BLS LLB 5 Years Sem 7 Company Law 2024-25 - ATKT 60/40 Question Paper with Solutions

The concept no longer exists in Indian company law, and that is the answer.

Under the Sick Industrial Companies (Special Provisions) Act, 1985, a "sick industrial company" was an industrial company registered for not less than five years which had at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Such a company was referred to the Board for Industrial and Financial Reconstruction for a scheme of revival or for winding up.

The SICA, 1985 was repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, brought into force on 1 December 2016, and the BIFR and the Appellate Authority were dissolved. Chapter XIX of the Companies Act, 2013, sections 253 to 269, which was to have provided a revival and rehabilitation regime for a "sick company", was omitted by the Eleventh Schedule to the Insolvency and Bankruptcy Code, 2016 and was never brought into force.

Section 2(70) of the Companies Act, 2013 defines a prospectus as any document described or issued as a prospectus, and includes a red herring prospectus under section 32, a shelf prospectus under section 31, and any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

Its essence is the invitation to the public: a document is a prospectus because of what it does, not because of what it is called.

Under section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014, a private company must appoint an internal auditor if, during the preceding financial year, it had:

1. A turnover of two hundred crore rupees or more; or
2. Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees at any point of time.

Under section 272(1) of the Companies Act, 2013, a petition for winding up by the Tribunal may be presented by:

1. The company itself;
2. Any contributory or contributories;
3. The Registrar;
4. Any person authorised by the Central Government in that behalf; and
5. The Central Government or a State Government, in a case falling under section 271(b), that is, where the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality.

Section 2(31) of the Companies Act, 2013 defines a deposit as including any receipt of money by way of deposit or loan or in any other form by a company, but as not including such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

The definition is therefore inclusive and residual: every receipt of money by a company is a deposit unless the Rules take it out.

For full marks, cover: both doctrines with their cases, the table of differences, the relationship between them, and the exceptions to indoor management.

1. Doctrine of constructive notice

The memorandum and articles of a company are, on registration, public documents open to inspection by any person under section 399 of the Companies Act, 2013. Every person dealing with the company is therefore deemed to have read them and to have understood their contents properly, whether or not he actually did.

The consequence is that he deals at his peril with a transaction which those documents forbid or which they permit only on conditions apparent on their face. He cannot plead ignorance of the registered documents.

The facts of Turquand. The company's deed of settlement provided that the directors might borrow such sums as should from time to time be authorised by a resolution passed at a general meeting. The directors gave a bond to the bank without any such resolution. The company was held liable: the bank, on reading the deed, would have found that the directors could borrow if authorised, and was entitled to assume that the necessary resolution had been passed, that being a matter no outsider could verify.

Dewan Singh v. Minerva Films Ltd. AIR 1959 Punj 106 applies it in India: an irregularity in the appointment of directors did not affect an outsider dealing with them in good faith.

3. The differences

Constructive notice, standing alone, would be intolerable. It would mean that an outsider must satisfy himself not only that the articles permit the act, but that every internal condition has actually been complied with, that the resolution was in fact passed, the meeting in fact held, the consent in fact given. He has no means of doing so, because the minute books and the register of resolutions are not open to him.

The two together therefore draw a workable line: the outsider is bound by what is public and open to him, and protected as to what is internal and closed to him.

5. The exceptions to indoor management

1. Knowledge of the irregularity. A person who actually knows cannot rely on the rule. Howard v. Patent Ivory Manufacturing Co. (1888) 38 Ch D 156: directors could borrow up to £1,000 without the consent of a general meeting and beyond that with consent; they issued debentures to themselves for £3,500 without consent, and being directors they knew, so the debentures were good only to £1,000;

Conclusion. Constructive notice and indoor management are two halves of one rule about how much an outsider must find out before he deals with a company. Because the memorandum and articles are registered under section 399 he is deemed to have read them, and is bound by what they say; because everything else happens behind closed doors he is entitled by Royal British Bank v. Turquand to assume it was regularly done. The line between them is public against internal, and the six exceptions to indoor management mark the cases where the outsider cannot honestly say he relied on that assumption.

