COMPANY & ITS WINDING UP By Prof. Syed Mamnoon Hasan* Advocate Supreme Court of Pakistan

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1 COMPANY & ITS WINDING UP By Prof. Syed Mamnoon Hasan* Advocate Supreme Court of Pakistan This article relates primarily with companies as defined in the Companies Ordinance, 1984, (the Ordinance) that is, those companies which are formed and registered under the Ordinance or were incorporated under the earlier Companies Act, The word Company has no strictly technical or legal meaning. In terms of Ordinance a company means a company formed and registered under the Ordinance or an existing company. Existing company means a company formed and registered under Companies Act, In common law a company is a 'legal person' or 'legal entity' separate from and capable, of surviving beyond the lives of its members. Like any juristic person, a company is legally an entity apart from its members, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Ordinance makes provision for private and public companies. These may or may not have a share capital and may or may not have limited liability. The Ordinance confers a wide range of options upon the incorporators. A company formed under the Ordinance may be a company with or without limited liability that is to say:- (a) (b) (c) a company limited by shares; or a company limited by guarantee; or an unlimited company. There are also other kinds of companies which are known as subsidiary and holding companies. In terms of Section 3 of the Ordinance, a company is deemed to be a subsidiary company of another if that other company or body corporate directly or indirectly controls, beneficially owns or holds more than fifty percent of its voting securities or otherwise has power to elect and appoint more than fifty percent of its directors; or the first mentioned company or body corporate is a subsidiary of any company or body corporate which is that other's subsidiary. A company is deemed to be another's holding company if, but only if, that other is its subsidiary. A subsidiary company is not allowed to acquire memberships of its holding company. Where one company has control over another, it is known as the holding company and company over which control is exercised is called the subsidiary company. Companies with unlimited liability are rarely formed now. In an un-limited company the shareholders are fully liable for the debts incurred by the company. * Principal Govt. Islamia Law College, Karachi. He is former Deputy Attorney General for Pakistan.

2 A private company is a very suitable device for carrying on the business of family and small scale concerns, as the minimum number or members required to form a private company is only two. A private company is defined in Section 2 (28) or the Ordinance while a public company has been defined under Section 2(30) of the Ordinance. Private company may be reregistered as public company and vice versa. Private company is a company which by its articles:- i) restricts the right to transfer its shares, if any, ii) limits the number of its members to fifty (50) not including persons who are in the employment of the company, and iii) prohibits any invitation to the public to subscribe for the shares, if any, or debentures of the company. Public company means 'a company which is not a private company'. A private company shall not have less than two Directors and every public company not less than seven Directors. A company limited by share is one in which the liability of the share holders to contribute to the company assets is limited by the Memorandum of Association to the amount if any, unpaid on their shares respectively held by them. A company limited by shares obtains its working funds by the issue of shares which may be subscribed by the signatories to the Memorandum of Association. A share holder is co-owner of the company not of its assets which, in view of the nature of the company as a legal person, are vested in the company. A Guarantee company is one in which the liability of the members is limited by the Memorandum to such amount as to guarantors agree to contribute to the assets of the company in the event of its being wound up. A company limited by guarantee is generally a non-profit making association and such a company is an alternative to a company limited by shares. The working capital of a company limited by Guarantee generally comes from other sources i.e. endowments, grants, fees, subscriptions etc. The liability of the members of a Guarantee company is limited by a fixed sum which is specified in the memorandum and beyond which they cannot be called upon to contribute. It is not necessary for a guarantee company to have any share capital. However, if it has share capital, it is subject to the same restriction as to reduction as the capital of a company limited by shares. It does not also have the liability to purchase its own shares. The outstanding feature of a company is its independent corporate existence. The company should have independent existence and powers to govern its affairs by itself. The company is a distinct entity separate from its promoters, share holders and directors. The liability of a company cannot be passed on to its directors personally. A partnership has no existence apart from its members. A company in law is a person. It is a distinct legal person existing

