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Unit 14: Winding Up of Companies

The petition on the ground of a company’s inability to pay its debts can be made by a Notes
creditor (including a secured creditor) a debenture holder, and a trustee for debenture
holders. Even a contingent creditor, such as a holder of bill of exchange may make a
petition. The company itself can file a petition. The registrar has a limited right to file a
petition for winding up of a company.
6. Just and Equitable: The court 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. In exercising
its power on this ground, the court shall give due weight to the interest of the company, its
employees, creditors and shareholders and the interest of the general public. The relief
based on the just and equitable clause is in the nature of a last resort when other remedies
are not efficacious enough to protect the general interests of the company. While in the
above five cases definite conditions should be fulfilled but in the ‘just and equitable’
clause the entire matter is left to the ‘wide and wise’ direction of the court. The winding up
must be just and equitable not only to the persons applying but also to the company and
to all its shareholders. [Hind Overseas Pvt. Ltd. vs. R.P. Jhunjhunwala (1977) ASIL. XIII] A
few of the examples of ‘just and equitable’ grounds on the basis of which the court may
order the winding up are given below:

(i) When the substratum of the company has gone: The substratum of a company is deemed
to be gone where its objects have failed or become impossible of achievement.
Some tests to ascertain whether the substratum of the company is gone were laid
down in In re Kaithal and General Mills Co. Ltd. (1951.) 31 Comp Cas 46 These are:
(a) Where the only subject matter of the company is gone; or
(b) The object for which it had been incorporated has substantially failed; or

(c) It is impossible for the company to continue except at a loss; or
(d) The existing liabilities are far in excess of existing and possible assets.
(ii) When there is a complete deadlock in the management: A company will be wound up on
this ground even though it is making good profits. In re Yenidje Tobacco Co. Ltd.
[1916]2 Ch 426, A and B, the only shareholders and directors of a Private Limited
company became so hostile to each other that neither of them would speak to the
other except through the secretary. Held: There was a complete deadlock and
consequently the company was ordered to be wound up.
(iii) Where the company was formed for fraudulent or illegal purposes: For this purpose, fraud
in the prospectus or in the manner of conducting company’s business is not sufficient.
It must be shown that, the original object of creating the company was fraudulent or
illegal [re T.E. Brismead & Sons Ltd. (1897)1 Ch.45].

(iv) Where the principal shareholders have adopted an aggressive or oppressive policy towards the
minority: [R. Sabapathy Rao vs. Sabapathy Press Ltd. AIR (1925) Mad. 489] However,
the court will order winding up only when it is satisfied that it is impossible for the
business of the company to be carried on for the benefit of the company as a whole
because of the way in which voting power is held and used.
(v) When the company is a ‘bubble’: This means it never had any real business [re London
and Country Coal Co. (1867) L.R. 3 Eq. 365].

(vi) Where the business of the company cannot be carried except at loss: But, mere apprehension
on the part of some shareholders that loss instead of gain will result has been held
to be no ground [Re Mahamandal Shastra Prakashik Samiti Ltd. (1917) 15 All L.T.
193]. Similarly, in re Shah Steamship Navigation Co. [(1901) 10 Bom. L.R. 107], it was

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