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 under Kenya laws, 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 under Kenya law 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 under the Kenya laws:-
(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.
Under the Kenya laws,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 under Kenya law 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 under Kenya law:-
(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 under Kenya law 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 under Kenya law 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.