Companies Act Section 375

Companies Act, Section 375: Winding Up of Unregistered Companies- Legal Framework, Grounds, and Process

Section 375 of the Companies Act, 2013 provides the statutory basis and procedures for the winding up of unregistered companies. While these entities are not formally incorporated under the Companies Act, they may still be subject to winding up under certain conditions as laid out in this Part of the Act. This section outlines the circumstances, limitations, and applicable provisions regarding such winding-up proceedings.

The law aims to bring unregistered business entities, particularly those with complex memberships or liabilities, under the regulatory ambit of the Companies Act during their dissolution phase, thereby ensuring creditor protection and orderly winding up.

1) Applicability and General Provision for Winding Up:

Subject to the specific provisions contained in sub-sections (2) to (4), any unregistered company can be wound up under the Companies Act, 2013.
The manner in which such a winding-up process is to be carried out will be prescribed by rules, and the general provisions relating to winding up of companies under this Act shall apply.
However, the application of these general provisions is subject to certain exceptions and additional requirements, which are detailed in the succeeding sub-sections.
2) Prohibition on Voluntary Winding Up

An unregistered company is not permitted to undergo voluntary winding up under the Companies Act.
Unlike registered companies, they cannot initiate their own winding-up proceedings by passing a resolution or filing a voluntary petition. Only compulsory winding up through the Tribunal is allowed.
3) Circumstances Under Which an Unregistered Company May Be Wound Up

An unregistered company can be compulsorily wound up by the Tribunal in the following scenarios:

(a) Cessation of Business or Limitation to Winding-Up Activities: If the company has already been dissolved, or has ceased to carry on business, or is functioning solely for the purpose of winding up its affairs, then a winding-up order may be passed.
(b) Inability to Pay Debts: If the company is financially insolvent and unable to pay its debts, it may be wound up.
(c) Just and Equitable Grounds: If the Tribunal forms the opinion that it is just and equitable to wind up the company considering, for example, mismanagement, deadlock in management, oppression of minority members, or loss of substratum the company may be wound up.
4) Determination of Inability to Pay Debts for Unregistered Companies

For the purposes of sub-section (3)(b), an unregistered company shall be deemed to be unable to pay its debts if any of the following situations apply:

(a) Unpaid Demand Notice from Creditor: A creditor (by assignment or otherwise) to whom the company owes more than ?1,00,000 serves a written demand for repayment.
This demand is properly served by leaving it at the company’s principal place of business or delivering it to an officer of the company (secretary, director, manager, etc.).
If the company fails to pay or arrange to settle the debt within three weeks of receiving such a demand, it is deemed unable to pay.
(b) Legal Proceedings Against a Member: If a suit or other legal proceeding is initiated against a member for a company-related debt or obligation, And the company, despite receiving written notice of such suit (served in an approved manner), fails to respond within 10 days by doing any of the following:
Paying or settling the debt, Securing a stay of the suit, or Indemnifying the member against the legal claim and associated expenses, then the company is deemed unable to pay its debts.
(c) Failed Execution of Court Order: If a court or Tribunal issues a decree or order in favour of a creditor against the company, or any of its members or representatives, And the execution of such order is returned wholly or partially unsatisfied, the company is considered insolvent.
(d) Other Evidence of Inability to Pay: The Tribunal may, on any other reasonable and provable ground, determine that the company is unable to meet its financial obligations.
Explanation- Definition of “Unregistered Company” Under this Part: The term “unregistered company” is specially defined for the purposes of this Part of the Act:

(a) Exclusions- Entities Not Considered Unregistered Companies: The following are not considered unregistered companies:

Railway companies incorporated under any Indian or UK law or Parliamentary Act. Any company that is registered under the Companies Act, 2013. 

Any company registered under earlier company laws, unless it had its registered office in Burma, Aden, or Pakistan, immediately before those countries separated from India.
(b) Inclusions- What Qualifies as an Unregistered Company: Unless excluded as above, the term unregistered company includes:

Partnership firms, Limited Liability Partnerships (LLPs), Societies, Co-operative societies, Associations, or any other form of company or business structure with more than seven members at the time of filing the winding-up petition before the Tribunal.