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.

-      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.

-      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.

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