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.

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.

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

pay the sum, to secure or compound for it to the reasonable satisfaction of the creditor or; ii. iii. Execution or other process in favour of creditors of the company is returned unsatisfied in whole or part or; 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.

ii. iii.

When the main object of the company has substantially failed or become impractical. 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. v. vi.

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. 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. 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 decisionmaking but was expected to sign resolutions by other directors. ii. iii. The substratum of the company had gone and that the company had no alternative business to engage in. 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.

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.

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.

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): -

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 principal liquidator 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

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, formation of the company within the past years in its employment during such a time. (ii) By persons who are or have been officers or were engaged in the

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) b) Whether creditors or contributories desire a liquidator of their choice. Whether there shall be a committee of inspection and whom shall it

consist.

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.

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) b) c) He resigns He is removed He is released.

Committee of inspection Creditors and contributories may apply to the courts to appoint a committee of inspection. There is no given limit of members of the committee of inspection. There is no given limit of members of the committee. The function of the committee is to assist and supervise the acts of the liquidator. The committee must meet once in a month but, the liquidator may call for meetings of inspection as often as he thinks. Power of the court to stay winding up The courts at any time after an order of winding up have a discretion on the application of the liquidator, official receiver or creditor or contributor, so stay proceedings in relation to winding up. The courts may stay the proceedings altogether or for a limited time. Dissolution of the company When the affairs of the company have been wound up, the court will, if the liquidator makes an application, make an order dissolving the company and the company is dissolved from the date of such order. The liquidator must within fourteen days deliver a copy of the order to the Registrar for registration. Voluntary winding up This is winding up by members or creditors without interference by the court. The members, creditors may however apply to the court for any direction, if and when necessary. A company may be wound up voluntarily on the following circumstances (sec.271).

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) b) Members voluntary winding up 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

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.

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

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.

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.