Winding up of companies in Kenya OR Liquidation is a formal insolvency procedure in which a company is brought to an end; all of its assets are liquidated and the proceeds from the sale of assets is used to repay creditors.
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.
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There are three modes of Company Winding Up:
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.
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:-
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 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,
iii. If it is proved to the satisfaction of the court that the company is unable to pay its debts.
(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”: –
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)Wherethe 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.
(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).
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.
(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.
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:-
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:-
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.
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.