Suraj Singh
Asked August 06, 2014

Fate of Winding Up Petition

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1. What are the circumstances which the Company Court takes into account before admitting/dismissing a Winding Up petition? How can a Company avoid admission of petition itself? 2. What exactly is the meaning of "commercial insolvency", which the Courts have taken into account while hearing the winding up petition post its admission. What is the financial data which courts look into while determining a company's commercial solvency/insolvency?

Answer 1

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Ayushi Singhal
1. A winding up petition is generally made when a company is unable to pay its debts. A company court while admitting or dismissing the petition; analyses the status of the debt which has been alleged to be unpaid. It has been held that a court will not admit a petition in case “the respondent raises a “substantial” or “bona fide” dispute as to the existence of the debt. ” This means that the admission or dismissal of a petition is dependent on the existence of a valid, undisputed and an unpaid debt in favor of the petitioner. No suit should be pending in relation to the debt and if such is the case, the suit should be resolved before the petition is admitted. It has been held so, so that the petitioner does not take the advantage of a winding up petition as a measure to force the company to pay the debt in question. The company can thus avoid the petition itself, by proving that the debt which the petitioner alleges is unpaid; is under a dispute. Since the winding up petition is made because of an unpaid debt, the admission of the petition can also be avoided by paying the unpaid debt. 2. Commercial insolvency under Section 434(1)(a) of the Companies Act, 1956 refers to a situation when the company is unable to meet its current liabilities. It does not matter that the company has sufficient assets, which if realized will lead to the discharge of all liabilities; the excess of current liabilities over the current assets is what is meant by commercial insolvency. The company doesn’t have to be insolvent in a comprehensive and a long term sense. It is thus possible that the company is wealthy and insolvent at the same time. The court examines the balance sheet of the company to see whether company is in a position to meet its current liabilities. If the working assets are insufficient to meet the existing liabilities and the cases where the “Company (is) … unable to pay its debts when they become due although its assets including its capital exceed its liabilities, such Company must also be held to be "commercially insolvent" and as being unable to pay its debt”.
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