The company is a miniature republic comprised of shareholders. It functions on democratic principles. The shareholders participate in the management of the company and give directions to the board of directors by according their consent to various proposals; approving functional and financial performance, appointing, reappointing or removing the directors and auditors etc. All such decisions are taken on the basis of the consensus of the constituent shareholders in a forum called general meeting. Thus general meeting is a meeting of the members or shareholders of the company. Sometimes particular class of meeting is called for meeting and my topic is of meeting of creditors.
Characteristic of company meeting
# 2 or more person required for holding meeting
# Assembly for discussion and transaction of some lawful business
# Proper notice for meeting
# Meeting must be held at particular place, date and time.
# Should follow the provision of Companies Act.
Types of meeting
# Statutory meeting (S.165)
# A.G.M. (S.166)
# E.G.M. (S.169)
# Class meeting of members of particular class
# Meeting of debenture holder
# Meeting of creditors
# Meeting for compromise or arrangement
# Meeting for Winding up
Meeting of creditors
The meetings of creditors are called when the company purposes to make a scheme for arrangement with its creditors.
Section 391 to 393 of the companies Act not only give powers to the company to compromise with the creditors but also lay down the procedure of doing so.
Creditors meeting are also convened in the case of creditor’s voluntary winding up.
# An application must be made to the High Court for direction to hold meeting of creditors
# The High Court may order a meeting of creditor.
# Holding of meeting of creditor as per the High Court order.
# Scheme of compromise or arrangement must be approved by 3/4th in value of creditors
# An approved scheme duly sanctioned by High Court in binding on all the creditor.
# Meeting of creditor on voluntary winding up
Section 498 provides that where the liquidator is of the opinion that the company will not be able to pay its debt in full, it will be considered as the creditors’ voluntary winding up and not a members’ voluntary winding up and he shall summon a meeting of the creditor as per section 495 of the Companies Act
Section 495 to 507 deals in detail with the topic
Meeting of creditors and Judicial Decision.
Section 499 to 509 are dealing with the provision of the meeting of creditor on voluntary winding up.
Creditor – Every person having a pecuniary claim against the company, whether actual or contingent, is a creditor. In general, any person having pecuniary claim against the company capable of estimate is a creditor.
The following case law are relevant in this context
Seksaria cotton mils LTD v. A.E.Naik - in this case it was held that while at the time of sanctioning of the scheme, the sales tax department had a claim against the company, even though the claim might have been a future claim or even a contiengent claim, the sales tax department was a creditor of the company and was bound by the scheme as an unsecured creditor.
Tika Ram and Sons Pvt. Ltd. v. CIT - In this case it was held that the income tax department cannot, before an assessment is made, be considered a creditor within the meaning of S. 391. It is only after an assessment is made that a debt can be said to accure to the department which can be proved before the liquidation court.
Interpretation by Indian court
In Maneckchowk & Ahmedabad Mfg. Co. Ltd - It is formidable difficulty to say what constitutes a class of creditors. Speaking very generally, in order to constitute a class, members belonging to class must form a homogeneous group of commonality of interest. If people with heterogeneous interests are combined in a class, naturally the majority having common interest may ride rough shod over the minority representing a distinct interest. One test that can be applied with reasonable certainty is as to the nature of compromise offered to different classes or groups. The company will ordinarily be expected to offer an identical compromise to persons belonging to one class, otherwise it may be discriminatory. At any rate, those who are offered substantially different compromises each will form a different class. Even if there are different groups within a class, the interests of which are different from the rest of the class or who are to be treated differently in the scheme, such groups must be treated as separate classes for the purpose of the scheme. Broadly speaking, a group of persons would constitute one class when it is shown that they have conveyed all interests and their claims are capable of being ascertained by any common system of valuation. The group styled as a class should ordinarily be homogenous and must have commonality of interest and the compromise inferred to them must be identical. This will provide rational indicia for determining the peripheral boundaries of classification. The test would be that a class must be confined to those persons whose rights are so similar as not to make it impossible for them to consult together with a view to their common interest.