3 independently of its members. The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of member of a company is limited. No member is bound to contribute anything more than the nominal value of the shares held by him. In a partnership firm, on the other hand, the liability of the partners for the debts of the business is unlimited. They are bound to meet without any exception all the business obligations of the firm. An incorporated company never dies. It is an entity with perpetual succession that means that membership of a company may keep changing from time to time, but that does not affect the company's continuity. Further, the death or insolvency of individual members does not, in any way, affect the corporate existence of the company. The company is also capable of owing, enjoying and disposing of property in its own name. The company may become owner of its capital and assets. A company being a body corporate can sue and be sued in its own name. A company though a legal person but cannot be termed a citizen under the constitution of Pakistan or under the Citizenship Act. It cannot, therefore, claim protection of such fundamental rights as are guaranteed to citizen only. A company has a nationality, domicile and residence. A company incorporated in a particular country has the nationality of that country, though unlike a natural person, it cannot change its nationality. A company, of course, can only act through human agents and that who manage its business are called directors. But the directors are only agents of the company, with the powers of management given by the company's articles of association and usually with power to delegate any of their powers to a Managing Director. The company is liable for torts and crimes committed by its servants and agents within the scope their employment or authority. The directors of a company, who are usually appointed by the members at their annual general meeting, have wide powers to manage the company's business conferred upon them by the articles of association. The members cannot control the exercise of these powers, although they can amend / alter the articles of association. The name of the company assumes importance as it help to indicate its object and its principal business. A company by registering its name gains a monopoly of the use of that name. Therefore, similar names are not permitted. Section 37 of the Ordinance puts prohibition on keeping certain names of the companies, that is to say; (i) No company shall be registered by a name which in the opinion of the authority is inappropriate or deceptive or is designed to exploit or offend the religious susceptibilities of the people.

4 (ii) (iii) A company shall not be registered by a name identical with that by which a company in existence is already registered, or so pearly resembling that name as to be calculated to deceive, except where the company in existence is in the course of being dissolved and signifies its consent in such manner as the registrar requires. No company without approval in writing of the authority shall be registered by a name which contains any words suggesting or Calculated to suggest:- (a) the patronage of any, past or present, Pakistani or foreign, Head of State: (b) any connection with the Federal Government or a Provincial Government or any department or authority of any such Government; (c) any connection with any corporation setup by or under any Federal or Provincial Laws; or (d) the patronage of, or any connection with, any foreign Government or any international organization. Whatever be the name of the company, if the liability of the members is limited, the last word of the name of the company must be 'limited', and in the case of private company 'private limited'. A registered company is capable of perpetual succession but it may become insolvent or it may decide to retire from business. In such a case it is wound up and goes into liquidation. Winding up of a company differs from insolvency of an individual in as much as a company cannot be made insolvent under the insolvency laws. The issued share capital is always maintained intact, except for losses in the way of business, so that it may be available to satisfy the company's debts. Accordingly, while the company is going concern the rule is that no part of the paid up capital may be returned to the share holders without consent of the Court. The personal liability of a member of the company continues in the event of Winding-up. If a contributory dies during Winding-up his liability automatically falls on his legal representative. The winding up of a company is the process whereby its life-is ended and its property administered for the benefit of its creditors and members. Section 297 of the Ordinance provides three types of Winding-up i.e. (i) Winding up by the Court, (ii) Voluntary Winding up and (iii) Winding up subject to the supervision of the Court. Generally compulsory Winding up occurs when the directors or those in control do not want that the company be wound up while the voluntary wind up occurs when they do. The Court does not choose to wind up a company sua moto. It has to be petitioned. A Petition may be presented by the company, by any creditor or by any contributory.

5 Every Petition for winding up is required to be advertised not less than 14 days before the date fixed for appearance in the Official Gazette and in one English and one vernacular daily newspaper. Such advertisement shall be in the form as provided under Rule 781 of the Sindh Chief Court Rules (O.S.). The Court is permitted to wind up a company but it does not, in every case, have to order a winding up. Different considerations apply depending upon grounds upon which the Petition for winding up is brought. A member's Petition for winding up will only succeed if he is able to show that prima facie he has a tangible interest in the winding up. Where winding up is opposed in the public or company's interest, winding up order is not passed. 'A company can be wound up on any of the grounds mentioned in Section 305 of the Ordinance, which reads as follows:- (a) If the company has, by special resolution, resolved that the company be wound up by the Court; (b) If default is made in delivering the statement report to the registrar or in holding the statutory meeting or any two consecutive annual general meetings; (c) If the company does not commence its business within a year from its incorporation, or suspends its business for a whole year; (d) If the number of members is reduced, in the case of private company below two or, in the case of any other company, below seven; (e) If the company is unable to pay its debts; (f) If the company is-- (i) Conceived or brought forth for, or is or has been carrying on, unlawful or fraudulent activities; (ii) Carrying on business not authorized by the memorandum; (iii) Conducting its business in a manner oppressive to any of its members or persons concerned with the formation or promotion of the company or the minority shareholders; (iv) run and managed by persons who fail to maintain proper and true accounts, or commit fraud, misfeasance or malfeasance in relation to the company; or (v) managed by persons who refuse to act according to the requirements of the memorandum or articles or the provisions of this Ordinance or fail to carry out the directions or decisions of the Court or the Registrar or the Authority given in the exercise of powers under this Ordinance; (g) if, being a listed company, it ceases to be such company; or (h) if the Court is of the opinion that it is just and equitable that the company be wound up.

