WINDING UP/LIQUIDATION OF COMPANIES

This is the process whereby the life of the company is ended and its property
administered for the benefit of creditors and members. An administrator is
appointed who takes control of the company affairs and assets. The
official/administrator so appointed to oversee the process of winding up is called
a liquidator.

There are three modes of Company Winding Up:

 Compulsory winding up by the court.

 Voluntary winding up: -
Members’ voluntary winding up.
Creditors’ voluntary winding up
 Winding up under the supervision of the court.

(I) COMPULSORY WINDING UP BY THE COURT

This is also known as compulsory winding up. Circumstances when this winding
up may occur:

(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. Where it is opposed
to public or company’s interest, the court may refuse to order winding up.

(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

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carrying on its business or if it is not possible for it to carry on its business.
The court will refuse to make an order where the suspension of business is
temporary or can be satisfactorily accounted for. 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:-

There are reasonable prospects of the company starting business within a

reasonable time.
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 public company
below two 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.

(e) Inability to pay debts: – That is if it is proved to the satisfaction of the court
that the company is unable to pay its debts. 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. Execution or other process in favor of the
creditors of a company is returned unsatisfied in whole or in part.

(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. Whenever the court
considers it just and equitable to do so, this clause gives the court very wide
powers to order winding.

Under the clause, “just and equitable” the following are instances where the
court can issue a winding up order: -

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  Where there is a deadlock in management
 Where it is impossible to carry on the business of the company except
at a loss.
 Where the company has engaged in illegal business.
 Where the object for which the company is formed is impossible of further
pursuit.
 Where the minority is being disregarded or oppressed.
 Where there is lack of confidence in directors.
 Where the company has been conceived and brought forth in fraud.
Just and equitable clause should be allowed as a last resort. The court
must be over-cautious before admitting a petition for winding up on the
just and equitable clause

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 preceding that date.
(d) By official receiver.
(e) By Attorney General in consequence of a report of inspectors upon the
company’s affairs.

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Consequence of Winding up Order

 Official liquidators are appointed.

 The powers of directors are terminated and
 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 LIQUIDATION
Voluntary liquidation is available to the company, acting through its members,
if and when they wish to wind up its affairs. There are two types of voluntary
liquidation:
 A members’ voluntary liquidation (MVL) is possible where the company’s
directors are able to make a declaration of solvency.
 A creditors’ voluntary liquidation (CVL) is where the members wish to wind
up the company’s affairs but the directors cannot make a declaration of
solvency.
Circumstances in which company may be wound up voluntarily
A company may be wound up voluntarily:
 when any period fixed for the duration of the company by the articles of
association expires, or an event occurs on which the articles provide that
the company is to be dissolved, and the company in general meeting has
passed a resolution requiring it to be wound up voluntarily;
 if the company resolves by special resolution that it be wound up
voluntarily;
The company meeting
Where a company is to be wound up voluntarily it will call a general meeting at
which the resolution for voluntary winding up will be proposed. Notice of the
meeting stating the type of resolution proposed must be given to all members
entitled to vote at least 14 days prior to the meeting in a private company. The
company’s articles may require a longer period of notice. The requirements for
the period of notice to be given can be waived by agreement of 90% of the
members at the meeting, if held at short notice, or a higher threshold if specified
by the company’s articles of association.
A resolution requires a simple majority but a special resolution to effect winding
up under requires a 75% majority.

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Notice of resolution to wind up
A copy of the resolution to wind up the company voluntarily must be forwarded
to the Registrar of Companies within 14 days and advertised in the Gazette
within 14 days.
A members’ voluntary liquidation.
A company can be put into liquidation voluntarily, at the instigation of its
directors, or compulsorily, by order of the Court. The effect in either case is that
a liquidator is appointed to bring the company’s existence to an end so that it
can be dissolved. Where the decision to go into liquidation is taken voluntarily
and the company is insolvent and cannot pay all its creditors in full, the
liquidation is termed a ‘creditors’ voluntary liquidation’. If the company is
solvent and can pay all its creditors in full, the liquidation may be a ‘members’
voluntary liquidation.

Winding Up Subject to Supervision of the Court

Windings up with the intervention of the court are ordered where the voluntary
winding up has already commenced. It is the voluntary winding up but under
the supervision of the court. A court may approve a resolution passed by the
Company for voluntary winding up but the winding up should continue under
the supervision of the court.

The court will issue such an order only under the following
circumstances:
(a) If the resolution for winding up was obtained by fraud by the company; or

(b) If the rules pertaining to winding up are not being properly adhered to; or

(c) If the liquidator is found to be prejudicial or is negligent in releasing the

assets of the company.

The Court may exercise the same powers as it has in the case of compulsory
winding up under the order of the court.