 377

Section 377(1). The provisions of this Part are in addition to and not in derogation of the provisions of the Act relating to winding up of companies by the Tribunal.

Section 377(2). The Tribunal or the Official Liquidator may exercise any powers or do any act in the case of unregistered companies which might be exercised or done in winding up a company formed and registered under this Act.

The proviso, which is the key to the whole Part: an unregistered company shall not, except in the event of its being wound up, be deemed to be a company under this Act, and then only to the extent provided by this Part.

So the status is temporary and partial. Winding up a partnership firm as an unregistered company does not make it a company for any other purpose, and does not give its members limited liability.

Other enactments preserved: section 378

Nothing in this Part affects the operation of any enactment providing for a partnership firm, limited liability partnership, society, co-operative society, association or company being wound up, or being wound up as a company or as an unregistered company, under the Companies Act, 1956 or any Act repealed by it. Proviso: references in such an enactment to a provision of the Companies Act, 1956 or of a repealed Act are to be read as references to the corresponding provision, if any, of this Act.

A worked example

Ratnagiri Traders, a partnership firm of eleven partners, has stopped trading and owes four lakh rupees to a supplier and eighteen lakh to a bank.

Is it an unregistered company? Yes. By the Explanation to section 375 the expression includes a partnership firm consisting of more than seven members at the time the petition is presented, and eleven exceeds seven. It is not a railway company, not registered under the Act, and not registered under any previous companies law.

On what grounds? It has ceased to carry on business, so clause (a) of section 375(3) is answered; it is unable to pay its debts, so clause (b); and, the partners being in deadlock, the Tribunal might also think it just and equitable under clause (c).

Proving inability to pay. The supplier, owed four lakh rupees then due, which exceeds one lakh, serves a demand under his hand at the firm's principal place of business requiring payment. The firm does nothing for three weeks. It is deemed unable to pay its debts under section 375(4)(a).

A second route. The bank has instead sued one of the partners for the debt, and served written notice of the suit on the firm at its principal place of business. The firm has ten days to pay, secure or compound the debt, procure the suit to be stayed, or indemnify the defendant against the suit and all costs, damages and expenses. Doing none of those, it is deemed unable to pay under clause (b).

A third. A decree obtained earlier was put into execution and the warrant was returned unsatisfied in part. That alone satisfies clause (c), with no demand and no waiting period.

What cannot be done. The partners cannot resolve to wind the firm up voluntarily under the Act: section 375(2) forbids it, and in any case the Companies Act no longer contains a voluntary winding up.

Which machinery applies. All the winding up provisions of the Act apply, with the exceptions and additions in section 375; and the Tribunal and the Official Liquidator may exercise the same powers as in winding up a registered company: section 377(2). So the list of contributories, the priority of workmen's dues, the avoidance of preferences and the summoning powers are all available.

What does not follow. The firm does not become a company for any other purpose. The proviso to section 377(2) is express: it is deemed a company only in the event of its being wound up, and then only to the extent provided by this Part. Its partners' liability under the Indian Partnership Act, 1932 is untouched.

A foreign body. Muscat Marine LLC, incorporated in a foreign country, carried on business in Mumbai for six years, closed its Indian office, and was then dissolved under the law of its own country, leaving Indian creditors unpaid. Under section 376 it may still be wound up in India as an unregistered company, notwithstanding that it has been dissolved or ceased to exist under the law of its incorporation, because it was incorporated outside India, carried on business in India, and has ceased to do so.

A small firm. Had Ratnagiri Traders consisted of six partners at the date of the petition, it would not be an unregistered company at all, and the creditors would be left to their ordinary remedies against the firm and the partners.

Distinctions that carry marks

What this does NOT mean

It does not mean an unregistered company becomes a company. The proviso to section 377(2) deems it one only in the event of its being wound up, and then only to the extent provided by this Part.

It does not mean any partnership can be wound up under the Act. It must consist of more than seven members at the time the petition is presented.

It does not mean the members can wind it up themselves. Section 375(2) forbids a voluntary winding up of an unregistered company.

