LIMITED LIABILITY PARTNERSHIP PART- XXXIX - (Winding up of LLP by Tribunal)

[Dr. Sanjiv Agarwal]

Section 64 of the LLP Act, 2008 deals with the circumstance in which Limited Liability Partnership  may be wound up by Tribunal This section  seeks to specify the circumstances in which an LLP may be wound up by the Tribunal.

Statutory Provision

Section 64 of  provides that a Tribunal can order for winding up of a LLP for six reasons. The LLP may be wound up by the Tribunal for the following reasons:

(i) LLP declares  that it should be wound up.

(ii) For a period of more than 6 months, the number of partners of LLP are reduced below 2.

(iii)  The LLP is not in a position (unable) to pay its debts.

(iv) LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or public order

(v)   LLP has not filed with the Registrar the Statement of Account and Solvency (Section 34) or annual return (Section 535) for any five consecutive financial years.

(vi) The Tribunal is of the opinion that it  is just and equitable that the LLP should be wound up.

These grounds are explained below-

(a)    LLP itself can also decide for winding up and make an application to the Tribunal under section 60(1)

(b)    So far as minimum number of partners is concerned, LLP shall always have atleast two partners and in the event of number of partners falling below the minimum two, the LLP shall induct  the new partners to comply with requirement of section 6. A reason for winding up of a LLP shall arise when the number of partners fall below the minimum required two ,ie, is only  one partner for a period of more than six months. Thus, where only one partner remains in a LLP, such LLP can continue as a LLP for a period up to six months, after which section 64 may be invoked as one of the grounds for winding up would exist.

(c)    when a LLP is not able to pay its debts, it would be a valid ground for a LLP to be wound up. Such situations would arise when a creditor is being neglected to be paid by LLP or secured to the satisfaction of the creditor or a debt remains unpaid or compounded. The creditor should have a clean debt established , or when a court decree remains unexecuted or unsatisfied or it is proved before any Court or Tribunal that LLP is unable to pay off its debts or liabilities.

The term 'debt' amounts to a definite sum and cannot include any claim for liquidated damages or a sum of money which is capable of being ascertained. [Newfinds (India) v. Vorion Chemicals & Distilleries, (1976) 46 Comp Cas. 87, 89 (Mad)]. failure to pay back the. amount of debenture and interest thereon was held out to be' sufficient admission of debt which was sufficient for winding up order.[John Paterson, Co. (India) Ltd. v. Promod Kumar Falan, (1983) 53 Comp Cas. 255 (Cal)].

A contingent or conditional liability is not a debt. A dividend, when declared, becomes a debt due by the company and entitles the shareholder to apply under this section  in case the company is unable to pay the amount of the dividend. On the ground of pre-incorporation debt, a winding up petition cannot be sustained. [Janbazar Manna Estate Ltd, Re,, (1931) 1 Comp Cas. 243: AIR 1931 Cal 692]. Unpaid salary is  also a debt for the purpose of filing winding up petition. [Capt. B. S. Demogray v. VIF Airways Ltd., (1998) 94 Comp Cas. 291 (AP)].

Where inspite of repeated demands by a creditor company neglected to pay, it is prima facie evidence of inability to pay. A winding up petition is not a proper mode of enforcing a bona fide disputed debt; it is an abuse of process of court. [Re Gold Hill Mines, (1883) 23 Ch D 210]. Where inspite of repeated notices by the creditor the company gives no response and ex parte order is made by the court, it has proved to be a case of inability to pay debts. Similarly, in a case Re, [Arvind Investment Consultant v. Presto Finance Ltd., (1998) 94 Comp Cas. 350 (Guj)] where failure to pay was without reasonable cause, presumption as to inability to pay debts as held can be raised.         

'Unable to pay debt' means unable to meet current demands in the commercial sense. [Tripura Administration v. Tripura State Bank Ltd., (1960) 30 Comp Cas. 324 : AIR 1959 Tripura 41]. The liabilities exceeding the assets does not show that the company is unable to pay debt, as it may still be in position to meet the demands of creditors when they are made [A. C. K. Krishnaswami V. Stressed Concrete Construction (Private) Ltd., (1964) 34 Comp Cas. 6 : (1963) 2 Comp LJ 301 (Mad); Registrar of Companies V. Atlas Transport P. Ltd (1974) 44 Comp Cas. 496 (P&H)].

