Audit of “Divisible Profits” and “Dividends”

Key Points:

1. Meaning of Profit.
2. Computation of Profit and Divisible Profit.
  (A) AOA or Articles of Association,
  (B) Companies Act,

Link : https://smckk14.blogspot.com/2023/07/audit-of-educational-institution-school.html

 

1. Meaning of Profit:

Profit = Sum of business Receipts less Expenses and losses.

Profit = Income (-) Expenses

Actual Profit means difference between market value of net assets of the business at the end and at beginning of accounting year.

As per Going Concerned Concept,

Profit = Revenue, Receipt from sales of goods and /or services (-) Expenses and losses of recurring nature.

Moreover, profit is that which has been actually ‘realized’, though it does not mean that goods should be actually converted into cash before saying that profit has been ‘realized’. However, sale of goods results in creation of book debts and bills receivable against credit buyers, only that part of the profit should be taken into account which remains after providing for possible bad debts.

There are Accounting Standards and GAAP or Generally Accepted Accounting Principles for determining the profit and it is no more open to the owners /managers to determine profit.

Overstatement of profit results in – (a) Payment of dividend out of capital, (b) Distortion of financial statement and this will harm the interest of all Shareholders, Creditors, Lenders, Government and Public.

Understatement of profit denies dividend legitimately due to shareholders, to workers the bonus, and to investors the appropriate to invest in business and to government the tax revenue.

2. Computation of Profit and Divisible Profit:

In case of ‘Sole Proprietorship’ or ‘Partnership Business’, the profits and divisible profits maybe interchangeable terms. But in case of ‘Company’, the company has to follow the following before deciding on distribution of dividend.

(A) AOA or Articles of Association,

(B) Companies Act,  

(A) AOA or Articles of Association:

Table ‘F’ of AOA limited by share, contains the following provision about distribution of dividend –

(i) Board to Recommend and General Meeting to Declare Dividend –

A company may declare dividend at its General Meeting but it cannot exceed the amount recommended by board. Clause (80) (But can decrease the amount)

(ii) Board can Announce and pay Interim dividend –

The Board may from time to time pay Interim dividend, if the payment is justified seeing profits of the company. Clause (81) however announcement can be revoked. It does not create enforceable right in favour of shareholders and against the company.

(iii) Dividend may be out post depreciation profits of the present, or past financial years, or out of money provided by Government –

Divisible profit should be calculated after providing depreciation for relevant year (s). Dividend may be declared out of money provided by Central or State Government (s) for distribution of dividend as per guarantee given by its section (123). Declaration of final dividend becomes an enforceable right against the company and it cannot back out on it.

(iv) Setting aside Profits or Reserve (s) –

Before recommending dividend, the board may at its description, set aside part of profits and reserve (s), or carry forward the entire profits without declaring dividend or creating reserve. The Reserve (s) maybe applied for the purposes of the company e.g. for meeting contingencies, equalizing dividend, etc. pending such application, the board may use the reserve (s) in company's business or invest it in other avenues, but not in share of the company. Clause (82)

(v)  Dividend to be Proportionate to the Amount Paid on Shares –

Dividend payment will be proportionate to the amount paid on shares. If entire call money has not been paid on certain shares, dividend pay on them will be proportionate to the amount actually paid, unless the AOA speaks of payment related to nominal value of shares. Amount paid or credited as paid against calls in advance will not be treated as amount paid on shares. However, participating preference shares may rank for dividend distribution out of profit in addition to fixed dividend payable to them. Clause (83).

