Indian Legal System > Civil Laws > Company Law > Contributory
In this article, we shall discuss the meaning of the term “winding up of a company” and the term “Contributory” used during winding up of a company.
The word ‘winding-up’ is a means by which the dissolution of the company is brought about and its assets realized and applied in payment of its debts, and after satisfaction of the debt; the balance, if any, remaining is paid back to the members in proportion to the contribution made by them to the capital of the Company. It is a process by which the business of the company is wound up, and the company ceases to exist anymore. Thus the company loses its corporate status and existence. All the assets of the company are sold, and the proceeds collected are used to discharge the liabilities on a priority basis. Winding up is a very complicated procedure. Once winding up commences, the Board of Directors go out of the picture and a liquidator takes charge. There are several grounds for winding up a company other than its insolvency.
In Official Liquidator v. Commr, (1992)) 73 Co. Cases 168 (Mad) case, the Court held that the company is not dissolved immediately at the commencement of winding up. Its corporate status and power continue.
In Pierce Leslie & Co. Ltd. v. Violet Ouchterlong Wapshare, AIR 1969 SC 843 case, Bachawat J. opined: “winding up precedes dissolution”.
Under Section 270 of the Companies Act, 2013 a company may be wound up by a compulsory winding-up i.e. winding up by the Tribunal. The other forms voluntary winding up or winding up subject to the supervision of the court (under the Companies Act, 1956) are abolished.
Contributories (S. 2(26)):
The term ‘Contributory’ means every person liable to contribute to the assets of a Company in the event of its being wound up, and includes the holder of any shares which are fully paid up; and for the purposes of 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.
In Alote Estate v. R. B. Seth Hiralal Kalyanmal, (1970) 1 SCC 425 case, the Court held that a contributory means a person liable to contribute to assets of a company in the event of winding-up and includes the holders of any shares which are fully paid-up.
A contributory shall be required to contribute towards the assets of the company in the following circumstances. In case the assets fall short for the payment of the company’s debts, liabilities and the cost of liquidation; or in case money is required for the adjustment of the rights of contributories as between themselves.
The term contributory includes all the members of the company who have not paid the full amount on their shares and all the members of the company including the holders of fully paid-up shares. Holders of partly paid shares may be required to contribute in order to bring them at par with those shareholders who have paid in full. The members who have not paid the full amount on shares are liable to pay the remaining amount but the members who have paid-up full amount on shares have no liability.
The liquidator shall prepare a list of all such contributories who may be made liable to contribute towards the assets of the company on account of deficiency in the assets of the company. In case there is a surplus in assets the liquidator shall prepare a list of those members who are entitled to share this surplus. The term ‘contributory’ includes members of both of these categories.
List of contributories has two parts, A and B. List A contains the names of all those persons who are members of the company on the date of the winding-up (present members), while List B shall contain the names of those persons who were members during the period of 12 months preceding the date of the winding-up (past members).
In the event of a Company being wound up, every present and past member shall 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, subject to the provisions of Section 285 of the Companies Act, 2013 and subject to following guidelines:–
- All the contributories of lists A and B shall share the liability of the company proportionately.
- No past member shall 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 Act.
- The shareholders who ceased to be the members of the company for 12 months before the winding up of the company are never liable as contributories.
- A past member is not liable as a contributory in respect of any deal or liability of the company incurred after he ceased to be a member of the company.
- In the case of a company limited by shares, any past or present member cannot be made to contribute any amount exceeding the amount, if any, unpaid on his share.
- A member of a company, whose liability is limited by guarantee, is not liable to pay more than the amount of guarantee.
The Extent and Limitation of liability:
A contributory’s liability is limited to the amount required for payment of (i) debts incurred during the period of his membership or directorship with unlimited liability or both; (ii) costs; (iii) charges and expenses of the winding-up; and (iv) on the adjustment of rights of the contributories among themselves, to the extent of such amount as remains unpaid on the shares held by him. It means that if the shares are fully paid, the liability of the contributory is nil. The liability of contributory commences from the date of the liquidator’s demand for payment by making a call or calls and the limitation for such liability runs for three years from the date of action i.e. making of a call by the liquidator.
Liabilities of Different Functionaries:
A past member shall not be liable to contribute if he has ceased to be a member for one year or upwards before the commencement of the Winding-Up. Thus the liability is nil.
Past Members:
These are the persons whose names do not appear in the register of members of the company, as on the date of the commencement of the winding-up of the company; but were members of the company within one year prior to the commencement of the winding-up and they ceased to be members of the company not by death but by transfer or forfeiture of their shares. No past member shall 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 Act. 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. In the case of a Company limited by shares, no contribution shall be required from any past member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as such member.
In Jtt Chandler and Co. v. H. Philips A 1926 All 550 case, the Court held that the liability as contributory shall continue unless they get rid of the shares before one year from the date of commencement of the winding-up and get the names of transferees registered in the company’s register of members.
