Corporate Law

Term Report

COMPANY WINDING UP
SEC 297-317
Term report

Prepared by:
Irfan Junejo (9063)
Sadaf Zehra
Saadia
Amenah
SECTION -

Prepared for:
Mr. Mansoor Ali Shahani
Instructor for Corporate Law

Dated:
12th March`09
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Table of Contents
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Section 297: Modes of winding up: -

(1) The winding up of a company may be

either-
(i) By the Court; or
(ii) Voluntary; or
(iii) subject to the supervision of the Court.

(2) Save as otherwise expressly provided, the provisions of this Ordinance with respect to winding up
shall apply to the winding up of a company in any of the modes specified in sub-section (1).

Contributories
Section 298: Liability as contributories of present and past members: -

(1) In the event of a company being wound up, every present and past member shall, subject to the
provisions of section 299, be liable to contribute to the assets of the company to an amount sufficient
for payment of its debts and liabilities and the costs, charges and expenses of the winding up, and for
the adjustment of the rights of the contributories among themselves, with the qualifications following,
that is to say:

(i) A past member shall not be liable to contribute if he has ceased to be member for one year or
upwards before the commencement of the winding up;

(ii) A past member shall not be liable to contribute in respect of any debt or liability of the company
contracted after he ceased to be a member;

(iii) A past member shall not be liable to contribute unless it appears to the Court that the present
members are unable to satisfy the contributions required to be made by them in pursuance of this
Ordinance;

(iv) In the case of a company limited by shares, no contribution shall be required from any past or
present member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as
such member;

(v) In the case of a company limited by guarantee, no contribution shall, subject to the provisions of sub-
section (2), be required from any past or present member exceeding the amount undertaken to be
contributed by him to the assets of the company in the event of its being wound up;

(vi) Nothing in this Ordinance shall invalidate any provision contained in any policy of insurance or other
contract whereby the liability of individual members on the policy or contract is restricted, or whereby
the funds of the company are alone made liable in respect of the policy or contract; and

(vii) A sum due to any past or present member of a company in his character as such, by way of
dividends, profits or otherwise, shall not be deemed to be a debt of the company payable to that
member in a case of competition between himself and any other creditor not being a member
of the company, but any such sum may be taken in to account for the purpose of the final adjustments
of the rights of the contributories among themselves.
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(2) In the winding up of a company limited by guarantee which has a share capital, every member of the
company shall be liable, in addition to the amount undertaken to be contributed by him to the assets of
the company in the event of its being wound up, to contribute to the extent of any sum unpaid on any
shares held by him, as if the company were a company limited by shares.

Section 299: Liability of directors whose liability is unlimited: -

In the winding up of a limited company any director, whether past or present, whose liability is, in
pursuance of this Ordinance, unlimited, shall, in addition to his ability, if any, to contribute as an
ordinary member, be liable to make a further contribution as if he were, at the commencement of the
winding up, a member of an unlimited company:

Provided that-

(i) A past director shall not be liable to make such further contribution if he has ceased to hold office for
a year or upwards before the commencement of the winding up;

(ii) A past director shall not be liable to make such further contribution in respect of any debtor liability
of the company contracted after he ceased to hold office;

(iii) Subject to the articles, a director shall not be liable to make such further contribution unless the
Court deems it necessary to require that contribution in order to satisfy the debts and liabilities of the
company, and the costs, charges and expenses of the winding up.

Section 300: Definition of "contributory”: -

The term "contributory" means every person liable to contribute to the assets of a company in the event
of its being wound up, and include the holder of any shares which are fully paid up; and, in all
proceedings for determining, and all proceedings prior to the final determination of, the persons who
are to be deemed contributories, includes any person alleged to be a contributory.

Section 301: Nature of liability of contributory: -

(1) The liability of a contributory shall create a debt accruing due from him at the time when his liability
commenced, but payable at the time specified in calls made on him for enforcing the liability.

(2) No claim founded on the liability of a contributory shall be cognizable by any Court of Small Causes.

Section 302: Contributories in case of death of member: -

(1) If a contributory dies either before or after he has been placed on the list of contributories, his legal
representatives shall be liable, in a due course of administration, to contribute to the assets of the
company in discharge of his liability, and shall be contributories accordingly.

(2) If the legal representatives make default in paying any money ordered to be paid by them,
proceedings may be taken for administering the property of the deceased contributory, and of
compelling payment thereout of the money due.
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Section 303: Contributory in case of insolvency of member: -

If a contributory is adjudged insolvent either before or after he has been placed on the list of
contributories, then-

(a) His assignees in insolvency shall represent him for all the purposes of the winding up, and shall be
contributories accordingly, and may be called on to admit to proof against the estate of the insolvent, or
otherwise to allow to be paid out of his assets in due course of law, any money due from the insolvent in
respect of his liability to contribute to the assets of the company and

(b) There may be proved against the estate of the insolvent the estimated value of his liability to further
calls as well as calls already made.