(vi) Declaration for Unpaid Calls etc. –

The board may deduct from dividend payable to any member, any money presently payable by him on calls, or otherwise, in respect of shares held by him. Clause (84)

(vii) Payment maybe paid by Cheque and Warrant –

Any dividend, interest or other money Payable in cash in respect of shares may be paid by cheque or warrant. The cheque or warrant should be sent through post directly to registered address of shareholders, and in case of joint holders, to registered address of that shareholders who has first name in the register of members, or to any person or address as directed in writing by the shareholder (s). The cheque or warrant will be payable to order of the payee. Clause (85)

(viii) One or more Joint holders may be given receipt for Dividend –

Acknowledgement of receipt of dividend, bonus or other money payable in respect of share may be given by anyone or more of the joint holders. Clause (86)

(ix) Notice of Dividend Declaration –

Notice of any dividend declared by company must be given to person and entitled to share it. Clause (87)

(x) Dividend not to Carry Interest –

Dividend will not carry interest against the company. Clause (88)

(B) Companies Act:

(i) Payment of dividend only amount of post depreciation profit of relevant or post financial year –

Section 123, A company can only declare dividend out of profits of the relevant year. Dividend can be declared or paid by the company for any financial year only out of –

(a) Profit for that year, arrived at after providing depreciation, or

(b) Profits for any financial year or financial years, after providing depreciation for the relevant financial year (s), or

(c) Aggregate of its profits mentioned (a) and (b) above, or

(d) Any money provided by Central Government or State Government (s) for payment of dividend in pursuance of a guarantee given by it.

(ii) Dividend may be paid out of free reserves –

Specific reserves like debenture redemption reserve, will not be used for distribution of dividend.

(iii) Payment of Dividend from Accumulated Profits only as per Rules –

If the company process to distribute dividend even despite nil or inadequate profit, it may do so by transferring accumulated profits to reserves, but subject to the rules.

(iv) Interim Dividend –

Board may declare interim dividend from surplus of Profit and Loss account and current financial year profit. But if the company has suffered loss in the financial year up to the end of the quarter proceeding the declaration, the rate of dividend cannot be more than the average dividend declared during the immediate preceding three financial years.

(v) Deposit of Dividend in Separate Account in Scheduled Bank –

The dividend including interim dividend should be deposited in a special account in a Scheduled Bank within 5 days from the date of declaration. It will only be payable in cash to the registered shareholders or to his order by a cheque or warrant or through any electronic mode.

(vi) Capitalisation of Profits or Reserves –

The company is free to capitalise its profits or reserves to issue fully paid up bonus shares or to use for adjustment against any amount due from shareholder (s).

(vii) No declaration of dividend in case of noncompliance with acceptance as to acceptance and repayment of Deposits -

A company cannot declare dividend if it fails to comply with provisions of section (73) and (74) dealing with acceptance and repayment of deposit and interest of them.

(viii) No rights to dividend, rights of bonus shares until registration of transfer of shares -

As per section 126, If a company has received and instrument of share though it has not get registered it, it will transfer dividend in respect of such share to unpaid dividend account. However, the company may pay such dividend to the transferee specified in the instrument if the registered holder of share authorized it to do so in writing. However, it will put on hold any offer of right share or issue of fully paid up bonus share until registration of the transfer of share.

(ix) Punishment for Non-payment of Dividend after Declaration -

According to section 127, if the company has declared dividend but has not paid it or has not posted the warrant to the shareholder within 30 days of declaration, every director who is knowingly a part to the default, shall face imprisonment up to 2 years and pay fine of ₹ 100000 per day of default. The company will be liable to pay interest at 18% per annum during the period of default. 

Audit of Educational Institution (School, College & University):

Key Points:

I. Preliminary
II. Audit of Income.
III. Expenditure Audit

 

Link : https://smckk14.blogspot.com/2023/03/cost-audit-meaning-objectives.html

The auditor should audit the accounts of an "Educational Institution" as follows -

I. Preliminary:

(a) Scope -

Auditor should go through his appointment letter to examine the scope.

(b) Fundamental Documents -

He should examine Bye - laws, Trust deed, or Regulation in case of school and college and should not its provisions affecting accounts. In case of University, he should study the Act and relevant rules.

(c) Minutes of Meeting -

Should examine minutes of meeting of General body, Society, Trust, Executive Council or Managing committee and note the resolutions on accounts, including banks accounts.

(d) Evaluation of Internal Control -

Careful evaluation of internal check and control systems to insure proper delegation of duties and responsibilities, system for authorisation and recording procedures in respect of assets and liabilities, reserve and expenses and observance of sound accounting practices.

