Provisions For Voluntary Winding Up
Provisions For Voluntary Winding Up
Provisions For Voluntary Winding Up
COMPANIES IN INDIA
Advait Narayan1
ABSTRACT
In todays society, banking companies play central roles in the completion of various
day-to-day tasks involving money, public finance, and economic growth, providing
essential machinery for these basic facets of modern life. People across all brackets of
income and economic prosperity depend on banks to act as safe, trusted locations in
which to deposit their money for the purpose of saving, collection of interest, and easy
withdrawal through facilities such as honouring of cheques and ATMs. Sometimes,
however, the continued existence of a particular bank or financial institution is not
feasible due to non recovery of loans, fraud, aiding of fraud, and unfeasibility of
business, among other issues. In these cases, the affairs of the bank have got to be
wound up properly in order for its business to be concluded.
Winding up of a bank is of two main types: Voluntary and court-ordered compulsory
winding up. Voluntary winding up, which is the specific subject of this research
paper, is winding up that is initiated by the banking company itself, on various
grounds including large numbers of defaulting borrower or non-feasibility of
business, which necessitate a complete end to all its operations. The process of
voluntary winding up is enumerated in detail in the Companies Act, 1956, and
Banking Regulation Act, 1949, and is explained in a stagewise manner in this
research paper.
This article attempts to deal specifically with the case of voluntary winding-up of a
banking company. It does this in four parts: Firstly, it enumerates the specific
circumstances under which a bank opts for voluntary winding-up. Following this it
describes in detail the process of doing so, right from the early stages of official
publication of winding up to the later stages of the work by appointed liquidators.
Thirdly, what follows is a critical evaluation of the policy along with constructive
suggestions to promote efficiency. Last of all is a conclusion that summaries the
1
B.A.L.L.B IIIrd Year, Gujarat National Law University, e-mail: [email protected].
1
above content effectively and concisely. An effort has been made by the author to
ensure that this article is as lucid and yet as comprehensive as possible.
KEY WORDS:
LIQUIDATORS, SHAREHOLDERS, CREDITORS, GENERAL MEETING,
SOLVENCY.
TARGET AUDIENCE:
Students, bankers, banking customers, Liquidators and creditors involved in voluntary
wind-up of banks, interpreters of statutes.
INTRODUCTION
In order to bring to the fore the topic of voluntary winding up of banks, it is necessary
to first enumerate the meaning, consequences, and aftermath of winding up. Winding
up, or liquidation, of banking companies is a complicated procedure. If not done
correctly, large amounts of loss would be suffered by a large number of people who
have had dealings with the bank in the course of its business depositors, creditors,
and shareholders - in consequence. Also, fraud or aiding of fraud may be committed
by the bank, in which case too it will be compelled to wind up.
The objectives of this article are to delve into the procedural aspects of voluntary
winding up of banking companies in detail, and to understand the role played by the
courts and the Reserve Bank of India in the winding up process. Unlike in compulsory
court-ordered winding up, where no action is taken by the company but is done under
court supervision, voluntary winding up directly involves in it a companys
shareholders and creditors. The provisions for voluntary winding up of banking
companies are enumerated in the Banking Regulation Act, 1949, and the Companies
Act, 1956. These Acts work in tandem in each other, as section 2 of the Banking
Companies Act provides that its provisions shall be in addition to and not in
derogation of the provisions of the Companies Act, 1956, and any law that is
presently in force.
The power to regulate winding up of banks lies ordinarily with the Reserve Bank of
India. It can apply to the courts for the winding up of any bank if thinks fit. A
company may, voluntary wind up its affairs if it is unable to carry on its business, or it
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was formed only for a specific, limited purpose, or if it is unable to clear its debts, and
other such financial difficulties. When the bank for itself believes it is in its interests
to wind up due to unfeasibility of business or other such financial troubles, it goes for
the option of voluntary winding up. In this respect the Banking Regulation Act and
the Companies Act statutes are important as they ensure that voluntary winding up of
banks is done speedily and with the aid of only a few provisions, without which it
would otherwise be time consuming, costly, and resource-depleting. At the same time
it also allows for voluntary winding up of banks by themselves, through the medium
of general meetings, board of directors meetings and appointing of a liquidator who
supervises the processes of winding up.
Post-independence, there have been very few instances of banking companies
voluntarily going into liquidation, with most if not all the instances of liquidation
being court-ordered compulsory liquidation. This unfortunately means that there is a
dearth of case laws on the field. However, there is still plenty of scope for voluntary
liquidation to come into the picture It is seen that as courts are nowadays over-
burdened with pending cases, it may be prudent for unfeasible or indebted banking
companies who intent to wind-up to take their own initiative by going in for voluntary
wind-up and appointing their own liquidators. It is therefore necessary to study
precedent of this aspect the numerous legal difficulties and questions of law that
come into question during the process in order to fully understand winding up of
banks.
3
liquidators. 2 This functional division of winding up on the basis of solvency is a well-
arrived-at policy decision as companies that have liabilities yet to be disposed off can
be made to take real and concrete steps to ensure that they pay their due to those who
have interest in the company.
Section 44 of the Banking Regulation Act sets certain conditions for the granting and
supervising of voluntary winding up of a bank by the high court. It states that, despite
any contravening provision contained in section 484 of the Companies Act, a banking
company may be voluntarily wound only if the Reserve Bank of India declares in
writing that it is solvent and is able to pay back all of its creditors. Under this section
the High Court also has the power to supervise and to enforce the continuation of
winding up. Section 44(3) also enumerates two circumstances in which, upon
application by the RBI, it is mandatory for the court to do so:
(a) When the banking company is being wound up voluntarily and at any stage during
the voluntary winding up proceedings is not able to meet its debts.