The exemptions

A private company enjoys a long list of exemptions under the notification issued under section 462, and naming a few shows why the classification matters in practice. Subject to the company not having defaulted in filing its financial statements or annual returns, the following apply with modifications or not at all: section 43 on kinds of share capital and section 47 on voting rights, where the memorandum or articles may provide otherwise; section 62(1)(a) and (2) on rights issues, where the notice period may be shortened with the consent of ninety per cent of members; section 62(1)(b), where an ordinary resolution suffices for employee stock options; section 73(2) on deposits from members, relaxed for a company accepting deposits up to prescribed limits; sections 101 to 107 and 109 on notice, explanatory statement, quorum, chairman, proxies, restriction on voting rights, voting by show of hands and demand for poll, all of which apply only if the articles do not otherwise provide; section 141(3)(g) on the twenty-company audit ceiling; sections 160 and 162 on the deposit for a director's candidature and on the appointment of directors by a single resolution; section 180, which does not apply at all, so the Board may borrow beyond the limits without a special resolution; section 184(2) and section 188, under which an interested director may participate after disclosing his interest and a related party member may vote; section 185 on loans to directors, relaxed subject to conditions; and section 196(4) and (5) on the appointment of a managing director.

For full marks, cover: the definition, who may file one, the one-year validity, the information memorandum with its refund rule, and the contrast with the other three prospectuses.

Section 31(1) provides that any class or classes of companies as the Securities and Exchange Board may provide by regulations may file with the Registrar, at the stage of the first offer of securities, a shelf prospectus indicating a period not exceeding one year as the period of validity of that prospectus from the date of opening of the first offer.

The explanation defines it as a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

The effect: in respect of a second or subsequent offer made during the period of validity, no further prospectus is required.

Conclusion. A shelf prospectus under section 31 lets a company that raises money more than once file a single prospectus valid for up to one year from the opening of the first offer, instead of a fresh one each time. The information memorandum is what keeps the disclosure current: it must be filed before every subsequent offer, stating new charges, changes in the financial position and other prescribed changes, and where it is filed with the shelf prospectus the two are together deemed to be a prospectus. An applicant whose circumstances change may withdraw and have his money back within fifteen days.

4. It is ordinarily redeemable on a fixed date and may be secured by a charge; and
5. Debentures may be issued at a discount, which shares may not, since there is no capital maintenance objection to a discounted loan.

Types:

On the basis of security:

1. Secured or mortgage debentures, secured by a fixed or floating charge on the company's assets; and
2. Unsecured or naked debentures, carrying no charge and ranking as ordinary unsecured debts.

On the basis of redemption:

1. Redeemable debentures, repayable on a fixed date or at the company's option; and
2. Irredeemable or perpetual debentures, repayable only on winding up or on a specified contingency. Section 71 and the Rules cap the redemption period at ten years, extended to thirty years for infrastructure companies and specified classes.

On the basis of convertibility:

1. Non-convertible debentures;

2. Debenture redemption reserve, section 71(4). The company must create a debenture redemption reserve account out of the profits available for payment of dividend and apply it only to the redemption of debentures;
3. Security. The company must create a charge on its properties or assets sufficient for the due redemption of secured debentures;
4. Remedy on default, section 71(10). Where a company fails to redeem the debentures on the date of maturity or to pay the interest when it is due, the Tribunal may, on the application of any or all of the debenture-holders or of the debenture trustee, and after hearing the parties concerned, direct the company to redeem the debentures forthwith on payment of principal and interest due; and
5. Section 71(11): contravention of a Tribunal order is punishable with imprisonment up to three years or a fine of not less than two lakh rupees, or both.

Debenture against share:

The two figures the question gives are precisely the two that do not count for a private company.

