9.Winding up.doc

7/28/2019 9.Winding up.doc

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WINDING UP OR LIQUIDATION

Winding up represent the proceeding by which a company is dissolved. The assets

of the company are disposed of, the debts are paid from assets proceeds (or from

contributories) and the surplus is distributed to the shareholders.

Winding up or liquidation is the process by which the management of a companys

affairs is taken out of its directors hands, its assets are realized by a liquidator and

its debts are paid out of the proceed of realization.

Professor Gower gave the following definition winding up of a company is a

process whereby its life is ended and its property administered for the benefit of its

creditors and members. An administrator called a liquidator, is appointed and he

takes control of the company, collects its assets, pays its debts and finally

distributes any surplus among the members in accordance with their rights.

Pennington gives the following definition of winding up. Winding up is a process

by which the management of a companys affairs is taken out of its directors

hands; its assets are realized by the liquidator and debts are paid out of the

proceeds of realization and any balance remaining is returned to its members. At

the end of the winding up, the company will have no assets or liabilities and will

therefore be simply a formal step for it to be dissolved, that is its legal personality

as a corporation to be brought to an end.

Winding up and dissolution

A company is said to be dissolved when it ceases to exist as a corporate entity.

Winding up precedes dissolution; it is the process by which the dissolution of a

company is brought about.

Winding up and insolvency

The following can be noted as regard to winding up and insolvency.

a) Winding up order can be made even when the company is solvent.


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b) On winding up, the company continues to exist it is only its

administration that is carried on through the medium of a liquidator.

c) Even where a company is wound up because it is in insolvent

circumstances, all the provisions of insolvency law do not apply to it.

Modes of winding up

There are three modes of winding up.

1. Winding up by court

2. Voluntary winding up.

a. Members voluntary winding up

b. Creditors voluntary winding up

3. Winding up subject to the supervision of the court

Winding up by the court (sec.219)

Winding by court is also called compulsory winding up. This may occur in the

following circumstances: -

a) If the company has by special resolution resolved that it be wound up by

court.

b) Default is made in delivering the statutory report to the Registrar or in

holding the statutory meeting.

c) Only a shareholder may present a petition on this ground and where reason

is failure to hold the statutory meeting, fourteen days must have elapsed

from the date meeting was due to be held. The courts may instead of making

the winding up order direct that the statutory report shall be delivered or the

meeting be held and the costs to be paid by any persons who are responsible

for the default.


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d) Where there is failure to commence business within a year or where the

business is suspended for a whole year by the company.

The court may order winding up if the company has no intention of carrying on its

business or if is not possible to carry on its business.

An example of a company that was wound up because of failure to continue

business is in Orissa Trunks and Enamel Works Ltd (1973) where the company

suspended business for ten years due to embezzlement.

If a company has not begun to carry on business within a year from its

incorporation or suspends its business for a whole year the court will not wind it up

if: -

i. There are reasonable prospects of a company starting business

within a reasonable time.

ii. There are good reasons for the delay.

e) The number is reduced in case of private company below two or in the case

of any other company below seven. If the company carries on business for

more than six months while the number is so reduced, every member who is

aware of the fact that the number is below the statutory minimum will be

severally liable for the payment of the debts of the company contracted after

six months.

This is also one of the situations under the act where the veil of incorporation is

lifted.

f)Where the company is unable to pay its debts.

i. A creditor to whom the company owes more than one

thousand rupees has left at the companys registered office a

demand under his hand for the payment of the sum due and

the company has for three weeks or thereafter neglected to


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pay the sum, to secure or compound for it to the reasonable

satisfaction of the creditor or;

ii. Execution or other process in favour of creditors of the

company is returned unsatisfied in whole or part or;

iii. It is proved to the satisfaction of the court that the company

is unable to pay its debts; taking into account the contingent

and prospective liabilities of the company.

g) When it is just and equitable.

The petition should be allowed only as a last resort or for compelling reasons when

other remedies are not efficacious enough to protect the general interests of the

company.

In Westbourne Galleries Ltd Re. (1973) AC 360 it was observed that a petitioner

who relies on the just equitable clause must come to the court with a clean hand,

and if the breakdown is confidence between him and other parties to the dispute

appears to have been due to his misconduct, he cannot insist on the company being

wound up if they wish to continue.

What is a just and equitable clause?

The courts may order winding up under the just and equitable clause in the

following

1. When the substratum is said to have disappeared. This occurs when the object

for which the company was formed has substantially failed or when it is impossible

to carry business except at loss or the existing and possible assets are insufficient

to meet the existing liabilities. In making the winding up order the courts should

consider the interests of the shareholders and creditors.

