THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XXI — Part II

Winding Up of Unregistered Companies

Sections 375–378

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Partnership Firms with >7 Members • Dissolved Foreign Cos • NCLT Jurisdiction

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Chapter XXI Part II — Winding Up of Unregistered Companies

Part II of Chapter XXI (Sections 375 to 378) addresses a peculiar category — entities that are 'companies' in the commercial sense but have never been registered as a company under the Companies Act, 2013 (or the 1956 Act), and yet may need to be wound up using the machinery of company law. Partnership firms with more than seven members, unregistered associations carrying on business for profit, dissolved foreign companies that carried on business in India, and other informal business groupings all fall within the scope of this Part.

The provisions are short but operationally important. They extend the Tribunal's winding-up jurisdiction to entities that would otherwise escape the corporate-liquidation regime. Part II has been in force since 15 December 2016 (with the corresponding High Court jurisdiction now vested in the NCLT).

Section 375 — Winding Up of Unregistered Companies

(1) Application of Winding Up Provisions

Subject to the provisions of this Part, any unregistered company may be wound up under this Act, in such manner as may be prescribed, and all the provisions of this Act, with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in sub-sections (2) to (4).

(2) No Voluntary Winding Up

No unregistered company shall be wound up under this Act voluntarily. This is a significant restriction — an unregistered company cannot self-terminate through the voluntary winding up route (which is in any event now under the IBC, Section 59). It can only be wound up compulsorily by the Tribunal.

(3) Circumstances in which an Unregistered Company May Be Wound Up

An unregistered company may be wound up under the following circumstances, namely —

1. If the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;If the company is unable to pay its debts;If the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Note that 'inability to pay debts' is retained as a ground in Section 375(3)(b) — because the IBC's carve-out under Section 271 of the Companies Act specifically applies to registered companies. Unregistered companies still come within Part II of Chapter XXI and can be wound up on the inability-to-pay-debts ground before the Tribunal.

(4) When is an Unregistered Company Unable to Pay its Debts?

An unregistered company shall, for the purposes of this Act, be deemed to be unable to pay its debts —

1. If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding ₹1 lakh then due, has served on the company, by leaving at its principal place of business, or by delivering to the secretary, or some director, manager or principal officer of the company, or by otherwise serving in such manner as the Tribunal may approve or direct, a demand under his hand requiring the company to pay the sum so due, and the company has, for three weeks after the service of the demand, neglected to pay the sum or to secure or compound for it to the satisfaction of the creditor;If any suit or other legal proceeding has been instituted against any member for any debt or demand due, or claimed to be due, from the company, or from him in his character as a member, and notice in writing of the institution of the suit or other legal proceeding having been served on the company by leaving the same at its principal place of business or by delivering it to the secretary, or some director, manager or principal officer of the company or by otherwise serving the same in such manner as the Tribunal may approve or direct, the company has not, within ten days after service of the notice — (i) paid, secured or compounded for the debt or demand; or (ii) procured the suit or other legal proceeding to be stayed; or (iii) indemnified the defendant to his reasonable satisfaction against the suit or other legal proceeding and against all costs, damages and expenses to be incurred by him by reason of the same;If execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor against the company, or any member thereof as such, or any person authorised to be sued as nominal defendant on behalf of the company, is returned unsatisfied in whole or in part; orIf it is otherwise proved to the satisfaction of the Tribunal that the company is unable to pay its debts.

Definition of 'Unregistered Company' — Scope

The expression 'unregistered company' is broadly interpreted. Sub-sections to Section 375 carve out both inclusions and exclusions:

Inclusions

For the purposes of winding up under this Part, the expression 'unregistered company' shall include any partnership firm, limited liability partnership or society or co-operative society, association or company consisting of more than seven members at the time when the petition for winding up the partnership firm, limited liability partnership or society or co-operative society, association or company, as the case may be, is presented before the Tribunal.

This definition catches:

• Partnership firms with more than 7 members (common in older joint family and large legal/accountancy firms);
• LLPs that — though registered under the LLP Act — fit the definitional criterion of 'company' in the broad sense under this Part;
• Societies and co-operative societies with more than 7 members, where they carry on commercial activity;
• Associations and informal groupings carrying on business for profit, with more than 7 members;
• Foreign bodies corporate that have been wound up or dissolved under their native law, but whose Indian business residue needs to be wound up.

Exclusions

• A railway company incorporated under any Act of Parliament or other Indian law or any Act of the British Parliament;
• A company registered under this Act (i.e., the 2013 Act) — because such a company is an 'unregistered company' only in a narrow technical sense and is wound up under Chapter XX Part I;
• A company registered under any previous companies law (i.e., the 1956 Act or earlier) — same reasoning;
• A company registered under this Act, whose registered office was in Burma, Aden or Pakistan immediately before the separation of that country from India — this is a historical carve-out to deal with partition-era entities.

Section 376 — Power to Wind Up Foreign Companies, although Dissolved

Where a body corporate incorporated outside India which has been carrying on business in India, ceases to carry on business in India, it may be wound up as an unregistered company under this Part, notwithstanding that the body corporate has been dissolved or otherwise ceased to exist as such under or by virtue of the laws of the country under which it was incorporated.