1. Paid-up capital of Rs. 60 crores. The paid-up capital test of fifty crore rupees applies only to an unlisted public company. There is no paid-up capital test for a private company at all. Had ABC been an unlisted public company, 60 crore would have crossed the 50 crore threshold and an internal auditor would have been required on that ground alone;

(b) Is rotation of statutory auditors applicable?

Yes.

Section 139(2) read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 applies the rotation requirement to:

1. Every listed company;
2. Every unlisted public company having paid-up share capital of ten crore rupees or more;
3. Every private limited company having paid-up share capital of fifty crore rupees or more; and
4. Every company having public borrowings from financial institutions, banks or public deposits of fifty crore rupees or more.

ABC is a private limited company with paid-up share capital of Rs. 60 crores, which is above the fifty crore threshold in item 3. Rotation therefore applies.

Note that ABC also falls within item 4, on the footing that its deposits of Rs. 30 crores taken with any public borrowings reach fifty crore rupees, but item 3 is satisfied on the paid-up capital alone and is the cleaner ground.

What rotation means:

Section 76 confines acceptance of deposits from persons other than members to an eligible public company, one having a net worth of not less than one hundred crore rupees or a turnover of not less than five hundred crore rupees, and then only by special resolution with a credit rating obtained every year.

A private company may accept deposits only from its members, under section 73, by ordinary resolution and subject to the conditions in section 73(2): a circular to members filed with the Registrar, a deposit repayment reserve account holding not less than twenty per cent of the deposits maturing in the following financial year, certification that the company has not defaulted, and, where secured, the creation of a charge on its assets.

So ABC's Rs. 30 crores must be either members' deposits under section 73, or money that is not a deposit at all, such as loans from banks or public financial institutions, inter-corporate deposits, or money received from a director on a declaration that it is not out of borrowed funds. If it is genuinely public deposit money, the company is in contravention of section 76, and under section 76A the company is liable to a penalty of not less than one crore rupees or twice the amount of deposits, whichever is lower, extending to ten crore rupees, and every officer in default to imprisonment up to seven years and a fine.

For full marks, cover: the Foss v. Harbottle objection, why it is answered by the personal rights exception, the alternative ground of an act requiring a special majority, and then the statutory remedies.

(a) Is the action maintainable?

Yes.

The company will object under the rule in Foss v. Harbottle (1843) 2 Hare 461, that where a wrong is done to a company the company is the proper plaintiff, and that a member cannot sue in respect of an irregularity in the internal management which the majority could ratify.

That objection fails here, on either of two established exceptions.

Second, an act which cannot be ratified by a simple majority. The rule in Foss v. Harbottle only bars an action where the majority is competent to confirm the act. A director's continuance in office contrary to the articles is not cured by a majority's acquiescence: to permit him to remain would in substance be to alter the articles, and the articles can be altered only by a special resolution under section 14. Edwards v. Halliwell [1950] 2 All ER 1064 is the authority for the proposition that where a thing can be done only by a special majority and is purported to be done otherwise, an individual member may sue.

Note also that a de facto director who continues without title does not thereby validate his acts as against the company, though section 176 protects third parties: acts done by a person as a director shall be valid notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification. That section protects the outsider, not the intruder.

3. Retirement by rotation, section 152(6). If Finex Co. Ltd is a public company, not less than two-thirds of the total number of directors must be liable to retire by rotation, and one-third of those must retire at every annual general meeting, those longest in office retiring first. A managing director may be excluded from the rotational two-thirds by the articles, but if the articles subject him to retirement, the statute and the articles together require it.

4. Removal under section 169. The direct and practical route. A company may, by ordinary resolution, remove a director before the expiry of the period of his office, after giving him a reasonable opportunity of being heard, notwithstanding anything in the articles or in any agreement with him. 'A' should procure special notice under section 115 from members holding not less than one per cent of the total voting power, or shares on which not more than five lakh rupees has been paid up, and requisition an extraordinary general meeting under section 100 if the Board will not call one, members holding one-tenth of the paid-up capital carrying voting rights being entitled to requisition.