6 For passing an order of winding up, the Court is to consider and to give due weight to the interests of the company, its employees, creditors and share holders and general public interest. The Court may refuse to make an order of winding up, if it is of the opinion that some other remedy is available to the petitioner and he is acting unreasonably in seeking to have the company wound up, instead of pursuing that other remedy. In majority of cases a company is wound up on the ground that the company is unable to pay its debts. A company shall be deemed to be unable to pay its debts if its creditor has served on it a demand requiring it to pay to him the sum due and the company has for 30 days thereafter neglected to pay the sum of or to secure or compound the same to the reasonable satisfaction of the creditor. Failure of the company to establish its solvency is a contributory factor in the winding up proceedings. When the company fails to establish that it is commercially sound or would be able to pay its debts, the company would be deemed unable to pay its debts and winding up order is passed. The onus is always on the company to show that either the amount claimed by the creditor is not due against it or that the company is commercially solvent, as the case may - be. Mere denial of liability is not enough. No doubt, a petition for winding up cannot become a substitute for recovery of dues but the mere fact that the Petitioner can also file a suit or similar proceedings for recovery of its dues can hardly be pleaded as valid defense to the winding up petition. Pendency of a civil suit is also no bar to a petition for winding up and all that the Court has to see is that the dispute is not merely a cloak. Therefore, notwithstanding the pendency of a civil suit, an order of winding up can be passed (PLD 1996 S.C. 601). A winding up of a company by the Court is deemed to commence at the time of the presentation of the Petition for the winding up (S.311). Certified copy of winding up order is to be filed with the Registrar within 15 days from the date of winding up order by the Petitioner in the winding up proceedings and the company (S.315). At the time of passing of the order of winding up of a company, a person who is called Liquidator is appointed to wind up its affairs. When the winding up of the company commences, the directors ceases to control its affairs and the management of the company is then placed in the hands of the Liquidator who administers and takes custody or control of the company's business and assets. He sells the company's assets and properties and pays as such of its debts as he can do out of the proceeds of the sale. If there is a surplus, the surplus is distributed among the share holders. An official liquidator shall not resign or quit his office as official liquidator before conclusion of the winding up proceedings except for reasons of personal disability to the satisfaction of the Court. However, an official liquidator may at any time be removed by the Court for reasons to be recorded (S.322).

7 An official liquidator not being a salaried officer of Government or of the salaried Court shall be entitled to such remuneration by way of percentage of the amount realized by him by disposal of assets or otherwise as may be fixed by the Court having regard to the amount and nature of the work actually done and subject to such limits as may be prescribed. If the official liquidator resigns, is removed from office or otherwise ceases to hold office before conclusion of the winding up proceedings, he shall not be entitled to any remuneration and the remuneration already received by him, if any, shall be refunded by him to the company (S.323). When the affairs of the company have been completely wound up, or when the Court is of the opinion that the Official Liquidator cannot proceed with the winding up of the company for want of funds and assets or any other reasons whatsoever and it is just and reasonable in the circumstances of the case that an order of dissolution of the company be made, the court shall make an order that the company shall be dissolved from the date of the order. A copy of the order shall within 15 days of the making thereof be forwarded by the Official Liquidator to the Registrar, who shall make in his books a minute of the resolution of the company. If the Official Liquidator makes default complying with the aforesaid requirement, he shall be liable to a fine not exceeding one hundred rupees for every day during which he is in default (S. 350). The company ceases to exist when it is dissolved. A company may only be dissolved when its affairs have been completely.wound up.