The substratum of a company disappears: -

i. When the subject matter of the company is gone.


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ii. When the main object of the company has substantially failed or become

impractical.

iii. When a companys main object fails its substratum is gone and it may be

wound up even though it is carrying on its business in pursuit of a

subsidiary object.

iv. When the company is carrying on its business at a loss and there is no

reasonable hope that the object of trading can be attained.

v. Where the majority shareholders are against winding up, the court will not

order a company to be wound up merely because it is making a loss.

vi. Where the existing and probable assets of the company are insufficient to

meet its existing liabilities.

2. When the management is carried in such a way that the minority are

disregarded or oppressed. The court will not make an order for winding up unless it

is proved that wrong has been done to the company by abuse of majority voting

power, and it is impossible for the business of the company as a whole, owing to

the way in which voting is held and used.

In Re Harnets Mining co. Ltd WC (winding case no 12 of 1977) the petitioner Mrs.

Beth Wambui Mugo wanted the company to be wound up on the just and equitable

ground, the reasons were as follows: -

i. The affairs of the company were conducted in manner oppressive to her.

Though she had 50% of shareholding she did not participate in decision-

making but was expected to sign resolutions by other directors.

ii. The substratum of the company had gone and that the company had no

alternative business to engage in.

iii. The directors had lost confidence and probity in each other to the extent

that the company could no longer be managed at all. It was held that the

company could be wound up.


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3. Where there is a deadlock in the management of a company.

This is usually real when the shareholding between the two competing sides is

equal and thus there is a complete deadlock in the company on account of lack of

probity in the management of the company and there is no possibility of efficient

continuance of the company as a commercial concern.

4. When the company was formed to carry out fraud or the illegal business or the

business of the company becomes illegal.

Petition for compulsory winding up.

An application to the courts for winding up by petition may be presented.

a) By the company

A company in general meeting may resolve that the company be wound up

by the court.

b) By a creditor or creditors (including any contingent or prospective

creditors).

Persons included in the category of creditors

1. A contingent or prospective creditor

2. A secured creditor

3. A debenture holder

4. Any person who has a pecuniary claim against the company.

5. The legal representatives of a deceased creditor.

6. The government or local authority to which any tax or public

charge is due.

Disputed debt

A creditor whose debt is disputed cannot get a winding up order.


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c) By petition of any contributory

A contributory is any person liable to contribute to the assets of the company

in the event its being wound up. The definition does not include debtors. A

holder of fully paid shares is regarded as a contributory although no further

calls can normally be imposed upon him in liquidation of the company.

d) By official receiver.

e) By the attorney general after receiving a report of inspectors on the

companys affairs.

f) Section 221 (2) provides that when a company is already in the course of

being wound up voluntarily or subject to supervision, the courts if satisfied

that voluntary winding up or winding up subject to supervision cannot be

continued with due regard to the interest of the creditors and contributories.

Right of assignee of a debt

The assignee of a debt has the same right which his assignor had to present a

petition for winding up order, unless the assignment was made after a petition had

already been presented.

Commencement of winding up

The commencement of winding up by the court is deemed to have started from the

date a petition is presented. When the order is made for winding up, it relates back

to the date of the presentation of petition.


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Powers of court (section 218,221&222)

Courts have jurisdiction to receive winding up petition, hear it and make

determination. The interest of the applicant alone is not of predominant

consideration. The interests of the shareholders of the company as a whole apart

from those other interests have to be kept in mind at the time of consideration as to

whether the application should be admitted on the allegations mentioned in the

petition.

The court may delay the order to enable the company to: -

a) Settle a list of contributories.

b) Order any person in possession of any property of the company to

surrender it to the liquidator immediately.

c) Make the last calls on the shares and debentures the members hold.

d) Where the companys business is running, the company has power to

appoint a special manager to take care of the business until it

determines.

e) Prevent any creditor from participating in the distribution of the

companys assets when the company is paying off its liabilities.

f) The courts have also power to prepare a priority list detailing the order

in which payment shall be made (sec.262).

g) If at the time of winding it appears that promoters might have

committed fraud to the company, the court may order that they be

examined.

Procedure for winding up by the courts

A petition for winding up order against a company may be presented to the high

court such a petition must be supported by an affidavit of the petitioner (sec.218).

When determining the case (petition) the court may (sec.222): -


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a) Dismiss it with or without costs.

b) Adjourn the hearing conditionally or unconditionally.

c) Make an interim order.

d) Make any other order (for compulsory winding up or winding up under

supervision of the court).

Consequences of winding up order

The consequences date back to the commencement of winding up. A winding up

order operates in favour of all creditors and contributories as if made on the joint

petition of a creditor and a contributory.