Conclusion. On these facts the action is maintainable. A shareholder cannot ordinarily sue for a wrong done to the company, but where the complaint is that the company is acting in breach of its own articles the member sues to enforce the statutory contract under section 10 and to vindicate his individual membership right, which is one of the recognised exceptions to Foss v. Harbottle. A managing director who refuses to retire when the articles require it holds office without authority, and the reliefs available are a declaration that he has ceased to hold office, an injunction restraining him from acting as such, and an application under sections 241 and 242 where the conduct forms part of a wider course of oppression.

1. By affirmation, express or implied, such as attending meetings, accepting dividends or attempting to sell the shares;
2. By unreasonable delay or laches. Re Christineville Rubber Estates Ltd., where about a year was fatal;
3. Where restitutio in integrum is impossible; and
4. By the commencement of winding up. Oakes v. Turquand (1867) LR 2 HL 325 decides it: once a company goes into liquidation, a member cannot rescind, because the rights of creditors have intervened and the register has become the basis on which the creditors' fund is to be made up. The facts state that the company became insolvent, so if winding up has commenced, rescission is barred.

2. Damages for deceit, against the directors. Where the misrepresentation was fraudulent within Derry v. Peek (1889) 14 App Cas 337, that is made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false, X may sue the directors personally in the tort of deceit for the loss actually suffered.

6. Proof in the liquidation. A shareholder who cannot rescind is a contributory, not a creditor, and ranks last in the section 53 waterfall. But a claim in damages under section 35 against the directors is a claim against their estates and is unaffected.

(b) The liability of the company and of the directors

The company's liability

1. Rescission and repayment at the suit of the allottee, subject to the four bars above, of which winding up is decisive here;
2. Damages for deceit, the company being liable for the fraud of its agents acting within the scope of their authority. Historically an allottee could not sue the company for damages while remaining a member, on the principle in Houldsworth v. City of Glasgow Bank (1880) 5 App Cas 317, so he had to rescind first;
3. Section 39(3): if the minimum subscription stated in the prospectus was not received, the whole application money must be repaid within the prescribed period with interest; and
4. Penalty under section 26(9) for issuing a prospectus in contravention of the section.

The directors' liability

2. That the prospectus was issued without his knowledge or consent, and that on becoming aware of it he forthwith gave reasonable public notice; or
3. That, as regards a statement purporting to be made by an expert or contained in an official document, it was a correct and fair representation or a correct copy or extract, and he had reasonable ground to believe and did believe, up to the time of the issue, that the expert was competent and had given his consent, which had not been withdrawn.

Criminal, section 34 read with section 447: imprisonment for not less than six months and up to ten years, and a fine of not less than the amount involved in the fraud and up to three times it; where the fraud involves public interest, the minimum term is three years. A defence lies if the person proves the statement or omission was immaterial, or that he had reasonable grounds to believe and did believe it to be true.

Contribution. A director held liable under section 35 may recover contribution from any other person who, if sued separately, would have been liable to make the same payment, unless that person was guilty of fraudulent misrepresentation and the claimant was not.

For full marks, cover: the definition and the three consequences, the Specific Relief Act cure, the two cases on the form of signature, the promoter's wider fiduciary position, and novation as the practical answer.

(a) What a pre-incorporation contract is

A pre-incorporation contract, also called a preliminary contract, is a contract purported to be made on behalf of a company before the company is incorporated, usually by its promoters, for the purposes of the company to be formed. The contract with M/s AB Brothers is exactly that.

Three consequences follow, and they all follow from one fact: at the date of the contract the company did not exist.

1. The company has no contractual capacity, so it cannot be a party;

Note the wording. The Act requires acceptance and communication, not ratification, and the difference is deliberate: ratification is legally impossible, so Parliament used a mechanism operating as a fresh adoption rather than a retrospective one. If the company does not accept, or accepts without communicating, AB Brothers has no claim against it.