Section 304: Contributories in case of winding up of a body corporate which is a

Member: -

If a body corporate which is a contributory is ordered to be wound up, either before or after it has been
placed on the list of contributories,-

(a) The liquidator of the body corporate shall represent it for all purposes of the winding up of the
company and shall be a contributory accordingly, and may be called on to admit to proof against the
assets of the body corporate, or otherwise to allow to be paid out of its assets in due course of law, any
money due from the body corporate in respect of its liability to contribute to the assets of the company;
and

(b) There may be proved against the assets of the body corporate the estimated value of its liability to
future calls as well as calls already made.

WINDING UP BY COURT
CASES IN WHICH COMPANIES MAY BE WOUND UP BY COURT

Section 305: Circumstances in which company may be wound up by Court: -

A company may be wound up by the Court:

(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 statutory 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;

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(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 Commission 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 opinion that it is just and equitable that the company should be wound up

Explanation I: The promotion or the carrying on of any scheme or business,

except the business carried on under the provisions of the Insurance Act, 1938 (IV of 1938), howsoever
described, whereby, in return for a deposit or contribution, whether periodically or otherwise, of a sum
of money in cash or by means of coupons, certificates, tickets or other documents, payment, at future
date or dates of money or grant of property, right or benefit, directly or indirectly, and whether with or
without any other right or benefit, determined by chance or lottery or any other like manner, is assured
or promised shall be deemed to be an unlawful activity.

Explanation II: "Minority shareholders" mean shareholders together holding not less than twenty per
cent of the equity share capital of the company.

Section 306: Company when deemed unable to pay its debts: -

(1) A company shall be deemed to be unable to pay its debts-

(a) If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one
per cent. of its paid-up capital of fifty thousand rupees, whichever is less, than due, has served on the
company, by causing the same to be delivered by registered post or otherwise, at its registered office, a
demand under his hand requiring the company to pay the sum so due and the company has for thirty
days thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction
of the creditor; or

(b) If execution or other process issued on a decree or order of any Court or any other competent
authority in favor of a creditor of the company is returned unsatisfied in whole or in part; or

(c) If it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in
determining whether a company is unable to pay its debts, the Court shall take into account the
contingent and prospective liabilities of the company.
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(2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given
under the hand of the creditor if it is signed by an agent or legal adviser duly authorized on his behalf, or
in the case of a firm if it is signed by such agent or legal adviser or by any member of the firm on behalf
of the firm.

TRANSFER OF PROCEEDINGS

Section 307: Transfer of proceedings to other Courts: -

Where the High Court makes an order for winding up a company under this Ordinance, it may, if it thinks
fit, direct all subsequent proceedings to be had in a civil Court empowered by the Federal
Government under sub-section (1) of section 7 or, with the consent of any other High Court, in such High
Court or in a civil Court subordinate thereto; and thereupon, for the purposes of the winding up of the
company, such High Court or civil court, as the case may be, shall be deemed to be the "Court" within
the meaning of this Ordinance and shall have all the powers and jurisdiction of the Court thereunder.

Section 308: Withdrawal and transfer of winding up from one Court to another: -

If, during the progress of a winding up in a civil court, it is made to appear to the High Court that the
same could be more conveniently proceeded within the High Court or in any civil court empowered by
the Federal Government under sub-section (1) of section 7 the High Court may, as the case may
require,-

(a) Withdraw the case and proceed with the winding up itself; or

(b) Transfer the case to such civil court, and thereafter the winding up shall proceed in such civil court.

PETITION FOR WINDING UP

Section 309: Provisions as to applications for winding up: -

An application to the Court for the winding up of a company shall be by petition presented, subject to
the provisions of this section, either by the company, or by any creditor or creditors (including any
contingent or prospective creditor or creditors), or by any contributory or contributories, or by all or any
of the aforesaid parties, together or separately, or by the registrar, or by the Commission or by a person
authorized by the Commission in that behalf.
Provided that-

(a) A contributory shall not be entitled to present a petition for winding up a company unless-

(i) Either the number of members is reduced, in the case of a private company, below two, or, in the
case of any other company, below seven; or

(ii) The shares in respect of which he is a contributory or some of them either were originally allotted to
him or have been held by him, and registered in his name, for at least six months during the eighteen
months before the commencement of the winding up, or have or devolved on him through the death of
a former holder;
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(b) The registrar shall not be entitled to present a petition for the winding up of a company unless the
previous sanction of the Commission has been obtained to the presentation of the petition:

Provided that no such sanction shall be given unless the company has first been afforded an opportunity
of making a representation and of being heard;