Following position emerge out of it.
1. Creditor can be divided into 3 categories of preferential creditors, secured creditors and unsecured creditors.
2. All preferential creditors who have no security for their debt can be treated as one class whether or not some are secured and some unsecured.
3. All unsecured creditors will normally form a single class.
4. Secured creditor with common security will be in same class.
5. Fixed deposited holder is considered as the creditor of the company.
Now under section 500
Meeting of creditors.
1. The company shall cause a meeting of the creditors of the company to be called for the day, or the day next following the day, on which there is to be held the general meeting of the company at which the resolution for voluntary winding up is to be proposed, and shall cause notices of the meeting of creditors to be sent by post to the creditors simultaneously with the sending of the notices of the meeting of the company.
2. The company shall cause notice of the meeting of the creditors to be advertised once at least in the Official Gazette and once at least in two newspapers circulating in the district where the re- gistered office or principal place of business of the company is situate.
3. The Board of directors of the company shall-
(A) cause a full statement of the position of the company affairs together with a list of the creditors of the company and the estimated amount of their claims to be laid before the meeting of the creditors to be held as aforesaid; and
(B) appoint one of their number to preside at the said meeting.
1. It shall be the duty of the director appointed to preside at the meeting of creditors to attend the meeting and preside thereat.
2. If the meeting of the company at which the resolution for voluntary winding up is to be proposed is adjourned and the resolution is passed at an adjourned meeting, any resolution passed at the meeting of the creditors held in pursuance of sub- section (1) sis hall have effect as if it had been passed immediately after the pass- ing of the resolution for winding up the company.
3. If default is made-
(A) by the company, in complying with sub- sections (1) and (2);
(B) by its Board of directors, in complying with sub- section (3);
(C) by any director of the company, in complying with sub- section (4); the company, each of the directors, or the director, as the case may be, shall be punishable with fine which may extend to one thousand rupees and, in the case of default by the company, every officer of the company who is in default, shall be liable to the like punishment.
Provisions intended to give controlling voice to creditors
The procedure laid down in this and the following sections, in regard to the creditors’ winding up of an insolvent company, i.e. a company which is not able to pay it’s debts and liabilities, is based upon the views expressed by NAVILLE,J., in In re, Karamelli and Barnett Ltd. “Under this procedure the company has to convene a meeting of the creditors to take place immediately after the meeting of the stakeholders, on the same day or the next day; and the directors have to place full statement of the position of the affairs at the creditors’ meeting. The creditors at the meeting have the right to nominate a liquidator and if their nominee is different from the one nominated by the stakeholders, creditors’ nomination prevails, subject to the power of interference of the court. Thus, the creditors are given a controlling voice in the winding up of an insolvent company.”
Where one of the directors was nominated to preside over a meeting of creditors, but he did not turn up, it was held that the creditors present at the meeting could appoint their own nominee to preside at the meeting and that the court was valid and, therefore, it was not necessary to seek directions of the court in the matter. Salcombe Hotel Development Co. Ltd., Re,
Notice of meeting to the creditors
The giving of notices under this section is analogous to the filing, under the law of insolvency, of a declaration of inability to pay debts.
Proxy by Fax
It has been held that message of proxy received through fax and signed by the creditor or by someone authorised by him would be a proper proxy form and the creditor would have the right to attend the creditors meeting through such a proxy. A Debtor, Ex Parte, I.R.C. v. The Debtor. It was also held that a proxy form would be deemed to be signed if it carried same distinctive or personal mark placed by the creditor, that is to say, signed by electronic devices or by a rubber stamp. In order to avoid any dispute or controversy the original proxy form should be sent immediately after fax transmission. It would also be advisable to have an authority in the company’s to accept faxed proxy forms.
