The Companies Act Cap. 486 does not define the term winding up or liquidation, however it uses them interchangeable, hence we assume them as synonymous.
Winding up, means a process of putting an end to the life of a company. It is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected and its debts are paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is left, it is distributed among the members in accordance with their rights.
Winding up or liquidation is the process by which the management of the company’s affairs is taken out of its directors’ hands, its assets are realized by the liquidator and its debts are paid out of the proceeds of realization.
Modes of Winding Up
There are three modes:-
(i) Compulsory winding up by the court.
(ii) Voluntary winding up:-
(a) Members’ voluntary winding up.
(b) Creditors’ voluntary winding up
(iii) Winding up under the supervision of the court.
(i) COMPULSORY WINDING UP BY THE COURT (Section 219)
This is also known as compulsory winding up.
This may occur in the following circumstances:-
(a) Special resolution of the company: - If the company has by special resolution resolved that it may be wound up by the court, the court may pass a winding up order. The power of the court in such a case is discretionary. The court may refuse to order winding up where it is opposed to public or company’s interest.
(b) Default in holding statutory meeting or in delivering the statutory report to the registrar: - If a company defaults in delivering a statutory report to the registrar or in holding the statutory meeting, the court may order winding up of the company either on the petition of the registrar or on the petition of a contributory. The petition must not be filed before expiry of 14 days after the last day in which the statutory meeting ought to have been held. However, the court may instead of making a winding up order, direct the statutory report to be delivered or that a meeting shall be held.
(c) Failure to commence or suspension of business: - Where a company does not commence its business within one year from its incorporation, or suspends its business for a whole year, the court may order for is winding up.
The court exercises power in this case only if the company has no intention of carrying on its business or if it is not possible for it to carry on its business.
Case Law: Orissa Trucks and Enamel Works Ltd (1973)
A company’s business remained suspended for 10 years, its capital had been embezzled and its major contributor, the Orissa government refused further help. It was held that the company should be wound up.
Where the suspension of business is temporary or can be satisfactorily accounted for, the court will refuse to make an order.
If a company has not begun to carry on its business within a year from its incorporation, or suspends its business for a whole year, the court will not wind up if:-
(i) There are reasonable prospects of the company starting business within a reasonable time.
(ii) There are good reasons for the delay, that is, the suspension of business is satisfactorily accounted for and appears to be due to temporary causes.
Case Law: Middleborough Assembly Rooms Company (1880)
A company suspended its business for more than 10 years due to depression in trade. A shareholder presented a petition for the winding up of the company a year later. 4/5th in value of the shareholders opposed the petition. The company intended to continue its operations when trade prospects improved. The petition was dismissed.
(d) Reduction of members below Minimum: -In the case of a private company
below two members and a public company below seven members
If the company carries on business for more than six months while the number is reduced, every member who is cognizant of the fact that it is carrying out business with members fewer than the statutory minimum, will be severally liable for the payment of the whole of the debts of the company contracted after six months.
This is an area in the company where corporation veil is lifted.
(e) Inability to pay debts: - That is,
(i) A creditor to whom the company owes more than Sh. 1,000 has left at the registered office, demand under his hand for the payment of the sum due, and the company has for 3 weeks thereafter reflected to honor the sum.
(ii) Execution or other process in favor of the creditors of a company is returned unsatisfied in whole or in part.
(iii) If it is proved to the satisfaction of the court that the company is unable to pay its debts.
The court will not prove whether assets exceed liabilities, rather whether the company is unable to meet its current demands.
(f) Just and equitable: - This is when the court is of the opinion that it is just and
equitable that the company should be wound up. This clause gives the court very wide powers to order winding whenever the court considers it just and equitable to do.
The following are the instances where the court can issue a winding up order under the clause, “just and equitable”: -
(a) Where there is a deadlock in management.
(b) Where it is impossible to carry on the business of the company except at a loss.
(c) Where the company has engaged in illegal business.
(d) Where the object for which the company is formed is impossible of further pursuit.
(e) Where the minority is being disregarded or oppressed.
(f) Where there is lack of confidence in directors.
(g) Where the company has been conceived and brought forth in fraud.
Just and Equitable clause
The court must be over-cautious before admitting a petition for winding up on the just and equitable clause. It should be allowed as a last resort.