In Pars ram Brij Kishore v. Jagraon Trading Syndicate Ltd. AIR 1936 Lah 226 case, the liquidator of a company called upon the defendant to pay the uncalled amount on his shares. His shares had been forfeited before the winding up and, therefore he was a past member. but existing members had not been called upon to contribute to the full extent of the unpaid amount of their share money. the Court held that in the circumstances past member could not be liable to contribute till liability of present members was exhausted.
In Mirza Ahamad Namazi, re, AIR 1924 Mad 703 case, the Court held that a person whose shares have been forfeited is also liable as a past member, provided the liquidation commences within one year of the date of forfeiture and the past member could not be liable to contribute till liability of present members was exhausted.
Present Members:
Present members are those persons whose names appear in the register of members of the company, as on the date of commencement of winding up. The present member who has not paid the full amount on shares is liable to pay the remaining amount but the members who have paid-up full amount on shares have no liability.
In R. Lakshmi N. Reddi v. Official Liquidator, Sree Films Ltd. AIR 1951 Mad 890 case, a person’s name is wrongly entered as member in the register before winding up and knowing this fact, he does not take any steps to have it removed, he will be estopped from disowning liability on the ground that he was not a member of the company when it went into winding up. The Court held that a contributory cannot contend that, although his name appears on the register, he is not liable because the allotment of hares to him was, for some reason, void. The Court opined that the liability of a member of a company to be included in the list of contributories is not ex contractu, that is, it does not arise by virtue of his contract to take shares. His liability is ex lege which means that it arises by the reason of the fact that his name appears on the register of members of the company.
In H. H. Manabendra Shah v. Official Liquidator, (1977) 47 Co. cases 356 case, the court held that if shares are allotted to a person without him having applied for them, the liquidator would not be justified in including his name on the list of contributories.
In Sonardih Coal Co. Ltd. re. AIR 1930 All 617 case, the Court held that a contributory is not liable to pay one farthing of the uncalled share money until the Tribunal has made such an order and a call notice has then be served upon the contributory in accordance with Tribunal’s order.
In Mohd. Akhar Abdulla Fazalbhoy v. Associated Banking Corpn of India, AIR 1950 Bom 386 case, the Court held that the Tribunal will authorize a call to be made only when it is satisfied that the financial condition of the company is such that a call is necessary to discharge the liabilities of the company.
In Pokhar Mal v. Flour & Oil Mills C. Ltd., AIR 1934 Lah 1015 case, the Court held that the members of a company in liquidation are liable in respect of unpaid calls even though the calls were made by the company before it went into liquidation and suit of the company for its realization had become barred by time.
Legal Representatives of Deceased Contributory:
The liability of the legal representatives of the deceased contributory shall be to the extent of assets of the deceased coming in their hands. Similarly, if the legal representative dies, his legal representative will, in turn, become contributory. If a contributor becomes insolvent, his assignees in insolvency can be treated as contributories. If a contributory itself a company that has been ordered to be wound up, the liquidator of that company can be treated as contributory.
In Sumitra Kuer v. Sitamarhi Sugar Works Ltd, AIR 1938 Pat 287 case, the Court held that if contributory dies during winding up, his liability automatically falls on his legal representatives.
In Bays water Trading Co. Ltd. (1970) 1 ALL E.R. 608 ( at 610) case, the Court held that the liability of the legal representative of a deceased Contributory is only a liability to pay out of the estate of the deceased and extends only to the extent of the value of the estate coming into the hands of the legal representatives.
In In re British Indian Banking and Industrial Corporation Ltd. v. Vitaldas Dhanji v. Shiva, 1934 Bom. 469 case, the Court held that where a deceased shareholder has been placed on the list of contributories, the proceeding is not a nullity as the Company is not bound to take notice of the death of any shareholder unless informed of it.
Subscribers to Memorandum:
In London, Hamburg & Continental Exchange Bank Re. Evan’s case (1867) LR 2 Ch. App. 427 case, the Court held that the subscribers to memorandum remain liable to contribute to the assets of the company in liquidation even though their names do not appear in the register of members of the company.
Not Subscribers to Memorandum:
All persons other than subscribers to memorandum, whether their names are on the record in the register of members of the company at the time of the commencement of winding up or were on the record in the register of members of the company one year before the date of commencement of the winding-up, are liable to constitute as contributories.
Members of Company Limited by Shares:
A contributory’s liability is limited to the unpaid amount on the shares held by him.
Members of Company Limited by Guarantee:
In the case of a Company limited by guarantee, no contribution shall 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.
Directors and Managers of Unlimited Company:
In the Winding-Up of a Limited Company, any Director or manager, unlimited, shall, in addition to this liability, 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.
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