Disclosure of material at creditors’ meeting
An application was made for disclosure of material withheld from creditors’ meeting by the administrators under the Insolvency Act, 1986. The application raised allegations of fraud but there was no evidence to substantiate the allegations. The application was accordingly refused. Trident Fashions plc; Anderson v. Kroll Ltd.
Rejection of creditors’ vote
Creditors resolved at their meeting for voluntary winding-u. The chairman objected to a creditors’ vote. The question in this case was as to what would be the effect of the chairman’s decisions in rejecting the creditor’s vote. The court found no prospect of calling a new meeting. The court dismissed the appeal. Power Builders (Surrey) Ltd., Power v. Petrus Estates Ltd.
If there is no compliance with the requirements of section 500 (2), the consequences of the default as stated in sub-section (6), are that the company or each of the directors shall be punishable with fine.
Section 502. Appointment of liquidator
1. The creditors and the company at their respective meetings mentioned in section 500 may nominate a person to be liquidator for the purpose of winding up the affairs and distributing the assets of the company.
2. If the creditors and the company nominate, different persons the person nominated by the creditors shall be liquidator: Provided that any director, member or creditor of the company may, within seven days after the date on which the nomination was made by the creditors, apply to the Court for an order either directing that the person nominated as liquidator by the company shall be liquidator instead of or jointly with the person nominated by the creditors, or appointing the Official Liquidator or some other person to be liquidator instead of the person appointed by the creditors.
3. If no person is nominated by the creditors, the person, if any, nominated by the company shall be liquidator.
4. If no person is nominated by the company, the person, if any, nominated by the creditors shall be liquidator.
Scope of Section
It may be noted that in a creditors’ voluntary winding up, the creditors are given a preferential right in the matter of the appointment of a liquidator, with a power to the court to vary the appointment on application made within seven days, by a director, member or creditor.
A liquidator appointed by a resolution of the members cannot be replaced by one appointed by a majority in value but not in number of creditor.
Section 509. Final meeting and dissolution
As soon as the affairs of the company are fully wound up, the liquidator shall-
(a)make up an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of; and
(b) call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meetings and giving any explanation thereof,
Each such meeting shall be called by advertisement-
(A) specifying the time, place and object thereof; and
(B) published not less than one month before the meeting in the Official Gazette and also in some newspaper circulating in the district where the registered office of the company is situate.
Within one week after the date of the meetings, or if the meetings are not held on the same date, after the date of the later meeting, the liquidator shall send to the 1[ Registrar and the Official Liquidator a copy each of the account and shall make a return to 1. Subs. by Act 31 of 1965, s. 55, for certain words (w. e. f. 15- 10- 1965 ). each of them] of the holding of the meetings and of the date or dates on which they were held. If the copy is not so sent or the return is not so made, the liquidator shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.
If a quorum (which for the purposes of this section shall be two persons) is not present at either of such meetings, the liquidator shall, in lieu of the return referred to in sub- section (3), make a return that the meeting was duly called and that no quorum was present thereat. Upon such a return being made within one week after the date fixed for the meeting, the provisions of sub- section (3) as to the making of the return shall, in respect of that meeting, be deemed to have been complied with.
1[ The Registrar, on receiving the account and also, in respect of each such meeting, either the return mentioned in sub- section (3) or the return mentioned in sub- section (4), shall forthwith register them.
The Official Liquidator, on receiving the account and either the return mentioned in sub- section (3) or the return mentioned in sub- section (4), shall, as soon as may be, make, and the liquidator and all officers, past or present, of the company shall give the Official Liquidator all reasonable facilities to make, a scrutiny of the books and papers of the company and if on such scrutiny the Official Liquidator makes a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest, then, from the date of the submission of the report to the Court the company shall be deemed to be dissolved.