Distinguish a provisional contract, which under the Companies Act, 1956 was a contract made by a public company after incorporation but before it obtained its certificate to commence business, and which became binding automatically when the certificate issued. That category has effectively disappeared with the modern law on commencement of business in section 10A.

(b) The liability of the promoters

On the contract itself: X and Y are personally liable, if they signed as agents.

The facts say X and Y contracted "on behalf of the company to be formed", which places them squarely in the first row. AB Brothers may sue X and Y personally, and they cannot answer that they contracted only as agents.

The promoter's wider position and liabilities, which a six-mark answer should include:

1. He is neither an agent nor a trustee of the company, because the company does not exist when he acts, but he stands in a fiduciary relationship to it. From that flow his duties: not to make a secret profit; to make full disclosure of any interest he has in a transaction with the company, to an independent Board or to the whole body of shareholders; and to account for any undisclosed profit;
2. Erlanger v. New Sombrero Phosphate Co. (1878) 3 App Cas 1218 is the case: a syndicate bought an island for £55,000 and resold it to a company they had formed and controlled for £110,000, without independent disclosure. The sale was rescinded. Gluckstein v. Barnes [1900] AC 240 is the companion, where a promoter who concealed a profit had to account for it;

The practical answer: novation. The way for a promoter to escape personal liability is a novation clause: a term providing that on incorporation the company will enter into a fresh contract on the same terms with the third party, and that the promoter shall thereupon be discharged. Novation creates a new contract between the company and the third party, and works precisely because it does not depend on the impossible idea of ratifying a contract made before the principal existed. In practice this is done by having the company, after incorporation, execute the agreement afresh.

Conclusion. On these facts the answer to (a) is that a pre-incorporation contract is one purporting to be made on behalf of a company before it exists, and the answer to (b) is that X and Y are personally liable on it. The company cannot be bound, because it was not in existence to be a principal and there is nothing capable of ratification, and the promoter who purported to contract for it answers on it himself. The company may nevertheless take the benefit under section 15(h) of the Specific Relief Act, 1963, and M/s. AB Brothers may enforce it against the company under section 19(e), if the contract was for the purposes of the company and the company has accepted it and communicated that acceptance.

For full marks, cover: the ten modes of appointment with sections, the codified duties in section 166 plus the fiduciary duties, and the whole of section 164 with section 167.

1. Appointment

Who may be a director. Section 2(34): a director appointed to the Board. Section 149(3): only an individual, so no body corporate, association or firm. Every director needs a Director Identification Number under section 152(3) and must give his consent in Form DIR-2 under section 152(5), which the company files within thirty days.

Numbers, section 149(1): minimum three for a public company, two for a private company, one for a One Person Company; maximum fifteen, exceedable by special resolution. At least one director must have stayed in India for not less than 182 days in the financial year.

The modes:

4. Additional director, section 161(1). By the Board, if the articles so authorise, of any person other than one who has failed to get appointed as a director in a general meeting; holds office only up to the date of the next annual general meeting or the last date on which it should have been held, whichever is earlier;
5. Alternate director, section 161(2). By the Board, if authorised by the articles or a general meeting resolution, for a director absent from India for not less than three months; vacates office on the original director's return;
6. Nominee director, section 161(3). By the Board, on the nomination of an institution under any law or agreement, or by the Central or State Government by virtue of its shareholding in a Government company;
7. Casual vacancy, section 161(4). Where the office of a director appointed in general meeting is vacated before the expiry of his term, the Board may fill it, and the appointment must be approved by members at the immediate next general meeting. The appointee holds office only for the unexpired term of his predecessor;
8. Small shareholders' director, section 151. A listed company may have one director elected by small shareholders, being those holding shares of nominal value of not more than twenty thousand rupees;

5. Not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates, and if found guilty, shall be liable to pay an amount equal to that gain to the company; and
6. Not assign his office, and any assignment so made shall be void.

Contravention attracts a fine of not less than one lakh rupees extending to five lakh rupees.