This is a valuable extraterritorial jurisdiction. Consider a scenario where a company is incorporated in Country X, carries on business in India, defaults on its obligations to Indian creditors, and is then dissolved under Country X's laws. If Part II did not exist, the Indian creditors would have no forum to pursue the foreign entity's Indian assets. Section 376 empowers the Tribunal to wind up such a 'dead' foreign company qua India, so that Indian assets can be realised and Indian creditors paid.

Section 377 — Provisions of Chapter Cumulative

The provisions of this Part with respect to unregistered companies shall be in addition to, and not in derogation of, any provisions hereinbefore in this Act contained with respect to winding up of companies by the Tribunal, and the Tribunal or the liquidator may exercise any powers or do any act in the case of unregistered companies which might be exercised or done by it or him in winding up of companies formed and registered under this Act.

In simpler terms: the Tribunal has full latitude to apply any of its existing winding-up powers — appointment of provisional liquidator, freezing of assets, directions to cooperate, public examination of officers, fraudulent preference rules under Sections 328–332, misfeasance proceedings under Section 340 — to an unregistered company. The powers are cumulative.

Section 378 — Saving and Construction of Enactments Conferring Power to Wind Up Partnership Firm, Association or Company, etc., in Certain Cases

Nothing in this Part shall affect the operation of any enactment which provides for any partnership firm, limited liability partnership or society or co-operative society, association or company being wound up, or being wound up as a company or as an unregistered company, under any other Act.

For example, the Multi-State Co-operative Societies Act, 2002, has its own winding-up machinery for multi-state co-operatives. Section 378 preserves that parallel jurisdiction — the existence of Part II does not oust the special law.

Quorum, Powers, and Procedure — Cross-References

While Part II sets the framework, the actual winding up of an unregistered company proceeds substantially under the provisions of Chapter XX (Sections 270 to 365) — by reference. The Tribunal will:

1. Receive the petition under Section 375 read with the mode-of-filing rules;Hear the unregistered company and any contributory or creditor;If satisfied of the grounds under Section 375(3), pass a winding-up order;Appoint a Company Liquidator (from the panel maintained under Section 275) or, if appropriate, the Official Liquidator under Part IV of Chapter XX;Apply the provisions of Part III of Chapter XX — preferential payments, fraudulent preference, misfeasance, priority of workmen's dues — to the liquidation of the unregistered company;Conclude with dissolution under Section 302 or the corresponding summary procedure under Section 361.

Practical Scenarios

Scenario 1 — Dissolved Partnership Firm with 15 Partners

A commercial partnership firm had 15 partners, carrying on business for profit. Due to internal disputes, the firm has ceased operations, but its partners refuse to formally dissolve under the Partnership Act. An aggrieved creditor has a claim of ₹25 lakh. The creditor may approach the Tribunal under Section 375 — the firm, having more than 7 members, is an 'unregistered company'; the firm has ceased business [ground (a)]; it is unable to pay debts [ground (b) — due to non-payment for more than 3 weeks after demand]. The Tribunal may order winding up, appoint a liquidator, and distribute the firm's assets.

Scenario 2 — Informal Association Running a Business

An unregistered association of 20 persons formed to run a chit fund commercially has collapsed. Depositors approach the Tribunal. Because the association carries on business for profit and has more than 7 members, it qualifies as an unregistered company under Section 375. The Tribunal may wind it up on the 'just and equitable' ground [Section 375(3)(c)] to protect depositors' interests.

Scenario 3 — Foreign Dissolved Entity

A US LLC carried on business through a branch office in Mumbai, entered into multiple contracts with Indian parties, defaulted, and was then dissolved under Delaware law. An Indian creditor may invoke Section 376 to wind up the Mumbai establishment as an unregistered company, enabling realisation of the Indian assets even though the parent has ceased to exist abroad.

Comparison — Part II vs Chapter XX Part I

Impact of the Insolvency and Bankruptcy Code, 2016

A recurring question is whether Part II survives the IBC's comprehensive insolvency regime. The answer is yes — with nuances:

• The IBC covers 'corporate persons' — defined in Section 3(7) of the IBC to mean a company, an LLP, or any other person incorporated with limited liability under any law for the time being in force. This definition excludes partnership firms, unregistered associations, and societies from the IBC's Part II framework;
• Individuals and partnership firms come under Part III of the IBC — but Part III has been only partially notified (notified for personal guarantors to corporate debtors; remaining provisions still not fully operational);
• Consequently, for partnership firms with more than 7 members, unregistered associations, and like entities — Chapter XXI Part II of the Companies Act remains the primary winding-up route before the NCLT;
• For registered LLPs — Section 59 of the IBC applies for voluntary liquidation; compulsory winding up of LLPs for inability to pay debts is under the IBC's CIRP framework (treating LLPs as corporate persons under Section 2(d) of the LLP Act read with Section 3(7) of the IBC).