Just and equitable clause depends upon the facts of each case. The court may order winding up under this clause when:-
(a) The substratum of the company is gone
Substratum of a company is said to have disappeared only when the object for which it was incorporated has substantially failed or when it is impossible to carry on business except at a loss, or the existing assets are insufficient to meet the existing liabilities.
Before the court makes a winding up order under this, the court should consider the interest of shareholders as well as creditors.
The substratum of a company disappears when:-
(i) The subject matter is gone.
Case Law: Pirie vs. Stewart
A shipping company lost its only ship, the remaining assets being a paltry sum of £363. Majority shareholders filed a petition for winding up but minority shareholders opposed this and desired to carry on business.
It was held that it was just and equitable that the company be would up.
(ii) When the main object of the company has substantially failed or become impractible
Case Law: German Date Coffee Company (1882)
The object clause of the German Date Coffee Company stated that it was formed for a German patent which would be granted for making a partial substitute for coffee from dates and for acquisition of incidental there and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work on a Swedish patent and carried on business at Hamburg where substitute for coffee was made from the dates, but not under the protection of a patent.
A petition was filed by two shareholders that the main object could not be achieved, and therefore it was just and equitable that the company should be wound up.
(iii) The company carries on business at a loss and there is no reasonable hope that the object of trading can be attained: - Where majority shareholders are against it, the court cannot order a company to be wound up merely because it is making a loss.
(iv) Where the existing and probable assets of the company are insufficient to meet its existing liabilities. Where the company is totally unable to pay off creditors and there is increasing burden of interest and deteriorating state of management and control of business owing to sharp differences between shareholders, the court will order winding up.
(b) When the management is carried on in such a way that the minority is disregarded or oppressed: - This is prejudicing the interests of minority shareholders by majority shareholders.
Case Law: Re Garnets Mining Company Ltd (1977)
The petitioner was Mrs. Beth Wambui Mugo. She wanted the company to be wound up on the “just and equitable” ground. Her reasons were as follows:-
(i) That the affairs of the company were being conducted in a manner which was oppressive to her. Despite her 50% shareholding, she was treated at most times as decorating figure because she was excluded from both the company and board meetings, but nevertheless expected to sign or approve most of the resolutions. When she suggested transferring her shareholding, she was out voted.
(ii) The substratum of the company had gone and that the company had no alternative business to engage in. A company had been incorporated to “mirie rubbis”. This business collapsed because Mugo influenced the government to withdraw the mining license as a way of revenging against the Greek directors.
(iii) Because of the differences between her and the rest of the Greek members, the management of the company had broken down completely and consequently there was loss of confidence and proximity in each other to the extent that the company could no longer be managed at all
It was held that though Mugo (petitioner) was partly to blame for sabotaging the business, she was entitled to this order under Section 215.
(c) Where there is deadlock in management of the Company: - When shareholding is equal and there is a case of complete deadlock and there is no hope or possibility of smooth and efficient continuance of the company as commercial concern.
Case Law: American Pioneer Leather Company (1918)
There were only three directors and shareholders in a private company. One of them left the country and the remaining two quarreled among themselves and as a result there was a complete deadlock.
It was held that it was just and equitable that the company be wound up.
Case Law: Yenidje Tobacco Company Ltd (1916)
A and B were the only shareholders and directors of a company with equal rights of management and voting powers. After a time, they become bitterly hostile to each other and disagreed about the appointment of important servants of the company. All communications between them were made through the secretary as they were not in speaking terms with each other. The company made large profits in spite of the disagreement.
It was held that there was complete deadlock in management and the company was ordered to be wound up.
(d) When the company was formed to carry out fraudulent or illegal business, or when the business of a company becomes illegal.
Case Law: Brinsmead (Thomas Edward) & Sons (1897)
Thomas Edward and two of his sons were employed by John Brinsmead & Sons Ltd in the business of piano manufacturing. They left John Brinsmead & Sons Ltd and started a company called Thomas Edward Brinsmead & Sons Ltd for carrying on similar business. They were restrained by a court injunction from using the name Brinsmead on the ground of fraud. A petition for compulsory winding up of the company was presented.
Held that the company was formed to carry out fraud and, therefore, it was just and equitable to be wound up.
(e) In the case of a company incorporated outside Kenya and carrying on business in Kenya, winding up proceedings have been commenced in respect of it either:-
(i) In the country of incorporation.
(ii) In any country in which it has established place of business (Section 219).
