INTRODUCTION
A company is an artificial person
and so it cannot die a natural death. But sometimes there may be circumstances
where it might be desirable that the life of the company be put to an end. This
is done through the legal process of winding up or liquidation.
Winding up of a company is a
process whereby its life is ended or terminated 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. Therefore it is a process, which involves the
realization of assets, payment of liabilities and distribution of surplus if
any amongst the members of the company.
It is however important to
distinguish winding up from dissolution of a company.
Winding up of a company precedes
its dissolution. Prior to dissolution and after winding up, the legal entity of
the company remains and can be sued in a court of law.
On dissolution the company ceases
to exist, its name is struck off the registers of companies by the registrar
and the same is published in the Kenya Gazette.
MODES
OR TYPES OF WINDING UP (SEC.212)
There are 3 modes of winding up
provided by the Act:
1.
Voluntary winding up which may be:
a)
Members' voluntary winding up
b)
Creditors' voluntary winding up
2.
Winding up by the court (also known as
compulsory winding up).
3.
Winding up subject to court supervision.
(supervisory winding up)
1. VOLUNTARY
WINDING UP
This means winding up by the
members or creditors of the company without interference by the court.
Grounds
for voluntary winding up
S.271 of the Act sets the grounds
under which a company may be wound up voluntarily. These are:
a) Passing ofa special resolution:
A company may at any time pass a
special resolution that it be wound up voluntarily. The reasons for this can be
varied including:
i)
loss of business prospects on favourably changed
business circumstances ii) insolvency, break down in management
or
iii) simply
the members wish to distribute surplus, assets amongst themselves and terminate
the company's activities.
b) If the company was formed to last only for
a fixed period and that period has come to an end.
Such a situation can arise where
for instance; a company was formed to prospect for oil for 5 years and this
period has ended.
c) If the company was created to last until
the occurrence of a specified event.
This event may include any
eventuality and may be the death of the last founding company director
Types
of Voluntary Winding Up
There two types of voluntary
winding up :�
i)
Member voluntary winding up
ii)
Creditors' voluntary winding up
i) Member voluntary winding up
Members voluntary winding up is
where the members of the company themselves conduct the liquidation process
through their appointed liquidator. This is possible when the company is
solvent and able to pay its liabilities in full. This requires the filing of a
statutory declaration of a solvency.
A declaration that the company is
solvent must be made by the directors at the meeting of the board. They have to
declare that the company has no debts or that it would be able to pay its debts
in full within 12 months from the commencement of the winding up.
In order to be effective, this
declaration must be made within 30 days immediately preceding the date of the
passing of the winding up resolution and the same resolution shall be delivered
to the registrar for filing before the said date accompanied by a copy of the
report of auditors of the company and the profit and loss account prepared
since the date of the last account and the balance sheet of the company made
out on the last mentioned date which must contain a statement of the company's
assets and liabilities as at the latest practicable date before the making of
the declaration.
Directors making false declaration
of solvency are punishable with imprisonment for not exceeding 12 months or to
a fine not exceeding Shs.20,000 or both.
Procedure
of members voluntary winding up
1. Appointment of Liquidator
The company in a general meeting
shall appoint one or more liquidators for the purpose of winding up the affairs
and distributing the assets of the company.
2. Cessation of director's powers
On the appointment of a
liquidator, all the powers of the directors shall cease except so far as
thecompany in a general meeting or the liquidator sanctions their
continuance.
3. The powers of a liquidator to accept
shares
Where a company is proposed to
be wound up, or is in the process of being wound up and the whole or part of
the assets of the company is proposed to be transferred to another company, the
liquidator of the transferor company may with the sanction of the company's
special resolution, receive in compensation shares or policies or other
interests in the transferee company for distribution amongst the members of the
transferee company.
4. Duty to call creditors meeting
If the liquidator is at any time
of the opinion that the company will not be able to pay its debts in full
within the period stated in the declaration, he shall summon a meeting of the
creditors and lay before it a statement of the assets and liabilities of the
company.
5. Meeting at the end of the year
If the liquidation goes on for
more than a year, the liquidator shall call a general meeting of the company at
the end of every year from the commencement of winding up.
