A Company is a legal or an artificial person brought into existence by following a process prescribed by the legislature under the Companies Act, 1956 (“Act”) which regulates the formation, financing, functioning and winding up of the companies. Since a company has a legal entity discrete from its members, the same is not affected by death, insanity or insolvency of an individual member and an end may be put to life of a company only in one or two ways, one of such way being the scheme of winding up comprised under Part VII of the Companies Act. Akin to the death of a natural being, winding up puts to end the business of the company and may be seen as a death of the company in commercial sense. Given the fact that company is an entity which does not work in isolation, winding up is seen as a delicate issue both by legislature and judiciary. This ethos is well manifested in the fact that Section 433 of the Act lists all the probable circumstances in which a company may be wound up under the order of the court and is further accentuated by the body of law prescribing strict principles on the applicability of the said section developed by judicial precedents.

One of the circumstances under which winding up order may be issued is company’s inability to pay its debt as laid down in sub section (e) of section 433 of the Act. From the provision contained in section 433 (e) it follows that there must be a debt to begin with and the company must be unable to pay the same. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date. The decision on inability should be taken after giving due consideration to financial status, strength and overall health of the company. Temporary factors such as short-term liquidity crunch or cash crisis would not constitute a ground empowering the court to wind up thecompany. One defense in hands of the company in winding up proceedings is to dispute the debt however the courts will be reluctant to order winding up only if the debt is bonafide disputed and the defence put forward by the company is a substantial one. A company cannot take recourse under this defence if despite having ability to pay it chooses not to pay a particular debt.

It has often been observed by courts that many petitions filed under section 433 (e) are generally driven by the creditor’s intention to claim his own debt and the process of law is merely used as a pressure tactic to force companies to pay debts which are substantially disputed. In each and every case for the inability of the company to pay its debts, winding up petition cannot be admitted as a rule or right. Courts are of the view that this section isn’t an escape route for the creditors to back their debts; this provision has to be used in public interest. Apex court has held that winding up petition is not a legitimate means of seeking to enforce payments of the debt which is a bona fide disputed by the company. A party to the dispute should not be allowed to use the threat of winding up petition as a means of enforcing the company to pay a bona fide disputed debt. In such cases proper remedy may lie with civil court because company court cannot be expected to act as a debt collecting agency.

The passing of winding up order against a company assumes greater importance for the reason that company is not a secluded organization and it impacts and has bearing on the interest of various interest groups. To start with company directly affects the interest of investors and creditors of the company whose money is at stake. Company being part of the economic set up of the country, its permanence or shutdown also influences the market forces which in turn have an effect on the interest of the end user of the goods or services manufactured or traded by the company. In addition, company’s continuity or otherwise may impinge upon the labour market of the country. Though ordinarily an unpaid creditor may aspire for an order of winding up, court cannot remain oblivious to the fact of company being a going concern having regular business and employment of employees. All these factors and more make it all the more important to develop stringent and well defined parameters for passing up of a winding up order. The ground of winding of contained in section 433 (e) is a double edged sword. On one hand lies the claim of a bonafide creditor who is very well entitled to use the provision of law to his benefit and for recovery of his money. On the other are the consideration of public interest and commercial character of the company having impact on the economic situation as a whole. Thus in wake of the above courts are rather circumspect before passing order under the said provision of section 433 (e).