In the case of compulsory winding up by courts, the winding up dates from the

presentation of the petition unless before that date a resolution was passed to

winding up voluntarily, in which case the commencement is the time of resolution.

Any subsequent disposition of the property and any transfer of shares or alteration

in the status of members is void unless the court otherwise orders.

When winding up order has been granted or an interim liquidator has been

appointed, no action may be preceded with or commenced against the company

except with the leave of the courts and subject to such terms as the courts may

impose.

The official receiver (of the court) becomes the principalliquidator to the company

until he or another person becomes liquidator (sec.236).

Special manager

Upon an application by the official receivers a special manager may be appointed,

acting as a liquidator, whether provisional or not by the courts. Such an application

may be made if the official receiver is satisfied that the nature of the companys


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business or interests of the creditors or contributories generally require the

appointment of a special manager other than himself.

The remuneration of the special manager may be fixed by the courts.

Official receiver as liquidator.

The courts are empowered by section 235 to appoint a provisional liquidator at any

time after presentation of a petition and before winding up order is made. Once the

winding up order has been made the official receiver becomes a provisional

liquidator until a liquidator is appointed.

Duties of an official receiver

An official receiver as a provisional liquidator can call on the directors to furnish

him with a statement of the companys affairs that has to be made out in

accordance to a statutory form and verified by an affidavit. This statement must

show: -

a) Particulars of assets, debts, and liability of the company.

b) Names, residence and occupation of its creditors.

c) The security held by creditors and the dates when they were given and such

other information as may be required.

d) The above statement must be submitted and verified by affidavit if: -

(i) By one or more directors and secretary or,

(ii) By persons who are or have been officers or were engaged in the

formation of the company within the past years in its employment

during such a time.


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Report by official receiver

After receiving a statement of affairs the official receiver has to submit a

preliminary report to the courts as soon as practical. The report should contain the

following: -

a) Amount of capital issued, subscribed and paid and the estimated

amount of assets and liabilities.

b) The cause of failure of the company (if the company failed).

c) Whether in his opinion there is need for further inquiry to any matter

relating to the promotion formation or failure of the company or the

conduct of its business.

First meeting of creditors and contributories

The official receiver is under obligation to convene separate meetings of the

creditors and contributories to find out whether they would like to appoint a

liquidator in place of the official receiver.

The above meeting should be held within sixty days from the date when the order

was given unless the courts provide otherwise.

A notice of seven days is required to hold both meetings. Rule 114 requires that the

official receiver must send to the creditors and contributories a summary of the

companys statement of affairs including causes of failure of the company and any

observation he may think fit to make.

Where such meetings are called the official receiver or (or liquidator) or his

nominee is the chairman at the meeting.

The object of the meetings is to find out;

a) Whether creditors or contributories desire a liquidator of their choice.

b) Whether there shall be a committee of inspection and whom shall it

consist.


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Powers of the liquidator

After winding order is granted or after a provisional liquidator is appointed he will

take into his custody or under his control all the property of the company and other

right of the company.

The liquidator has power with leave of the court or committee.

a) To institute or defend suits and other legal proceedings, civil, criminal in

the name of the company.

b) To carry on the business of the company so far as necessary for the

beneficial winding up of the company.

c) To appoint an advocate and to assist him in performing his duties.

d) Pay any class of creditors in full.

e) Make any compromise with creditors or persons claiming to be creditors.

f) Compromise calls debts and other claims between the company and any

contributory or debtor and,

A liquidator may, without sanction of the courts,

a) Sell companys movable and immovable property.

b) Do all acts and execute all documents in the companys seal.

c) Prove and receive dividends in the bankruptcy of any contributory.

d) Draw, accept and endorse bills and notes in the name of the company.

e) Borrow money on the security of the company assets.

f) Take out his official name letters of administration to a deceased

contributory.

g) Appoint an agent to do any business which the liquidator is unable to do

himself.


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Additional powers

These are powers of the courts delegated to the liquidator.

a) To call and hold meeting of creditors and contributories.

b) Settling the list of contributories and rectifying the register of members.

c) Paying, delivery, conveyance, surrender or transfer of money, property

and documents to the liquidator.

d) Making calls on the contributories.

e) Fixing time within which debts and claims must be proved. The above

powers are exercised by the liquidator as an officer of the court.

Disclaimer by a liquidator

Section 315 empowers a liquidator with leave of the courts to disclaim any onerous

property of the company. The liquidator has to disclaim the property within one

year from the date of commencement winding up or from the date he became

aware of the onerous property.

The disclaimer extinguishes the rights, interests and liabilities of the company in

the property disclaimed. If any person suffers a loss (or damages by a disclaimer of

the property, he may prove for the amount as a creditor).