6. Final meeting & dissolution
After the affairs of the company
are completely wound up, the liquidator will call the final general meeting of
the company for the purpose of laying the detailed accounts of the winding up
before it and giving an explanation.
ii) Creditors voluntary winding up
In voluntary winding up where a
declaration of solvency is not made, the creditors take it up. Here the
creditors take over the winding upprocedure in order to protect their own
interest in the company. The winding up then proceeds in the following
manner:
1. Meeting of creditors
A company shall call a meeting of
the creditors of the company on the day or the day next following the day on
which there is to be the general meeting of the company at which the resolution
for winding up is to be proposed.
2. Notice of the meeting
The company shall cause notice of
the meeting of creditors to be advertised in the Kenya Gazette at least once
and at least once in a newspaper of wide circulation in Kenya.
3. Statement of affair to be tabled
The board of directors must lay
before the meeting of the directors a full statement of the position of the
company's affairs together with the list of the creditors of the company and
the estimated amounts of their claims. 4. Appointment
of liquidator
The creditors and members at their
respective meetings may nominate a liquidator for the purpose of winding up the
affairs of the company and distributing the assets of the company.
5. Appointment of committee of inspection
The creditors may at their meeting
appoint a committee of inspection comprising of not more than 5 persons.
6. Fixing the liquidator's remuneration
The remuneration of the liquidator
is to be fixed either by committee of inspection and if there's no such
committee then by the creditors.
7. Cessation of directors' power
On the appointment of the liquidator
all the powers of the board shall seize and the same shall vest in the
liquidator.
8. Power to fill vacancy of liquidator
If a vacancy occurs by death or
resignation of liquidator, the creditors may appoint another one to fill the
vacancy.
9. Calling a meeting at the end of the
year:
If the winding up proceeds for
more than one year, then the liquidator must call a meeting of the creditors to
review the progress of the liquidation.
10. Calling of the final meeting:
Once the affairs of the company
have been wound up, the liquidator shall call the final meeting at which a
resolution shall be passed that the affairs of the company be wound up and its
assets distributed. The liquidator shall then notify the court of the
resolution and the court shall then order for the dissolution of the
company.
WINDING
UP BY THE COURT (Compulsory winding up) (Sec. 219)
This type of winding up is called
winding up by the court because it is the court which makes the first order
that the company to be wound up and thereafter its effect passes on to the
liquidator.
On what ground can a company be wound up compulsorily
or by the court? a) Passing of a special resolution
Where a company has by a special
resolution resolved that it be wound up by the court, the court may order the
winding up of the company.
There are various reasons which
may underlie the passing of a resolution by the company. This may include
i) deteriorating financial and trading
position of a company which implies future inability of the company to pay its debts or ii) lack
of working capital or
iii) changed
business conditions which render the continued operation of the company
difficult
or
iv) where
the objects for which the company was crated has been achieved or v) due
to break down in the management or vi) general
paralysis arising from labour or industrial unrest.
b) Default in holding a
statutory meeting or delivering a statutory report to the registrar: If the
company has made default in delivering the statutory report or holding the
statutory meeting then the court may order the winding up of the company.
A company is required under
Sec.130 to hold its first general meeting after one month but before expiry of
3 months from the date on which the company was entitled to commence
business.
A winding up petition on this
ground can be presented either by the registrar or by a contributory on or
after the expiry of 14 days after the last day on which the statutory meeting
ought to have been held.
c) Failure to commence business within one
year of incorporation or suspending business for a whole year
It is important that a company
commences business immediately, after incorporation and upon the fulfillment of
required conditions in respect of public companies. In addition, after it has
commenced business it must stay operating until perhaps the day of liquidation.
Therefore, failure to commence business or suspending business for a year may
render the company a sham or a bubble.
d) Reduction in membership below the statutory
minimum
If at any time the number of
members of a company is reduced in the case of a private company, below 2 and
in the case of a public company below 7, a company may be ordered to be wound
up.
If the company carries on business
for more than 6 months while the number is so reduced every member who knows
this fact will be liable for the payment of the whole of the debts of the
company contracted during that time.
e) Where the company is unable to pay its
debts
This is the commonest of all grounds.
