Friday, May 29, 2009

Companies Act_Practical Problems_83

XYZ Limited has its subsidiary company PRM Ltd, which is formed to carry out some of the objectives of XYZ Limited. XYZ Limited suspends one of its several businesses, by passing a resolution at the company‘s extraordinary general meeting, with effect from Ist January 2008. The business so suspended continues to be suspended until March 2008. On Ist April 2008, a group of shareholders of XYZ Limited file a petition in the court for winding of the company on the ground of suspension of business by the company. Referring to the provisions of the Companies Act, 1956, decide:
(i) Whether the shareholders’ contention shall be tenable?
(ii) What would be your answer in case XYZ Limited suspends all its business?

Section 433 provides that if a company does not commence its business within a year from its incorporation or suspends its business for a whole year, it may be wound up by the court .The contention of the shareholders of XYZ Ltd that the company is liable to be wound up on the ground of suspensions of business, is not tenable for the following reasons:
(i) (a) A company may be wound up by court if a company suspends its business for a whole year. Here the business was suspended only on 1. 1.2008. Hence on 1st April, 2008 the business has not been suspended for the whole year to attract Section 433(c)
(b) Where a company having much business discontinues one of them, it cannot be said to have suspended business within the meaning of Section 433(c).
(c) Where a company ceases to do any business but is a holding company of subsidiaries engaged in the pursuit of the business, which it was previously doing, it cannot be said that the company has suspended its business (Ref; Eastern Telegraph Company Ltd).
(ii) Even if XYZ Ltd suspended all its business the suspension was not for a period of more that 1 year as on 1.4.1997 and hence the provisions of Section 433(c) are not applicable. Again for the reasons stated in (i) (c) above XYZ Ltd cannot be said to have suspended its business as its subsidiary in carrying on the business.

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