Termination of liquidators powers

A liquidator will cease to function if: -

a) He resigns

b) He is removed

c) He is released.


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a) When the period for the duration of the company have come to an end or the

event which the company is to be wound up has happened and the company

has in a general meeting passed a resolution which may be an ordinary

resolution unless articles provide otherwise.

b) If the company passes a resolution to wind up voluntarily.

Types of winding up

a) Members voluntary winding up

b) Creditors voluntary winding up.

a) Members voluntary winding up

This is allowed if a declaration of solvency of the company is made. The

declaration shall be made by a majority of the directors at a meeting to of the board

that they have made a full inquiry into the affairs of the company and that having

done so they are of the opinion that

a) That the company has no debts

b) That the debts can be paid in full within twelve months from the

commencement of the winding up. Such declaration is infective unless:

-

a. it is made within thirty days immediately preceding the dates of

passing of the resolution and delivered to the registrar.

b. It embodies a statement of the companys assets and liabilities at the

latest practicable date before the making of the declaration.

DECLARATION OF SOLVENCY


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This is declaration by a director that a company is able to pay all its debts within

one year. If late it is proved that a director has made the declaration of solvency

without reasonable grounds he may be liable to imprisonment up to a year or a fine

or both.

Notice of declaration

The notice of the resolution to voluntarily wind up a company must be advertised

in the Gazette within fourteen days.

Summoning a general meeting

If the winding continues for more than a year the liquidator must summon a

general meeting at the end of the first and subsequent years.

The liquidator must lay before the meeting an account of his acts and dealing of

winding up during the preceding year.

Final meeting

When the affairs of company are wound up the liquidator must make up a final

account and call a general meeting of the company, which must be advertised in

the Gazette.

The liquidator must send a copy of the accounts to the Registrar and make a return

of the holding of the meeting within fourteen days.

Creditors voluntary winding up

This arises when the company is insolvent in which case the company must call a

meeting of the creditors on the same day of the general meeting of member on a

day after.


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The meeting must be advertised in the gazette and directors must lay before the

meeting, a statement of the position of the company with a list of its creditors.

The directors can appoint one of their numbers to preside at the meeting

Appointment of liquidator

The creditors and the company in their separate meetings may nominate a

liquidator for the purpose of winding up the affairs of the company.

If the creditors and the company nominate different persons the nomination of

creditors will prevail.

The liquidator must within fourteen days of his appointment, publish in the Gazette

and deliver to the Registrar of companies notice of his appointment in the form

prescribed by the register (sec.299).

Committee of inspection

Creditors at their meeting may appoint a committee of inspection, and the

committee may appoint not more than five persons to the members of the

committee subject to the power of the creditors to disapprove persons so appointed

(sec 288).

A liquidator is to call a meeting of members and creditors after each year-end and

has to lay before the meeting an account of his acts and dealings of the winding up

of the preceding year.

Final meeting and dissolution

When the company is fully wound up, the liquidator has to hold a general meeting

of the company and a meeting of creditors and has to produce an account of the

winding up showing how it has been conducted and property of the company


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disposed of. These meetings are to be advertised in the gazette, published thirty

days before the meeting.

Within fourteen days after the meeting the liquidator must send to the Registrar a

copy of the accounts and a return of the meetings.

WINDING UP SUBJECT TO SUPERVISION OF COURT.

Section 304 provides that when a company has passed a resolution to wind up

voluntarily, the courts may order the continuation of voluntary winding up subject

to their supervision on any terms or conditions.

The liquidator will continue to exercise all powers subject to any restrictions laid

by the courts. A petition for winding subject to court supervision may be presented

by any person entitled to petition for the compulsory winding up.

Effects of supervision order.

Powers for the exercise of which such liquidation would require sanction may be

exercised only with the sanction of the courts or the committee of inspections

otherwise in all other instances ordinary voluntary liquidation procedures are

followed.

Preferential payment

Section 302 provides that the companys assets must be used to pay all costs,

charges and expenses properly incurred in the winding up including liquidation.

Thus winding up charges and expenses rank in priority to all other claims.

The following preferential payments are required to be made in priority to all other

debts and such debts rank Pari Passu i.e. they rank equally amongst themselves.

a) All government and local rates payable with 12 months before the date of

winding up.


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b) All government rents not more than one year in arrears.

c) Wages and salary of any clerk or servant for services rendered during four

months preceding the relevant date not exceeding four thousand rupees.

d) All amounts done in respect of any compensation under the workmens

compensation act, which have accrued before the relevant date.

e) Proceeds left may be given to the shareholders and if any portion remains

unclaimed, if goes to the public trustee as Bona vacantia i.e. owners

property.

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