Where the liability to pay debts is challenged and the company raises a counter claim against the petitioner, the petition for winding up, admitted without considering the claim of financial soundness of the company, and the adverse ,effect that the winding up order will have on the employment of its 105 employees, will have to be quashed and set aside along with any directions given in that order to the company, [Tata Iron & Steel Co. v. Micro Forge (India) Ltd., (2000) 39 CLA (Sur) 11 (Guj)].

The rules stated by the Supreme Court in case of petition of winding up based on disputed claims in [Madhusudan Gordhandas and Company v Madhu Wollen Industries Pvt. Ltd (1972) 42 Comp. Cas 125: AIR 1971 Sc 2600] are as under.:

"Two rules are well settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company.. . . . .. Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but chooses not to pay that particular debt. [In re, A Company (1984) 2 Ch 349 (Ch D)]. Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed, the court will make a winding up order without requiring the creditor to quantify the debt precisely [See In Re Tweed's Garages Ltd., 1962 Ch 406 : (1962) 32 Comp Cas. 795]. The principles on which the court acts are (1) that the defence of the company is in good faith and one of substance; (2) the defence is likely to succeed in point of law; and (3) the company adduces prima facie proof of the facts on which the defence depends".

Another rule which the court follows is that if there is opposition to the making of the winding up order by the creditors, the court will consider their wishes and may decline to make the winding up order. Under section 557 of the Companies Act, 1956, in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders also are considered, though, perhaps, the court may attach greater weight to the views of the creditors.

(d)  Tribunal may order for winding up a LLP if it is proved that -

(i)      LLP has acted against the interests of sovereignty and integrity of India.

(ii)      LLP has acted against security of the State

(iii)     LLP has acted against any public order.

(e) The default in filing of Statement of Account and Solvency under section 34 and Annual Return under section 35 would also invoke winding up provisions for the concerned LLP. This action is over and above the prescribed  in those sections.

(f) Tribunal's opinion that it would be just and equitable that a LLP be wound up is a general but wider  impact provision where Tribunal's opinion would be most crucial to survival or winding up of a LLP. Such power has to be judiciously exercised in interest of all the stakeholders. This residual ground is independent of other five grounds and provides unlimited powers to the Tribunal but such power ought to be exercised with abundant caution and in a judicious manner. Court's satisfaction of existence of the circumstances for winding up would be the most important factor. Such reasons could be-

i.      illegal objectives of LLP

ii.      deadlock in partners or management

iii.      oppression of minority members

iv.      against public interest

v.      not in national interest, eg, prohibition of business by Government or nationalization of business or other such  reasons.

In K.S. Mothilal v K.S Kasimaris Ceramique Pvt Ltd (2004) 50 SCL 116, it was held if the existence of an alternative remedy is there, whether it is involved  or not, it would defeat the plea for winding up of company as the ground of, just and equitable.

The words "just and equitable" in clause (f) will have to be construed in a manner to fit in with the scope and purpose of the Act in light of the detailed provisions of the Act. The words 'just and equitable' are not to be read ejusdem generis with the preceding clauses. [Davis & Co. Ltd. v. Brunswick (Australia) Ltd., AIR 1936 PC 114 : (1936) 6 Comp Cas. 227, Jaldu Anantha Raghurama Arya Alias Rama Rao v. East Coast Transport and Shipping Co. (Pot.) Ltd., (1958) 28 Comp. Cas. 20: AIR 1958 AP 259]. The fact that the company is prosperous and makes profit and equitable to do so. [Needle Industries (India) Ltd. V. Needle Industries Newey (India) Holding Ltd., (1981) 51 Comp Cas. 743 (at 779) : AIR 1981 SC 1298].

In Re Ranka Cables Ltd. V. Board for Industrial and Financial Reconstruction, (2000) 39 Corpt. LA 39 (AP), the Court dismissed a writ petition filed by a sick industrial company challenging the order of the Appellate Authority under the Sick Industrial Companies (Special Provisions) Act, confirming the view of the BIFR that the company should be wound up, since the State Bank of India, its main creditor, refused to make any concessions in favour of the company and the Bank had locus standi in the proceedings.