It does not mean a demand is always needed. Clause (c) is satisfied by an execution returned unsatisfied, and clause (d) by any other proof to the Tribunal's satisfaction.

It does not mean dissolution abroad protects a foreign body. Section 376 allows a winding up here notwithstanding that it has been dissolved or ceased to exist under the law of its incorporation.

It does not mean this Part replaces the rest of the Act. It is in addition to and not in derogation of the provisions on winding up by the Tribunal.

Quick revision

• 375(1) and (2): an unregistered company may be wound up under this Act in the prescribed manner, all the winding up provisions applying with the exceptions and additions in sub-sections (2) to (4); and it shall not be wound up voluntarily.
• 375(3), three grounds: the company is dissolved, has ceased to carry on business, or is carrying on business only to wind up its affairs; it is unable to pay its debts; or the Tribunal thinks it just and equitable.
• 375(4), deemed inability: a creditor's demand for a sum exceeding one lakh rupees then due, served at the principal place of business or on the secretary, a director, manager or principal officer, neglected for three weeks; a suit against a member with written notice to the company, not answered within ten days by payment, security, composition, a stay, or an indemnity to the defendant against the suit and all costs, damages and expenses; execution returned unsatisfied on a decree against the company, a member as such, or a nominal defendant; or any other proof to the Tribunal's satisfaction.
• Explanation: the expression excludes railway companies incorporated by an Act of Parliament, companies registered under this Act, and companies registered under a previous companies law save those whose registered office was in Burma, Aden or Pakistan before separation; and includes any partnership firm, limited liability partnership, society, co-operative society, association or company of more than seven members at the time the petition is presented.
• 376: a body corporate incorporated outside India which carried on business in India and has ceased to do so may be wound up as an unregistered company notwithstanding its dissolution or ceasing to exist under the law of its incorporation.
• 377: the Part is in addition to and not in derogation of the winding up provisions; the Tribunal and Official Liquidator have the same powers as in a registered company's winding up; but an unregistered company is not deemed a company except in the event of its being wound up, and then only to the extent provided by this Part.
• 378: enactments providing for such bodies to be wound up under the Companies Act, 1956 or an Act repealed by it are unaffected, references being read as references to the corresponding provision of this Act.

Test yourself

1. What is an unregistered company? By the Explanation to section 375 it excludes a railway company incorporated by an Act of Parliament, a company registered under this Act, and a company registered under any previous companies law other than one whose registered office was in Burma, Aden or Pakistan before separation; and otherwise includes any partnership firm, limited liability partnership, society, co-operative society, association or company consisting of more than seven members at the time the winding up petition is presented.

2. On what grounds may it be wound up? That it is dissolved, has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs; that it is unable to pay its debts; or that the Tribunal is of opinion that it is just and equitable that it should be wound up: section 375(3).

3. When is it deemed unable to pay its debts on a creditor's demand? Where a creditor to whom it is indebted in a sum exceeding one lakh rupees then due serves a demand under his hand at the principal place of business, or on the secretary, a director, manager or principal officer, or as the Tribunal approves, and the company for three weeks after service neglects to pay the sum or to secure or compound for it to the creditor's satisfaction: section 375(4)(a).

4. What must the company do when a member is sued? Within ten days after service of written notice of the institution of the suit, it must pay, secure or compound for the debt or demand, procure the suit or other legal proceeding to be stayed, or indemnify the defendant to his satisfaction against the suit and against all costs, damages and expenses he will incur; otherwise it is deemed unable to pay its debts: section 375(4)(b).

5. Can a foreign company dissolved abroad be wound up in India? Yes. Where a body corporate incorporated outside India which has been carrying on business in India ceases to carry on business in India, it may be wound up as an unregistered company notwithstanding that it has been dissolved or otherwise ceased to exist under the laws of the country of its incorporation: section 376.

6. Does winding up an unregistered company make it a company? No. By the proviso to section 377(2) an unregistered company is not deemed to be a company under this Act except in the event of its being wound up, and then only to the extent provided by this Part.