The general law adds:

1. No secret profit. Regal (Hastings) Ltd. v. Gulliver [1967] 2 AC 134: directors who subscribed for shares in a subsidiary and profited on the sale had to account, although the company had suffered no loss and could not itself have subscribed. Liability is strict and does not depend on bad faith;
2. No diversion of corporate opportunity. Cook v. Deeks [1916] 1 AC 554; Industrial Development Consultants Ltd. v. Cooley [1972] 1 WLR 443;

3. Disqualification, section 164(1)

A person shall not be eligible for appointment as a director if he:

1. Is of unsound mind and stands so declared by a competent court;
2. Is an undischarged insolvent;
3. Has applied to be adjudicated an insolvent and his application is pending;
4. Has been convicted of any offence, whether or not involving moral turpitude, and sentenced to imprisonment for not less than six months, and five years have not elapsed from the expiry of the sentence; and where the sentence is seven years or more, he is permanently ineligible;
5. Has been disqualified by an order of a court or Tribunal which is in force;
6. Has not paid any calls on his shares and six months have elapsed from the last day fixed for payment;
7. Has been convicted of an offence under section 188 on related party transactions in the preceding five years; or
8. Has not complied with section 152(3), that is, has no DIN.

5. Vacation of office, section 167

The office of a director becomes vacant automatically if he incurs any section 164 disqualification; absents himself from all Board meetings held during twelve months, with or without leave; acts in contravention of section 184 or fails to disclose his interest; becomes disqualified by an order of a court or Tribunal; is convicted and sentenced to imprisonment for not less than six months; is removed under the Act; or, having been appointed by virtue of holding an office in the holding, subsidiary or associate company, ceases to hold that office.

Section 167(2): a person who functions as a director knowing that his office has become vacant is punishable with imprisonment up to one year or a fine of not less than one lakh rupees extending to five lakh rupees, or both. Where all the directors vacate office, the promoter or, in his absence, the Central Government appoints the required number until directors are appointed in general meeting.

For full marks, cover: the three-way classification, the AGM with all its figures, the EGM with the requisition machinery, class and creditors' meetings, Board and committee meetings, and the requisites of a valid meeting.

Meetings under the Companies Act, 2013 fall into three classes: meetings of members, of creditors, and of directors.

A. Meetings of shareholders

1. Annual General Meeting, section 96

Every company other than a One Person Company must hold an AGM in each year.

Default: any member may apply to the Tribunal under section 97, which may call the meeting and may direct that one member present shall be deemed to constitute a meeting; and under section 99 the company and every officer in default are liable to a fine up to one lakh rupees, with a further fine up to five thousand rupees a day for continuing default.

2. Extraordinary General Meeting, section 100

Any general meeting other than the AGM, called for urgent special business. All business at an EGM is special business.

It may be called:

1. By the Board on its own motion;
2. By the Board on requisition of members holding not less than one-tenth of the paid-up share capital carrying voting rights, or one-tenth of the total voting power in a company without share capital. The Board must proceed within twenty-one days to call it for a day not later than forty-five days from receipt;

B. Meetings of creditors

Held under section 230 where a compromise or arrangement is proposed between a company and its creditors or any class of them. The Tribunal orders the meeting, and the scheme requires the approval of a majority in number representing three-fourths in value of the creditors or class present and voting in person, by proxy or by postal ballot. Creditors also meet in a liquidation, where under the Insolvency and Bankruptcy Code the committee of creditors takes the decisions.

C. Meetings of directors

1. Board meetings, section 173

1. The first Board meeting within thirty days of incorporation;
2. Thereafter a minimum of four meetings every year, with not more than one hundred and twenty days between two consecutive meetings;
3. A One Person Company, small company and dormant company need hold only two meetings a year, one in each half of the calendar year with a gap of not less than ninety days; an OPC with only one director is outside section 173(5) altogether;

Section 175 allows certain matters to be passed by circular resolution, by circulating the draft with the necessary papers to all directors and approval by a majority of the directors entitled to vote, but a resolution so passed must be noted at the next Board meeting, and any matter which section 179(3) requires to be decided at a meeting cannot be passed by circulation.