(b) When, during voluntary or court-supervised liquidation, the High Court is satisfied
that it cannot be continued without adversely affecting the interests of the
depositors.
2
Hong Kong Institute of Bankers (HKIB), Banking Law and Practice, 1st edn., John Wiley & Sons,
2012.
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However, it is well-settled that Section 45B of the Banking Regulation Act, which is
the power of the High Court to decide all claims made by or against banking
companies - will not apply to any banking company that is voluntarily being wound
up.3
3
Century Bank Ltd., Bangalore v. M. Marlingappa, AIR 1965 Mys 68.
4
http://www.caclubindia.com/articles/winding-up-of-companies-3971.asp#.UiBTMtKkwkQ. Retrieved
21.08.2013.
5
Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India and Ors., AIR 1962 SC 1371.
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o S.490 (1) FUNCTIONS OF A LIQUIDATOR AND HIS
APPOINTMENT
The liquidator appointed by the company plays a central role during its winding up.
He is required to aid in speedy realization of assets, preparation of list of creditors,
admission of proof, statement of list of individuals with pending debts, payment to
creditors of costs, payment of preferential claims, and distribution of surplus among
the company executives after adjustments and meeting all the claims and the rights of
creditors. A liquidator is to take steps to determine in clear terms the Creditors and
liabilities owed to each of them and discharge the same out of the funds available with
the company. He is also to call for a General Meeting and to collect from assets and
make payments to the creditors.
After the passing of the resolution, the next stage of members winding up is the
official appointment of a liquidator, whose functions include supervising the work of
the company during the winding up procedure and, subsequent to that, supervising the
distribution of the profits of the bank company, for which he will receive
remuneration under S.490 (2). The registrar must also be informed of the appointment
within ten days. It is also important that the liquidators be given extensive freedom to
conduct winding up, and it be assumed he has in mind the companys best interests.
Upon appointment of a liquidator, most significantly, all the official authority of the
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board of directors, MDs, and managers shall cease to exist. The liquidator is
generally given a free hand, to carry out the winding up procedure in such a manner
as he thinks best in the interest of creditors, and company. Section 496 states that if
the winding up lasts longer than one year, a general meeting will be called each year
by the liquidator, where he is to present a complete account of wind-up proceedings.
The purpose of this progress report is to ensure that the process is functioning and
proceeding as it should, and this is a well thought-out provision that ensures
transparency and reaffirms that the activities of the liquidator and the interests of the
creditors are aligned.
6
Hari Prasad Jayantilal and Co. v. Income Tax Officer, Special Investigation Circle-B. [1966] 59 ITR
794(SC.)
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o AFTER COMPLETION OF THE MEMBERS WINDING UP
PROCESS.
Section 497 governs what is to be done by the liquidation upon completion of the
winding up. First, he is to call, through the means of detailed advertisement, one final
general meeting of the erstwhile managers and directors of the company, where a
complete documentation of accounts, winding up procedure details, and property
distribution details are to be presented. This report, along with all other relevant
documents and account books, will go to the official liquidator who, upon perusal and
satisfaction that the carrying on of the affairs of the company is not publicly
detrimental, will declare the company dissolved from the date he receives the report.
If he finds otherwise, he may in some cases, be directed by the Courts to begin
investigating the matter a further safeguard to prevent unauthorised acts by the
company to the detriment of others.
7
In Re Metropolitan Bank. Heiron's Case, 15 ChD 139
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liquidator, all the powers of the cos Board of Directors are to cease immediately. In
case also the winding up lasts more than a year, the selfsame provision of s.505 of the
Companies Act, requiring the liquidator to convene annual general meetings to
display the progress of winding up, is to be done.
8
Subbarama Naidu v. V. Subbarayudu [1964] 34 Comp Cas 81
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CONCLUSION
In conclusion it is evident that the statutory laws governing voluntary liquidation of
banks allow this to be done in a very systematic and stage-wise manner, ensuring that
banks who go in for this option do not rush into it in an unplanned form without
thinking of the probable consequences. Critically speaking these should provide
enough freedom both for bank to carry it on at an appropriately efficient pace, while
at the same time, keeping the best interests of the creditors at heart, and allowing the
liquidator to take as much time as possible to do his work after careful consideration
of the present affairs and the situation that the company is actually in.
One important thing to note is that the interests of the creditors and solvency of the
company are held in the highest of importance at every possible stage of the process.
In fact, the type of voluntary winding up itself depends solely on the solvency of the
Company. If it is insolvent it is given a very strict time period to attain solvency
before which it cannot be wound up which serves to protect any and all individuals
who may have controlling interests in it and the liquidator is to, after the general
meeting held subsequently, create a very detailed report listing the names of all
creditors and individual moneys owed to them and it is necessary to pay back before
wind up is approved by the Official Liquidator.
However, there are several limitations to the scope of the article. As stated earlier,
very few banks have been voluntarily been wound up since the Banking Regulation
Act was enacted, meaning that there is little or no empirical evidence, and very little
conclusive proof of the benefits or even the frequency of voluntary liquidation. The
topic itself is quite narrow in scope and there is a prominent dearth of case laws. Due
to this it becomes difficult to a certain extent for the author to provide authoritative
suggestions to further streamline the process.
The advantages to voluntary liquidation, however, are evident. There is less of direct
court intervention, meaning that courts will be free to focus on more important
administrative issues and cases. Additionally, greater autonomy will undoubtedly be
given to both company executives and liquidators to decide what type and nature of
winding up is better suited to them and their creditors interests. Hence, with this,
there is plenty of scope for voluntary winding up to serve useful purposes at some
point in the future.