(c) The Commission or a person authorized by the Commission in that behalf shall not be entitled to
present a petition for the winding up of a company unless an investigation into the affairs of the
company has revealed that it was formed for any fraudulent or unlawful purpose or that it is carrying
on a business not authorized by its memorandum or that its business is being conducted in a manner
oppressive to any of its members or persons concerned in the formation of the company or that its
management has been guilty of fraud, misfeasance or other misconduct towards the company or
towards any to its members; and such petition shall not be presented or authorized to be presented by
the Commission unless the company has been afforded an opportunity of making a representation and
of being heard;

(d) The Court shall not give a hearing to a petition for winding up a company by a contingent or
prospective creditor until such security for costs has been given as the Court thinks reasonable and until
a prima facie case for winding up has been established to the satisfaction of the Court;

(e) The Court shall not give a hearing to a petition for winding up a company by the company until the
company has furnished with its petition, in the prescribed manner, the particulars of its assets and
liabilities and business operations and the suits or proceedings pending against it.

Section 310: Right to present winding up petition where company is being wound up voluntarily or
subject to Court's supervision: -

(1) Where a company is being wound up voluntarily or subject to the supervision of the Court, a petition
for its winding up by the Court may be presented by any person authorized to do so under section 309
and subject to the provisions of that section.

(2) The Court shall not make a winding up order on a petition presented to it under sub-section (1)
unless it is satisfied that the voluntary winding up or winding up subject to the supervision of the Court
cannot be continued with due regard to the interests of the creditors or contributories or both.

COMMENCEMENT OF WINDING UP

Section 311: Commencement of winding up by Court: A winding up of a company by the Court shall be
deemed to commence at the time of the presentation of the petition for the winding up.

POWERS OF COURT HEARING APPLICATION

Section 312: Hearing of winding up petition by the Court:

A petition for winding up of a company shall come up for regular hearing, be proceeded with and
decided in the manner laid down in section 9.
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Section 313: Court may grant injunction: -

The Court may, at any time after presentation of the petition for winding up a company under this
Ordinance, and before making an order for its winding up, upon the application of the company itself or
of any its creditors or contributories, restrain further proceedings in any suit or proceeding against the
company, upon such terms as the Court thinks fit.

Section 314: Powers of Court on hearing petition: -

(1) On hearing a winding up petition the Court may dismiss it with or without costs, or adjourn the
hearing conditionally or unconditionally subject to the limitation imposed in section 9 or make any
interim order, or an order for winding up the company or any other order that it deems just; but the
Court shall not refuse to make a winding up order on the ground only that the assets of the company
have been mortgaged to an amount equal to or in excess of those assets, or that the company has no
assets.

(2) Where the petition is presented on the ground that it is just and equitable that the company should
be wound up, the Court may refuse to make an order of winding up, if it is of opinion that some other
remedy is available to the petitioners and that they are acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.

(3) Where the petition is presented on the ground of default in delivering the statutory report or in
holding the statutory meeting or any two consecutive annual general meetings, the Court may instead
of making a winding up order, direct that the statutory report shall be delivered or that a meeting shall
be held, and order that costs to be paid by any persons who, in the opinion of the Court, are responsible
for the default.

(4) If, on hearing a petition, the Court is of opinion that, although the facts would justify the making of a
winding up order, the making of such order would unfairly prejudice the members or the creditors, the
Court may, instead of making an order for winding up the company, make such order as it thinks fit in
the circumstances for regulating the conduct of the affairs of the company and bringing to an end the
matters complained of, including an order for a change in the management of the company.

(5) Where the Court makes an order for the winding up of a company, it shall forthwith cause intimation
thereof to be sent to the official liquidator appointed by it and to the registrar.

Section 315: Copy of winding up order to be filed with registrar: -

(1) Within fifteen days from the date of the making of the winding up order, the petitioner in the
winding up proceedings and the company shall file a certified copy of the order with the registrar.

(2) If default is made in complying with the foregoing provision, the petitioner or, as the case may
require, the company, and every officer of the company who is in default, shall be punishable with fine
which may extend to one hundred rupees for each day during which the default continues.
(3) On the filing of a certified copy of a winding up order, the registrar shall forthwith make a minute
thereof in his books relating to the company, and shall simultaneously notify in the official Gazette that
such an order has been made.
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(4) Such order shall be deemed to be notice of discharge to the servants of the company, except when
the business of the company is continued.

Section 316: Suits stayed on winding up order: -

(1) When a winding up order has been made or a provisional manager has been appointed, no suit or
other legal proceeding shall be proceeded with or commenced against the company except by leave of
the Court, and subject to such terms as the Court may impose.