A company may be wound up if it is unable to pay its debts or honour its
monetary commitments.
A company is deemed to be unable
to pay its debts if:
a)
a creditor for the sum of Shs.1000 or more has
served on the company at its registered office a demand for payment and the
company has for 3 weeks thereafter neglected to pay or otherwise satisfy him;
or
b)
If execution or other process issued on a decree
or order of any court in favour of a creditor of a company is returned
unsatisfied in whole or in part; or
c)
If it is proved to the satisfaction of the court
that the company is unable to pay its debts and in determining whether the
company is unable to pay its debts, the court shall take into account the
contingent and prospective liabilities of the company.
f) Where it is just and equitable to wind
up the company
A company may also be wound up if
the court is of the opinion that it is just and equitable that the company
should be wound up. What is just and equitable is a question of fact depending
on the circumstances of each case.
The following grounds have been
held to justify the winding up of a company on just and equitable ground
i) When the substratum of the company is
deemed to be gone (failure of substratum) A substratum of thecompany is
deemed to be gone when the main object for which the company was formed has
become impossible or impracticable. ii) Where
there is a complete deadlock in the management of the company
This is possible if it is not
possible for the company to carry out its objects for which it was formed
because the managers of the firm cannot agree on any matter e.g. in Re Yenidje Tobacco Co. Ltd case W &
R were the sole shareholders and directors of the company with equal rights of
management and voting power. After some time, they became bitterly hostile to
each other and could not see eye to eye thereby paralysing the management of
the company. All communications between them was through the secretary. The
court held that the circumstances the company should be wound up on just and
equitable reasons not withstanding that it was in fact making profits.
iii) Unfair prejudice
Where the affairs of the company
are being conducted in a manner, which is unfair or prejudicial upon a minority
of shareholders. Such member may petition for winding up under Section 211 of
the Act.
iv)
Where the business of the company is making
a loss even though the company is not technically insolvent. However an order
will only be granted on this ground where it is clear that it is impossible for
the company ever to make a profit even with a change to more effective
management.
v)
Where the conduct of a director or
shareholders of small private company is such that if the company were a
partnership it would lead to the dissolution of the partnership e.g where there
is a constant breach of trust.
vi)
Where the purpose for which the company was
formed is fraudulent or illegal or where the business of the company has
subsequently become illegal.
vii)
When the company is a mere bubble i.e it
does not have any practical existence e.g it does not have any property or it
is not carrying on any business.
viii)
When the articles provided for winding up in
the event which has happened. This relates to a company formed to achieve a
pertain objective after which it is to be dissolved.
ix) Exclusion from management.
Where there is a management
participation agreement and one group prevents the other group from management,
the other may petition the winding up of the company on just and equitable
ground.
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Under Sec.221 if there are any circumstances
warranting the winding up revealed in the report of inspectors appointed to
investigate certain affairs of the company's management, a winding up petition
may be launched by the Attorney General to wind up the company in question.
Matters in which the management may be investigated are varied and include
mismanagement.
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Where winding up proceedings of the parent
company have been commenced. In the case of a company incorporated outside
Kenya and carrying on business in Kenya if winding up proceedings have been
commenced in respect of it in the country or territory of its incorporation or
in any other country or territory in which it has established a place of
business the same proceedings shall be instituted in Kenya.
Who
may petition or compulsory winding up ?
The application for compulsory
winding up may be made by any of the following persons:
1. By the company
A petition
to the court by the company for its winding up may be made by its directors.
This is possible when it passed a special resolution to that effect or when the
directors are of the opinion that the circumstances leading to the insolvent
merging of the company ought to be investigated by the court.
2. By creditors
Under Sec.221 of the Act, a creditor
has locus
standi to present a winding up petition. The Act does not define a
creditor but the following persons may be considered as creditors.
a)
All persons having a pecuniary interest or
claims in the company or against the company
b)
Any assignee of a debt in law or equity
c)
Secured creditor
d)
A creditor by subrogation and many others
1. Any contributory
A contributory
is any person liable to contribute to the assets of the company in the event of
its being wound up. He cannot however petition for the winding up of the
company unless a) the number of members is reduced below the statutory minimum.