2. Committee meetings

Of the Audit Committee (section 177), the Nomination and Remuneration Committee and the Stakeholders Relationship Committee (section 178), and the CSR Committee (section 135), each governed by its own constitution and terms of reference.

D. Requisites of a valid meeting

1. Properly convened by the proper authority;
2. Proper notice to every person entitled, stating day, time, place and business, with an explanatory statement for special business;
3. Quorum present;
4. A chairman presiding, elected under section 104 on a show of hands if the articles do not name one;

For full marks, cover: the meaning and the difference from dissolution, the two modes today, the Tribunal procedure step by step with its time limits, the section 53 waterfall, voluntary liquidation, and the distinction from CIRP.

1. Meaning

Winding up, or liquidation, is the process by which the life of a company is brought to an end and its property administered for the benefit of its creditors and members. A liquidator takes control of the assets, realises them, pays the debts in the statutory order and distributes any surplus among the members.

Winding up is not dissolution. Winding up is the process; dissolution is the event at the end of it, when the company ceases to exist and its name is struck off. During winding up the company continues to exist, retains its corporate personality and its property, and may carry on business so far as is necessary for a beneficial winding up.

Section 2(94A) defines winding up as winding up under the Companies Act, 2013 or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.

3. Winding up by the Tribunal, step by step

Step 1: a ground, section 271. Special resolution of the company; acting against the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; on the Registrar's or an authorised person's application, affairs conducted fraudulently, formation for a fraudulent or unlawful purpose, or persons concerned guilty of fraud, misfeasance or misconduct; default in filing financial statements or annual returns for five consecutive financial years; or the Tribunal's opinion that it is just and equitable.

Inability to pay debts is no longer a ground, nor is reduction of members below the statutory minimum.

The just and equitable ground covers deadlock (Re Yenidje Tobacco Co. Ltd.), loss of substratum (Re German Date Coffee Co.), a bubble company, oppression of a minority, and the breakdown of a quasi-partnership (Ebrahimi v. Westbourne Galleries Ltd.).

Step 5: the Company Liquidator, sections 275 and 276. Appointed by the Tribunal from a panel of insolvency professionals; terms and fee fixed by the Tribunal; removable for misconduct, fraud, professional incompetence, inability to act or conflict of interest.

Step 6: statement of affairs, section 274. Where the petition is by another, the Tribunal may direct the company to file objections with a statement of affairs within thirty days, extendable by thirty. Failure forfeits the right to oppose and is punishable.

Step 7: the report, section 281. Within sixty days of the order, on the assets, capital, liabilities, debts due, guarantees, contributories, intellectual property and held-for-sale property, his opinion whether any fraud has been committed, and a report on the viability of the business and any proposal for revival.

Step 8: custody and realisation, sections 283 and 290. He takes custody of all property, effects and actionable claims, deemed to be in the custody of the Tribunal from the date of the order, and with the Tribunal's sanction may carry on the business, sell the property including the whole undertaking as a going concern, institute or defend suits, raise money on the security of the assets and settle claims.

4. Voluntary liquidation, section 59 of the IBC

For a corporate person which has not committed any default:

1. Declaration of solvency by a majority of the directors, verified by affidavit, on a full inquiry, that the company has no debt or can pay its debts in full from the proceeds of the assets and is not being liquidated to defraud any person, with the audited financial statements and record of business operations for two years and a valuation report;
2. Within four weeks, a special resolution appointing an insolvency professional as liquidator;
3. Where the company owes debt, approval of creditors representing two-thirds in value within seven days; and
4. Notice to the Registrar and the Board within seven days.

Liquidation commences from the date of the resolution, and on completion the liquidator applies to the NCLT for dissolution.