II. Audit of Income:

(i) Tuition Fees etc. -

Auditor should check the Student Fees Register for each month and with class registers, showing the names of students on roll. He should test check entries in Fees register for tuition fees, sports fees, building fund etc. and see whether there have been properly computed, demanded and recovered from students.

(ii) Proof of Fee Receipt -

He should check the fees received with counter foils of money receipts issued to students, as also with entries in cash book and fees register. If fees have been received online, he should check the Bank account and entries in fees register.

(iii) Investigation of Deviations -

He should check fees collection for the month with aggregate total in fees register. In case of any difference, whether due to arrears or advance payments, he should see that the respective amount are carried forward and appropriately disclosed in annual accounts.

(iv) Fee Concession etc. -

In case of free studentship of other concessions, he should examine the authorisation and see that it is consistent with the policy decision of managing committee.

(v) Late Payments -

He should check late payment of fees along with fines, if any, with entries in fees register and authorisation for late payment by responsible official.

(vi) Capital Receipts -

Capital receipt like admission fees, building fund, contribution etc. are to be credited to separate account, unless there is a specific decision of managing committee to the contrary.

(vii) Arrears of Fees -

He should ascertain if all arrears of fees, including hostel dues, are recovered before the student's accounts are closed. In case there are heavy arrears of fees or hostel dues, it should be enquired whether these have been brought to the notice of the Management Committee.

(viii) Grants from Government or Local body -

He should check the basis of rules of Institution and relevant correspondence. If any Grant is in terms of a percentage of actual expenses, he should examine the unapproved expenses that are not eligible for grant.

(ix) Income from Endowment Fund -

He should examine the endowments fund and legacies and vouch the income from them by reference to relevant vouchers and investments. The investments as far as possible by physically verified and, if in the custody of a third person, he should be asked to confirm the holding. In case of endowments created for distribution of prizes in the names of donors, he should see that these are credited to a separate account and, where the income exceeds the expenses on prizes, the surplus is invested along with the Corpus. Income from donations or funds for specific purposes should not be treated as general income or applied elsewhere.

(x) Rental Income -

If a part of the building in the premises or elsewhere has been rented out, rental income should be checked with Rent Rolls, and income arrears or received in advance should be disclosed in annual statement, Income and Expenditure account and Balance sheet of the institution.

(xi) Investment Income -

If part of Grants or endowment has been invested in bank or Government Security, the auditor should follow the income and see if there is any default in payment. Some Institutions may use the capital for unauthorised construction of building to accommodate more students to enhance fee income. It is auditor's duty to check these and, if necessary, to report it to the authority giving the Grant. These may also be default in depositing provident fund contributions of staff.

III. Expenditure Audit:

(i). Classification of Reserve and Capital Expenses -

These should be proper difference between capital and revenue expenses. Capital expenses should be vouched with the resolution of managing committee that authorise it, as also relevant vouchers and receipts reserve expenses like salary of staff etc. should be checked with Cash /Bank account. If salary etc. are electronically transferred to accounts of the recipients, entries in the bank account and individual ledger account should be the basis for checking.

(ii) Expenses in excess of Budgeted Amount -

It should be authorised by managing committee giving reasons.

(iii) Purchase, Issues and Custody of Materials -

An institution purchases different things like Stationery, Sports item, Lab materials, Music Instrument, Furniture's etc. The auditor should see that all the purchases and issues are the properly authorised. Supported by receipts from vendors, and the remaining items are in safe custody of the responsible person.

(iv) Stock - Taking -

Stock of Furniture, Stationery, Equipment's etc. should, as far as practicable, be physically verified. He should compare the stock on hand with the quantity and description as given in the stock register and ascertain whether it has been properly valued. 

"Prevention of Oppression and Mismanagement": Under Section (241 to 246)

Key Points:

1. Introduction.
2. Meaning of Oppression.
3. Meaning of Mismanagement.
4. Who can apply to Tribunal?
5. Powers of Tribunal: Under Section (242)
6. Effects of the order of Tribunal.
7. Class Action: Under Section (245)
8. Reasons / Bases to File Application.