(6A) If on such scrutiny the Official Liquidator makes a report to the Court that the affairs of the company have been conducted in a manner prejudicial as aforesaid, the Court shall by order direct the Official Liquidator to make a further investigation of the affairs of the company and for that purpose shall invest him with all such powers as the Court may deem fit.
(6B) On the receipt of the report of the Official Liquidator on such further investigation the Court may either make an order that the company shall stand dissolved with effect from the date to be specified by the Court therein or make such other order as the circumstances of the case brought out in the report permit.]
1. Subs. by Act 31 of 1965, s. 55, for sub- sections (5) and (6) (w. e. f. 15. 10. 1965 ).
7. If the liquidator fails to call a general meeting of the company or a meeting of the creditors as required by this section, he shall be punishable, in respect of each such failure, with fine which may extend to five hundred rupees. Provisions applicable to every voluntary winding up
A company in liquidation ceases to exist as a separate entity capable of holding property only when the final meeting under section 509 has taken place. Until then it retain its complete existence so that if the liquidation is annulled at any time before the meeting it will resume its power.
Company voluntary wound up – final account of the winding up filed by the liquidator to the registrar. Registrar registered on 15th march 1963 company shall be deemed to have been dissolved under section 509 (5)
CREDITORS VOLUNTARILY WINDING UP
Where the resolution for winding up has been passed, but the Board of Directors are not in a position to give a declaration on the liability of company, they may call a meeting of creditors, for the purpose of winding up. (Sec.500) It is the duty of Board of Directors, to present a full statement of company’s affairs, and list of creditors alongwith their dues, before the meeting of creditors(Sec.50(3)) Whatever resolution, the company passes in creditor's meeting, shall be given to the Registrar within ten days of its passing. (Sec.501) Company in the general meeting [in which resolution for winding up is passed], and the creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act.(Sec.502)
Any director, member or creditor may approach the tribunal, for direction that:
# Liquidator appointed in general meeting shall act, or
# He shall act jointly with liquidator appointed by creditor, or appointing official liquidator, or
# Some other person to be appointed as liquidator.(Sec. 502(2))
The remuneration of liquidator shall be fixed by the creditors, or by the tribunal.(Sec.504) On appointment of liquidator, all the power of Board of Directors shall cease. (Sec.505) As per section 509, the liquidator shall take the following steps, when affair of the company are fully wound up:
# Call a general meeting, and meeting of creditors, and lay before it, complete picture of accounts, winding up procedure and how the properties of company are disposed of.
# The meeting shall be called by advertisement, specifying the time, place and object of the meeting.
# The liquidator shall send to the Registrar and official liquidator copy of account, within one week after the meeting.
# If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it’s members or public, then the company shall be deemed to be dissolved, from the date of report to the tribunal.
# However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public, and then tribunal may direct the liquidator to investigate further.
Restrictions on the appointment of body corporate as Liquidator in case of a voluntary winding up.(Sec.513) The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. (Sec. 463).
There are legal provisions for the meeting of the creditors on winding up (voluntary). When the meeting of creditor is not called on such voluntary winding up. They can approach the court or CLB for the same reason. As the creditors are the main investors in the company with the shareholder. They have given a large amount to the company and if company is winding up then there will be loss to the creditor at large
The creditors will be paid back on voluntary winding up of the company and for this purpose official liquidator is also appointed. The liquidator take care of issue of creditors. This thing we have seen in above mentioned cases also.
Reply to the hypothesis is positive and meeting is required for voluntary winding up.
# Halsbury’s law of England
# Palmer’s company law
# (1967) 37 com cases 656 (Bom)
# 51 ITR 403
# (1970) 40 com cases 819 (Guj)
# Arvind Mills limited In re (2002) 37 SCL Guj 660
# 1917 1 ch 203
# 1991 BCLC 44
# (1996) 1 BCLC 538
# (2004) 2 BCLC 35
# (2009) 1 BCLC 250
# AIR 1962 Punj 190 (194)
# AIR 1959 ALL 245
# 37 Com case 686
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