Under what circumstances can winding up of a company by the Court be possible?

Question: Under what circumstances can winding up of a company by the Court be possible? [BJS 2011]

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Answer

Winding up of a company by the Court is a process by which a company's assets are liquidated and its affairs are brought to a close. This process can be initiated by a creditor, shareholder, or the company itself, and it is usually ordered by the Court when a company is unable to pay its debts.

According to Section 2(94A) of the Companies Act, 2013 or Insolvency and Bankruptcy Code, 2016, “Winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.” Chapter XX Sections 270–378 of the Companies Act, 2013 deals with winding up and other aspects of it.

As per Section 270 of the Companies Act 2013, the procedure for winding up of a company can be initiated either – a) By the tribunal or, b) Voluntary.

The following are some of the circumstances under which winding up of a company by the Court can be possible:

Insolvency: If a company is unable to pay its debts as they fall due, it can be wound up by the Court. This is known as compulsory winding up and is governed by the provisions of the Insolvency Act 1986 in the UK.

Just and Equitable: If it is just and equitable for a company to be wound up, the Court may order a winding up, even if the company is solvent. This can occur, for example, if there is a deadlock between the shareholders or if the company has become unable to carry on its business effectively.

Voluntary Winding Up: A company can also be wound up voluntarily by the shareholders or by the company itself if it has the power to do so. This occurs when the shareholders agree to dissolve the company and wind up its affairs.

Some landmark cases of Winding Up are:

Re Barings plc (No 5), [2000] 1 BCLC 523: In this case, the Court ordered the winding up of Barings Bank, one of the oldest and most prestigious banks in the UK, due to insolvency caused by the fraudulent activities of a single trader. This case highlights the importance of good corporate governance and the need for companies to have effective risk management systems in place.

Re Polly Peck International plc, [1998] 3 All ER 812: In this case, the Court ordered the winding up of a multinational company that had engaged in fraudulent activities and was insolvent. The case highlights the importance of transparency and accountability in corporate governance and the need for companies to act in a manner that is consistent with good corporate governance practices.

Winding up of a company by the Court can be ordered in several circumstances, including insolvency, if it is just and equitable, or if the company is voluntarily wound up. Landmark cases of winding up, such as Re Barings plc, Re African Banking Corporation of South Africa, and Re Polly Peck International plc, highlight the importance of good corporate governance and the need for companies to act in a manner that is in the best interests of their stakeholders.

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