• Rights of Tribunal regarding Prevention of Oppression and Mismanagement Section (241)
• Consequence of Termination /Modification of Certain Agreement: Under Section (243)

 

Link : https://smckk14.blogspot.com/2023/07/winding-up-of-company-detailed.html

1. Introduction:

Members of a company control the management and its policies. It is done by majority. Directors are appointed by members to manage the affairs of the company and directors manage the company with consent of the members. Thus the majority succeed in doing those works what they want.

It creates oppression against the minority and this evil gradually spreads to the entire company which severely affect the interest of minority.

To curb this oppression /evil, there are some provisions in Companies Act, 2013 which prohibit the misuse of oppressions committed by majority and gives rights to minority to present their plea before the Tribunal to get remedy.

These provisions are given from section (241 to 246).

2. Meaning of Oppression:

Oppression is a social act of inflicting severe reactions on an individual group or institution.

Cambridge dictionary - A feeling of being very uncomfortable and worried.

Oppression is not defined in company law 2013. But the court defines it as a conduct that includes a visible departure from the standards of fair dealing and violation of conditions that require fair practice for rights of shareholders.

Oppression involves fraud, breach of duty and misconduct.

3. Meaning of Mismanagement:

Mismanagement is also not defined in company law 2013. It may be described as a control on matters of the company in unjust and dishonest matter.

It also refers the process of managing incompetently, wrongly or badly.

4. Rights of Tribunal regarding Prevention of Oppression and Mismanagement Section (241):

On submitting the application before the Tribunal, the Tribunal can exercise its powers in two conditions -

(i) In case of oppression. (ii) In case of Mismanagement.

5.. Who can apply to Tribunal?

In case of oppression and mismanagement, following members may apply to Tribunal for remedies -

(i) In case of Company with a Share Capital -

Not less than 100 members or not less than 1/10^th of the total number of its members whichever is less, or

Any member or members holding not less than 1/10^th of the issued share capital of the company.

Note - The applicant should have paid all the calls and other sums payable on shares.

(ii) In case of a company with no share capital -

Not less than 1/5^th of the total number of its members. Section (244)

Anyone or more than one members, after obtaining consent of other members, may apply on behalf of all of them. The Central Government may allow less number of applicants, if deems think appropriate under section (241)

(1) Application in Tribunal in case of Injustice -

If members complain about Injustice and the Tribunal is of the opinion that (a) The management of the company is being performed which is against public policy or unjust against anyone or more members and (b) The Order of winding up of the company shall be harmful to the interest of such members,

The Tribunal may order to rectify the related matters as it thinks fit.

Such an order is an alternative to order of winding up.

Case Laws - (i) N R Murthy Vs ID corporation of Odisha.

(ii) Elder Vs Elder and Watson Limited.

(2). Application in Tribunal in case of Mismanagement -

If members of the company, feel that -

(i) The functions of the company are against Public Interest or companies interest, or

(ii) Due to any substantial change in control of management of the company, it is possible that such change may go against Public Interest or company’s interest,

The members may apply to Tribunal for prohibiting this mismanagement.

If on the basis of such application, the Tribunal believes that there is Mismanagement in the company which may cause harm to interest of public or company, that Tribunal may pass such an order as it thinks appropriate.

Note - As provided in section (241), change made in management or control of the company, which negatively affects the interest of company, is called 'Mismanagement'. e.g. (i) Change in Board of Directors or Management, (ii) Change in ownership of shares, (iii) In case of company with no share capital, any change occurred in membership of company etc.

Case Laws - (i) V J Thomas Vs Kuttanav Rubber Company Limited.

(ii) Kumar Exporters Private Limited and Others Vs Naini Oxygen and Acetylene Gas Company Limited and Others.

6. Powers of Tribunal: Under Section (242):

(I) Power to Prevent Oppression and Mismanagement -

The Tribunal may issue orders for followings -

(i) To regularize the affairs of the company in future.

(ii) To purchase the interest or shares of the members of the company by other members or company itself.

(iii) To reduce the share capital of the company in case of purchase of shares by the company.