Who may Petition for Compulsory Winding Up?
The following persons can file a petition:-
(a) The company: - A company may itself file a petition for winding up after it has passed a special resolution. The directors have no powers to present a petition for winding up.
(b) Creditors: - The word creditor here refers to every person having a pecuniary claim against the company, whether actual or contingent, and such a person is competent to file a petition for the winding up of the company.
Disputed debt: – A creditor whose debt is disputed cannot get a winding up order. The court may either order the petition or stand over until the validity of the debt can be determined, or may dismiss a petition.
(c) Petition by any contributory: - Section 214 defines a contributory as any person liable to contribute to the assets of the company in the event of its being wound up. It however includes all persons who at the date:-
(i) are members of the company or,
(ii) have been members within a year immediately proceeding that date.
(d) By official receiver.
(e) By Attorney General in consequence of a report of inspectors upon the company’s affairs.
Consequence of Winding up Order
(i) Official liquidators are appointed.
(ii) The powers of directors are terminated and
(iii) The company’s servants are “ipso facto” dismissed.
A receiver is not under any obligation to discharge debts even though incurred after the date of his appointment, unless he exceeded his authority or expressly accepted or agreed a personal liability.
(ii) VOLUNTARY WINDING UP
Voluntary winding up means winding up by members, or creditors without interference by the court. They are left to settle their affairs without going to the court. They may, however, apply to the court for any directions, if and when necessary.
A company may be wound up voluntarily when:-
(a) The period fixed by articles for the duration of the company has expired or an event upon which the company is to be wound up has happened and the company in a general meeting has passed an ordinary resolution.
(b) If the company for whatever reason, has passed a special resolution to wind up voluntarily.
Types of Voluntary Winding Up
(a) Members’ voluntary winding up.
(b) Creditors’ voluntary winding up.
(a) Members voluntary winding up
In a voluntary winding up of a company, if a declaration of its solvency is made, it is a members’ voluntary winding up. The declaration shall be made by majority of directors at a meeting 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:-
(i) The company has no debts.
(ii) That it will be able to pay debts in full within 12 months from the date of commencement of the winding up.
Declaration of solvency: - This should be done before the general meeting passing the resolution for winding up and not after the general meeting. It is a solemn declaration of solvency made by a director that the company is solvent and able to pay all its debts in full within a period of 12 months.
(b) Creditors’ voluntary winding up
Where the declaration of solvency is not made, the winding up is referred to as creditors’ winding up. It is presumed that the company is insolvent. In such a case, a company must call a meeting of creditors on the same day or the following day after the meeting, at which resolution for winding up is to be made or proposed. The directors must lay before the creditors the position of the company.
(iii) WINDING UP SUBJECT TO SUPERVISION OF COURT
Section 304 provides that when a company has passed a resolution to wind up voluntarily, the court may order the continuation of voluntarily winding up subject to their supervision on any terms.
The liquidator will continue to exercise all powers subject to the restrictions laid down by the courts. A petition for the winding up of the company subject to the supervision of the courts may be presented by any person entitled for the compulsory winding up, but before the court refuses or makes a supervision order, they must call a meeting for ascertaining the wishes of creditors and contributories.
The court will usually be called to supervise a voluntary winding up if there is a substantial dispute between the company and creditors, especially where they disagree over the appointment of a liquidator.
Distinction between Voluntary winding up and Compulsory Winding up.
(a) Declaration of solvency is a must in members whereas it is not necessary in creditors winding up.
(b) Mode of discharging liabilities incase of winding up: - The company must pay all costs, charges and expenses property incurred in the winding up including liquidation costs. These expenses rank in priority to other claims. If assets are insufficient to satisfy all the liabilities, the courts may make any order as to the payment of those costs and charges as they deem fit.
(c) Then, preferential creditors must be paid under Section 311. The following preferential creditors must be paid in priority:-
(i) All government and local rates payable within 12 months before the date of winding up.
(ii) All government rent not more than one year.
(iii) Wages and salaries of any servant for services rendered during four months proceeding relevant period not exceeding Sh. 4,000.
(iv) All amounts due in respect of any compensation under workmen’s compensation, which has occurred before the relevant date.
(d) Finally, proceeds left may be given to shareholders and if any portion remains unclaimed, it goes to the public trustee as “Bona vacantia”, that is, ownerless property.