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Company Winding up and Registration

We noticed at the beginning that upon registration, a company becomes a legal personality. It personally comes to an end at the dissolution ...

We noticed at the beginning that upon registration, a company becomes a legal personality. It personally comes to an end at the dissolution of the company. During its life the company would have acquired rigths and incurred liabilities. These have to be dealt with before the company is finally dissolved. Theb process of ascertaining and realising the assets and apportioning them to the payment of creditors and distribution of the residue to the members is called winding up or liquidation.

Therefore, winding up is just a process.

Dissolution spells the death of the company and its legal personality is extinguished. The concepts of dissolution and winding up, even though they are used synonymously are interchangeable and should not be confused. These two concepts should, in addition not be confused with de-registration. Deregistration does not terminate the existance of a company. It simply deprives it of its legal personality but it will continue as an asset whose members are personally liable for its debts.

Winding up is essentially an administrative process which involves the handing over of company’s affairs to a luiquidator. Directors are therefore releived of their duties of directing the company. During the process of winding up the company retains its legal personality which is only extingushed at dissolution.
Winding up and Registration
There are two procedures for winding up a company as provided for in Section 199 which provides as follows:-
“Modes of winding up
(1) The winding up of a company be either –
(a) by the court; or
(b) voluntary.”

Winding up by the court is called compulsory winding up. In this case the company is wound up by the court following a petition by various persons specified in the Act.

Where the company is wound up voluntarily, this follows an application by the company itself following a special resolution.

Section 206 sets out the circumstances in which the company may be wound up by the court as follows:-

“A company may be wound up by the court –
(a) if the company has by special resolution resolved that the company be wound up by the court;
(b) if default is made in lodging the statutory report or in holding a statutory meeting;
(c) if the company does not commence its business within a year from its incorporation or suspends its business for a whole year;
(d) if the company ceases to have any members;
(e) if 75% of the paid up share capital of the company has been lost or has become useless for the business of the company;
(f) if the company is unable to pay its debts;
(g) if the court is of the opinion that it is just and equitable that the company should be wound up.”

The petition for winding up under this ground should not be presented before the expiration of 14 days after the last day on which the meeting ought to have been held. The ideas give the directors an opportunity to remedy the wrong or put right the default (Section 207 (1) (ii).

In terms of Section 208 (3), the court has a discretion and may , instead of making a winding up order direct that the statutory report should be delivered or that the meeting should be held.

Under this groung, the court can order the winding up of a company for failure to commence business within a year. This is because a year is long enough for a company to have started operating and failure to do so within this period may be indicatice of the fact that the company is unable to operate and so should be dissolved. The court , however has a discretion and can give the company a chance if there are prospects that the company will be able to operate in the near future ( Section114 sets out the conditions that must be fulfilled before a company may commence business.)

When the members’ number been reduced to below one, or when the company ceases to have any members, then the company may be wound up. In terms of Section 7 a company must have at least one member. In terms of Section 32, if a company ceases to have any members but carries on business for more than 6 months, then any person who knowingly caused it to do so, shall be liable together with the company for its debts.

The purpose of this requirement is to pre-empt a situation whereby a company will be unable to meet its obligations to third parties. Once a company uses up 75% of its paid up capital, the interested party may pertition the court for winding up. The court, however excercises a discretion. The fact that 75% of paid up capital has been lost or has become useless does not necessarily mean that the company is unable to pay its debts especially where the share capital is lost where the directors did not over commit the company but entered onl;y into transactions which the company could meet and the company has debts to pay and other monetary obligations to discharge.

This is considered the most common ground for winding up. Failure to pay debts is delt in Section 205. It has been said that the court has a discretion. It should be established that the company is unable to pay its debts in the sense of being unable to meet its current obligations. If the company is still solvent in the sense that its assets exceeds its liabilities, the court may resolve to order winding up.

This is a common ground for winding up. This is because this ground is all encompassing and gives the court a very wide discretion. It is based on the principle of good faith which is derived from law of partnerships.

The ground is usually divided into the following categopries:

(1) Loss of company’s substratum
(2) Illegality
(3) Deadlock
(4) Minority oppression
(5) Lack of probity in the company’s affairs.

This occurs where the company has abandoned its main objects or is unable to achieve them. It has been decided that where a company was formed to mine copper and no copper was found then the substratum of the company has disappeared and it ought to be wound up. The reason for this is that it will be unfair for the company to persue other objects which were not contemplated by the shareholders.

In RE SERMAN DATE COFFEE COMPANY, a company’s main object was to acquire a (plant) for manufacturing dates as a substitute for cofee. The company was unable to obtain such (plant) but was doing well. It was held that it should have been wound up.

In NAKHOODA V NORTHERN IND, A company was formed to establish a mineral factory, and a large dry –cleaning business. It did neither of these but carried on activities of money lending. An application for winding up was granted.

This may occur where a company is unable to take manegement decisions on acount of equal voting strength of two opposing groups of shareholders. This is most common in companies where the shareholders may have personal relationships. The court then tends to the company as if it were a partnership. Once the court is of the opinion that the true confidence has been undermined, it will order winding up.

In RE YENDJE TOBACCO CO. LTD (1916), there were 2 tobacco manufacturers who were the only shareholders in the company. They weere also the directors, with equal voting powers. They had a serious disagreement resulting in continous quarrels. At one time, one director brought a legal action against the other. They had over one thousand pounds in intigation over the validity of the dismissal of a factory manager. They also argued over the term of employment of a travelling salesman. It is said that the relations between them became so sour that they could not talk to each other but communicated only through the secretary! Although the company was doing very well, the court applying the principles of partnership ordered a winding up.

If it can be shown that persons who control the company have conducted themselves in a manner oppressive to the petitioner, the court may grant winding up. The court, however will only grant winding up on the petition of the members even though some other remedies are available provided that the member is not being unreasonable to persue that other remedy (Section 208(2)).

This is where there is no transparency. There is dishonesty or misconduct in the affairs of the company in the case of WOOLMARK V COMMERCIAL VEHICLE SPARES, a minority shareholder complained that the directors and the majority shareholders had perpetrated a fraud on him by falsifying minutes, illegally issuing shares and declaring and paying dividents he said that this constituted a fraud and that as a result of this misconduct, he hafd lost confidence in the management of the company’s affairs. The court granted the order sought.

What we have looked at are the ways and reasons for winding up. The rest of the winding up proceedure is merely administartive and fully provided for in the companies Act. It is therefore unnecessary for us to regurgitate the Act.