(iv) On termination or correction of any agreement done between the company and the following persons - (a) Managing Director, (b) Any other Director, (c) Managing Agent, (d) Secretary, (e) Treasurer and (f) Manager

(v) Agreement between company and the members who have not be mentioned in (iv) cannot be terminated or corrected as long as not informed to the concerned parties.

(vi) For cancellation of any transfer, delivery or payment of any property by the company.

(vii) For any other matter, which the Tribunal thinks justifiable under section (242).

(II) Power to Issue Interim Order -

On any application given by any person, before giving any Final Decision, the Tribunal may issue any such interim order to control the affairs, which it thinks appropriate and justifiable section (242).

7. Effects of the Order of Tribunal:

(i) Effects on MOA and AOA -

If subject to any order of the company, any changes have been made in AOA or MOA no company can make such a change which has been made in the contrary to the change made by Tribunal or the change made does not match with the change made by the company.

If the company makes any change in MOA or AOA, its information should be given by the company to the ROC within 30 days.

(ii) Effects on Managers /Officers -

If, as a result of the order of the Tribunal, agreements made with manager /officers (Managing Director, Director, Manager etc.) get cancelled or any amendments are made in the agreements and due to this amendment, any person is removed from his post, then - (a) No compensation shall be given to him and (b) He will not be appointed on same post till next 5 years.

(iii) Penalty – Under Section 242 (8)

If any company violates the provisions of section 242 (5), the company will be imposed with the penalty of minimum ₹ 1 lakh to maximum ₹ 25 lakhs and every defaulting officer of the company shall be punished with imprisonment of maximum 6 month or with fine of minimum ₹ 25000 and maximum ₹ 1 lakh or with both.

8. Consequence of Termination /Modification of Certain Agreement: Under Section (243)

(i) Where an order issued under section (242); terminates, sets aside or modified an agreement such as is referred to in sub - section (2) in that section -

(a) Such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise.

(b) No managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of 5 years from the date of order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company.

Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave as been served on the central government and that government has been given a reasonable opportunity of being heard in the matter.

(ii) The person who knowingly violated the clause (b) of sub-section (1) and acts as a managing director or other director or manager of the company and such every director who knowingly becomes a part of such violation, shall be punishable with imprisonment for the term which may extend to 6 months of with fine which may extend to ₹ 5 Lakhs or with both.

9. Class Action: Under Section (245)

(i) If Member (s) or Depositor (s) of the company feel that the business of the company is carrying out against the interest of them, they can file an application before the Tribunal in this regard.

(ii) The Member (s) or Depositor (s) rise the demand for action against the auditor or firm of the auditor, the concerned audit firm and every defaulting partner shall be declared as responsible.

(iii) (a) In case of a company with share capital minimum 100 members of the company or any specified number of total members of company whichever is less or any member (s) who have specified person of issued share capital of the company, may make demand.

(b) In case of company with no share capital 1/5^th of number of total members.

(iv) Order issued by Tribunal shall be applicable to the company, all the members, depositors and auditor (including firm of Auditor, Expert, Consultant and Advisor) or any person of the company.

(v) Any company, who under this section fails to implement the order issued by Tribunal, it will be fined with minimum ₹ 5 lakhs and maximum ₹ 25 lakhs, and every defaulting officer of the company shall be punished with imprisonment of a term of up to 3 years, and with fine of ₹ 25000 and maximum ₹ 1 lakh or with both.

10. Reasons / Bases to File Application:

For following purposes, application may be submitted before the Tribunal -

(i) Prohibiting of the company from ultra-virus Acts of MOA and AOA.

(ii) Prohibiting of the company from violating provisions of MOA and AOA.

(iii) If any resolution have been passed by winding the important facts or by misstatements which alter the MOA and AOA, declaring such resolution void and null.

(iv) Prohibiting the company and directors to work on resolution.

(v) Prohibiting the company to do such acts which are against the provisions of Companies Act or other laws.

(vi) Any other remedy with which the Tribunal may think appropriate. 

Winding - up of a Company : Detailed Information

"Winding - up" of a Company

Key Points:

1. Meaning of Winding up of a Company.
2. Definition of Winding up of a Company.
3. Characteristics of Winding up.
4. Methods of Winding – up.
5. Petition for Winding up.
6. Commencement of Winding up by Tribunal.
7. Procedure of Compulsory Winding up /Winding up by the Tribunal.