(2) The Court which is winding up the company shall, notwithstanding anything contained in any other
law for the time being in force, have jurisdiction to entertain, or dispose of, any suit or proceeding by or
against the company.

(3) Any suit or proceeding by or against the company which is pending in any Court other than that in
which the winding up of the company is proceeding may, notwithstanding anything contained in any
other law for the time being in force, be transferred to and disposed of by the Court.

Section 317: Court may require expeditious disposal of suits, etc: -

(1) Notwithstanding anything contained in any other law:

(a) If any suit or proceedings, including an appeal, by or against the company which is allowed to be
proceeded with in any Court other than the Court in which winding up of the company is proceeding,
the Court may issue directions to that other Court if that Court is subordinate to it and, in any other
case, make a request to that other Court for expeditious disposal of the pending suit or proceedings by
or against the company; and

(b) If any proceedings, including proceedings for assessment or recovery of any tax, duty or levies or
appeal or review petitions against any order is pending or is likely to be instituted, before any officer,
tribunal, authority or other body, the Court may issue directions to that officer, tribunal, authority or
other body for expeditious action and disposal of the said proceedings.

(2) Upon issue of a direction or making of a request as aforesaid, the Court, officer, tribunal, authority or
body to whom the same is addressed shall, notwithstanding anything contained in any other law,
proceed to dispose of the said suit or other proceedings expeditiously by according it special priority and
adopting such measures as may be necessary in this behalf, and shall inform the Court issuing the
direction or making the request of the action taken.

Case studies: -
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Pakistan - Baig Spinning wraps up as textile

crisis deepens
14 Jan, 2009 - Pakistan  
The energy crisis and high cost of doing business has swallowed its latest victim, Baig Spinning,
a big name in the textile industry.

Baig Spinning Mills Ltd, which closed its production units in 2006, has now been wound up. Dr
Mirza Ikhtiar Baig, federal adviser on textile and one of the directors of the company, told The
News the factory was closed two years ago in consultation with all the shareholders.

He said a liquidator was appointed and all payments of banks were cleared. Something was also
given to the shareholders, he said. He was happy that all loans of banks were repaid besides
payments to the workers at a time when other companies were declaring losses.

The escalation in cost, increase in raw material prices, high bank mark-up, rupee depreciation,
increased power tariff and depressed market conditions for yarn were major factors, said the
company secretary.

In reply to a show-cause notice sent by the Karachi Stock Exchange for not declaring dividend,
company secretary Hussain Ali Bhojani wrote on Monday that since the company was not
generating profit it could not declare dividend.” Persistent textile crisis forced the members to
voluntarily wind up the company,” he said.

The financial statement of Baig Spinning shows a decline in fixed assets by Rs26.2 million to
Rs284.1 million in 2006 from Rs310.3 million in 2001. Its current assets declined by Rs26.9
million to Rs120.0 million in 2006 from 146.9 million in 2001. However, it shows that liabilities
increased by Rs29.07 million to Rs196.1 million in 2006 from 167.03 million in 2001.

The textile industry and especially the spinning industry has been under continuous pressure of
various natures, including lack of support from the government for not providing a level playing
field to the spinning industry, said the company secretary. Other factors included rising rates of
cotton both locally and internationally, increase in fuel and power tariff, rise in mark up rates
and no correspondent increase in the prices of finished goods.

Narrating various reasons, he said, “there has been a liquidity crunch and the company could
not pay dividend and even had to get loan rescheduling from the banks.”

Despite the presence of adverse business conditions, the company managed to earn profits in
six out of eight previous years, although the amount of profit earned was not significant enough
to enable the company to declare dividend. “The earning of the company did not permit it to
declare dividend in the presence of huge business loss brought forward from year to year.”
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He said the management and directors decided to close production facilities effective from July
31, 2006, which ultimately proved to be a practical decision. Otherwise, the losses incurred
could have increased exorbitantly resulting in further deterioration to the disadvantage of
shareholders.

The company waited for a longer period for the improvement, but the directors felt that there
was no point in waiting indefinitely for reversal of the spinning sector crisis, and were left with
no choice except to recommend to general body of the company to wind up the company
voluntarily.

Hundreds of thousands of workers have already lost their jobs due to the closure of nearly 350
mills in two years. Ministry of Textile said that 90 major textile mills were closed in 2008 alone.
Whereas, officials of Pakistan Hosiery Manufacturers Association said that around 250 mills
from the knitwear and hosiery sub-sector were closed in two years.

Market players wonder that when a big company like Baig Spinning could not face the blow of
hardships against the textile industry, what would happen to small investors.

In order to save other textile companies, advisor on textile Dr Mirza Iftikhar Baig is taking up the
issue of high markup, 3 per cent markup rebate on spinning, RandD claims and other issues
with the State Bank governor on Thursday.

Source: The Nation, Pakistan