Conclusion. Winding up realises the assets, discharges the liabilities and returns any surplus, and dissolution under section 302 is what actually ends the company. The process is narrower than the name suggests, because the Companies Act now provides only for winding up by the Tribunal on the grounds in section 271, voluntary winding up having moved to section 59 of the Insolvency and Bankruptcy Code, 2016. Two routes must be kept apart from it: the summary procedure under section 361, and removal of the name under section 248, where there is no liquidator and no realisation at all and the remedy is restoration by the Tribunal within three years.

Facts. Aron Salomon carried on business as a leather merchant and boot manufacturer. He formed a company and sold the business to it for about £39,000. Of the price he took 20,000 fully paid shares of £1 each and debentures of £10,000 secured by a floating charge on the company's assets, the balance in cash. His wife and five children held one share each, so that the statutory minimum of seven members was met.

The business declined and the company went into liquidation. Its assets were about £6,000, its debentures £10,000, and its unsecured trade creditors about £7,000. The liquidator contended that the company was a mere sham, an alias or agent for Salomon, that the whole scheme was a device to enable him to carry on business with limited liability, and that Salomon should indemnify the company against its debts.

Held, unanimously, by the House of Lords, reversing the Court of Appeal:

1. The company had been duly incorporated in accordance with the requirements of the statute, and the motives of those who took part in its formation were irrelevant;

2. Capacity to contract with its own members. Lee v. Lee's Air Farming Ltd. [1961] AC 12. Lee formed a company for aerial top-dressing, holding 2,999 of its 3,000 shares, and was its governing director for life. He was also appointed its chief pilot at a salary. He was killed while flying. His widow claimed compensation under the New Zealand workers' compensation legislation, which required that he be a "worker", that is, a person employed under a contract of service. The Privy Council held that Lee and the company were distinct legal entities, so there was no reason why he could not be both governing director and employee. Compensation was payable. One man, two capacities, because there are two persons.

3. Perpetual succession. The company continues until wound up or struck off. The death, insolvency or retirement of a member does not affect it; his shares pass by transmission under section 56(2). The old illustration is that a company survives even if all its members die.

4. Limited liability. The member's liability is limited to the amount unpaid on his shares, section 2(22), or to his guarantee, section 2(21). It is a consequence of separate personality, not the same thing: an unlimited company under section 2(92) has full corporate personality and no limited liability.

• State Trading Corporation of India v. Commercial Tax Officer AIR 1963 SC 1811. A company, though a legal person, is not a citizen for the purposes of Part III of the Constitution, and cannot claim the rights conferred only on citizens, such as Article 19. It may claim rights conferred on "persons", such as Article 14 and Article 300A. Bennett Coleman & Co. v. Union of India AIR 1973 SC 106 allowed the shareholders to assert their own Article 19 rights where State action against the company affected them; and
• Standard Chartered Bank v. Directorate of Enforcement (2005) 4 SCC 530 and Iridium India Telecom Ltd. v. Motorola Inc. (2011) 1 SCC 74, applying the alter ego doctrine: because a company has no mind of its own, the state of mind of the directing mind and will is attributed to it, so that a company may be prosecuted for an offence requiring mens rea.

4. The limits

The statement in the question is true, but it is not absolute, and a full answer says where it stops.

Statutory lifting of the veil:

1. Fraud or improper conduct. Gilford Motor Co. Ltd. v. Horne [1933] Ch 935, a company formed as "a mere cloak or sham" to break a covenant not to solicit customers; injunction against both;
2. Evasion of an obligation. Jones v. Lipman [1962] 1 WLR 832, land transferred to a controlled company to defeat specific performance; decree against both, the company being "a device and a sham, a mask which he holds before his face";
3. Enemy character. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307;
4. Tax evasion. Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom 371;
5. Single economic entity. State of U.P. v. Renusagar Power Co. AIR 1988 SC 1737; and
6. Avoidance of welfare legislation. Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. AIR 1986 SC 1, where a subsidiary with no business of its own was created so that dividend income would not appear in the parent's profits and the workers' bonus would fall; the veil was lifted.