Case Law - The New Swadeshi Mills Ahmedabad Limited vs Dye Chemicals Corporation (1985)

 

Link : https://smckk14.blogspot.com/2023/07/minutes-under-section-118-to-122.html

"Winding - up of a Company"

1. Meaning of Winding - up of a Company:

Winding up of a company is meant by a process through which the company is liquidated /ends by following the legal process. A company is an artificial person. It is created by the law and liquidates by law.

The main objective of the winding up is to distribute the surplus amount among its shareholders after the making payments of loans and liabilities from the amount received by sale of assets.

2. Definition of Winding - up of a Company:

According to M. C. Kuchhal - "The winding up or liquidation of a company is process to bring about an end to the life of a company".

3. Characteristics of Winding - up:

(i) It is a Process.

(ii) It is different from Dissolution.

(iii) Winding up is not for Insolvency of Company. A company maybe wound up, in case of sound financial position also.

(iv) This process start from sale of assets and ends with payment to creditors, loans, Government dues and at last payment to shareholders.

(v) Creditors are paid in sequential order.

(vi) The amount remaining after all payments, is distributed among in the ratio of their rights.

4. Methods of Winding - up:

According to Under Section 270, the winding up of a company may be done in any two of the following Methods /Ways -

(I) By Tribunal /Compulsory Winding - up:

When the winding up of a company is done by the Tribunal, it is known as “Winding up by Tribunal or Compulsory Winding – up” .

In following cases, the winding up of a company is done by Tribunal -

(1) By Special Resolution -

When company has passed a special resolution that the winding up of a company shall be done by Tribunal, then after passing such resolution, the winding up maybe performed due to any reason.

This is to be noted that the Tribunal considers the application of the company and passes the order of winding up only if the winding up is in the interest of the public or the company.

(2) Not filing Annual Returns /Statements -

If the company fails to submit the financial statement or annual returns of last five consecutive years, the Tribunal may be winding up the company.

(3) Business acts against Public Policy -

If the company has acted against the interest of the sovereignty and integrity of India, the security of the state, friendly relations with foreign States, public order, decency and morality.

(4) If on an application made by Registrar or any other person authorised by the central government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner of the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation of management of its affairs have been guilty of fraud, misfeasance and misconduct in connection therewith and that is proper that of company be wound up.

(5) Under the Chapter XIX -

If the Tribunal has ordered the winding up of the company under the chapter XIX.

(6) Inability to Pay Debts -

The Tribunal may order for winding up, if the company is unable to pay its debts.

Under following conditions, the company is deemed to unable to pay its debts -

(i). When the creditor of ₹1,00,000 or more, demands for return of loan and the company deposit pay within 21 days from the date of demand or could not convince the creditor.

(ii) When the company becomes unable to pay the Decree either fully or partially issued by Tribunal in favour of company.

(iii) Upon seeing all the circumstances, the Tribunal gets satisfied that the company is unable to pay its debts, the Tribunal passes the order of winding up.

Case Law - The New Swadeshi Mills Ahmedabad Limited vs Dye Chemicals Corporation (1985).

(7) If winding up is just and equitable in the opinion of Tribunal -

Generally, the Tribunal considers the following conditions as just and equitable -

(i). When the attainment of main objective, for which the company was formed, becomes impossible or impractical.

(ii) When the company has lost its substratum.

(iii) If the company is running in loss for several years and there is no hope for profit in future.

(iv) If the company has been formed for illegal or fraudulent purposes.

(v) When it becomes impossible to run the company due to lock down, Strike etc.

(vi) If minority shareholders are facing oppression.

(vii) If company is a shell company.

(viii) If the company has lost all its capital.

(ix) If AOA provides the provisions happening upon which the company may be compulsory wound up, and anyone or more of the such provisions have already happened.

(x) If overall inspection of the company becomes necessary.

(xi) On fear of incidents against Public Interest.

