An Introduction To Section 470 of Companies Act 2016

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An Introduction To Section 470 of Companies Act 2016

July 30, 2022 Corporate & Commercial Disputes 0

What can be done (in a potential winding-up scenario) to ensure that a company’s assets are preserved for its creditors? 

In comes the first safeguard mechanism- section 470 of the Companies Act. We will briefly look at it below.

What does section 470 say?

Section 470 of the act states that:

“ At any time after the presentation of a winding-up petition and before a winding-up order has been made, the company or any creditor or contributory may, where any action or proceeding against the company is pending, apply to the Court for an order to stay or restrain further proceedings in the action or proceeding, and the Court may stay or restrain the action or proceeding accordingly on such terms as it thinks fit.”

What is the purpose of section 470?

In the event a company is wound up, it ensures that a company’s assets are preserved for distribution to its debtors. 

What is the end result?

All legal proceedings against the company are put on hold except that of the winding-up petition against the company (whether it is civil, criminal, or revenue, or even proceedings in foreign courts).  As noted by the court:

“The purpose of giving the court the power under section 222 (now section 470) of the Act to stay further proceedings in action or proceeding (other than the hearing of winding-up petition pending before the court), is to enable the court to ensure that no creditor shall gain priority over others of his class.”

When can such an application be made?

After a presentation of winding up is made against the company and before the court makes a winding-up order against the company.

Who can apply?

The company/ its contributories/ its creditors

Where to file it?

In the court where a legal proceeding is pending against the company.

Where not to file it?

In the court where the winding-up petition was filed

What to do if the court allows the section 470 application?

Lodge with the Registrar of Companies the copy of the order of the court (granting the application) within fourteen days from when the court makes such an order.

Will such an order be granted automatically by the court?

No. The court will first examine all the facts and circumstances of the case before giving the green light for the section 470 application. The threshold for granting a section 470 application is generally high, as the trial court is required to dispose of the cases within a specific time, expeditiously and fairly. Essentially (and to be fair to all parties involved), if a section 470 application was not made in good faith or there are reasons to suspect that such an application was not made in good faith, the application will be dismissed immediately

Examples of successful/ failed applications:

  1. Failed application- the objective of applying for it appears to be merely to delay adjudication on a claim;
  2. Failed application- legal proceedings has no relevance to the winding-up proceedings;
  3. Successful application- it was necessary for the interest of rehabilitating a company and that the company should not become the victim of conflicting court orders

Up next, we will look at another safeguard mechanism in the form of section 471 of the Act. Stay tuned to find out more.

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