(xii) If there is mismanagement in the company and the members have lost their confidence on each other.

5. Petition for Winding - up:

According to Under Section 272, the following persons may be file petition in the court for winding up by Tribunal or for compulsory winding up -

(i) By Company Itself -

A company may file petition for compulsory winding up by passing special resolution in general meeting, in this regard.

(ii) By Creditor (s) of the Company -

Creditors is a comprehensive word which includes present, future or contingent creditors also. A secured creditor, debenture holders and Trustee of debenture holders are also included in this category.

(iii) By Contributory (ies) -

Contributories of the company may also file petition for compulsory winding up of the company. But they can do so only when - (i) They are the owner of fully paid up shares, or (ii) Company has zero assets, or (iii) There is no assets remaining to be distributed among shareholders, after payment of liabilities.

A contributory may file petition for compulsory winding up in following circumstances only -

(a) If company has ownership of shares less than required as minimum, or

(b) If he is the original allottee of shares or the shares have been required at least up to before 6 months before the 18 months of starting the process of winding up, or

(c) If he has received the shares on the basis of succession after the death of the original shareholder.

(iv) By ROC -

ROC may file petition in the situation when the company is not able to pay its debts and as long as it is not clear to him on the basis of report of an investigator regarding the investigation of financial position of the company.

The ROC must have to take permission of Central government to file petition and the central government shall not give permission until the company was not allowed to present its stake.

(v) By Central Government -

If the Central Government on the basis of report of investigators believes that -

(a) Business of the company is being carried out to form the creditors or members.

(b) Company is being managed for illegal or fraudulent matters, the central government may direct any person (include ROC) to file the petition.

(vi) By Liquidator -

If company is going under voluntary winding up, the liquidator may file petition. The Tribunal will order for compulsory liquidation when it becomes satisfied that keeping the interest in mind, the interest of creditors or members or both the voluntary liquidation is not possible.

6. Commencement of Winding - up by Tribunal:

(i) From the date of passing the resolution by the company -

If the company passes the resolution regarding voluntary liquidation in General Meeting before filing the petition in the Tribunal, the commencement of liquidation is deemed to have been started from the date of passing the resolution.

As long as, the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.

(ii) From the date of representing the application form -

In all other cases, the winding up of a company by the Tribunal shall be deemed to commence at the time of present presentations of the petition for the winding up.

7. Procedure of Compulsory Winding up /Winding up by the Tribunal:

(i)  Application -

By the company itself, creditors, contributories, members /shareholders, Registrar or liquidator to Tribunal.

(ii) Considering of Application by Tribunal -

It is a solely on Tribunal whether it accepts the application for consider or not. If accepted, further process starts and if rejected, no process is initiated.

(iii) Publication in Gazette -

Application is published in gazette which contains the date of hearing.

(iv) Advertisement in Newspapers -

At least before 14 days before the hearing date.

(v) Application for Cessation of Winding up -

After submission of application for compulsory winding up but before issue of order of winding up, an application by the company or creditor, member may be submitted in Tribunal at any time.

(vi) Hearing on Application - 

The Tribunal hears the presentations of directors, creditors or members.

(vii) Order after Hearing -

After hearing, the Tribunal may issue any of the following orders -

(a) May accept the application with or without expenses.

(b) May adjourn the hearing with or without imposing any condition.

(c) If thinks appropriate, may issue interim order.

(d) If thinks appropriate, may issue the order of compulsory winding up with or without cost.

(viii) Not Issuing the order of Winding up -

If the application is submitted before Tribunal on the basis of 'Just and Equitable' approach, the Tribunal shall reject the issue of order of winding up, if it thinks that the company maybe compulsorily wound up on any other grounds.

(ix) Other Order to Call Statutory Meeting or giving Report -

If application for winding up is made on the ground that the company has been failed to call statutory meeting or submitting statutory report, the Tribunal may order to call the statutory meeting or to present statutory report.

Any defaulting person shall be ordered to pay the expenses incurred.

(x) Appointment of Liquidator -

When Tribunal passes order of winding up, it also appoints a liquidator and this information is sent to the person so appointed as liquidator and ROC both.