WINDING-UP

LSU
FMSC
USJP
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INTENDED LEARNING
OUTCOMES OF THE LESSON
• On successful completion of this chapter, undergraduates will be able
to:
• Identify what is winding up.
• Identify modes of winding up.
• Describe how does winding up commence and entire procedure.
• Explain distribution of assets of the company during winding up.

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COMPANY COLLAPSE

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INADEQUATE CAPITAL

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INADEQUATE CONTROL OVER WORKING
CAPITAL

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FRAUD

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REASONS FOR CORPORATE
COLLAPSE CONT….
• Management inexperienced and
incompetence
• Management shortcomings (do not attend to
meetings)
• Accountancy failings
• Unable to respond to change (Eg: political,
cultural, social changes)
Eg: COVID-19, changes in the gvt
Spend too much on R&D
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MODES OF WINDING UP

• 267. (1) The winding up of a company may

be either –
(a) by the court; (court/ compulsory W-up)
(b) voluntary; (member or creditor) or
(c) subject to the supervision of the court.
• In SL, W-up is a part of Companies law

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W-UP, INTRODUCTION
• Winding – up/ liquidation(not the death) is
a terminal form of administration of the
affairs of a company, for usually the
winding – up of a company will lead to its
dissolution, which is, effectively, the death
of a company. (end of the company
affairs)

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• Winding – up is a collective process whereby
the assets of a company are collected and
realized, the resulting proceeds are applied in
discharging all its debts and liabilities, and
any balance is distributed among the
members; (based on the articles or the
agreements among parties)
• it is process which prepares the company for
its death, which is known as dissolution.
• In a broad sense, winding –up is the
bankruptcy of a company.

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W-UP IS FORMAL

• Company cannot wind-up informally. (cannot do

voluntarily and based on agreements) – should do
according to CA
• The law governing liquidation is essentially the
product of statutory enactment, that is the
Companies Act No.07 of 2007, and winding – up
can only proceed according to the terms of that Act

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 REASONS FOR WINDING-UP
1. If the company is insolvent, the creditors (have more
rights than SHs here) wish to have its assets applied
in payment of debts that are due to them.
2. Sometimes the company is solvent, and the members
cause it to be wound up in order to realize the
investment represented by their share or interest in
the property of the company. (voluntary W-up)
3. As a scheme for amalgamation with some other
company or enterprise.
4. As a result of oppression or mismanagement in the
affairs of the company
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THE PURPOSES OF WINDING UP

• W-up procedure allows for an equitable and fair

distribution of the debtor company amongst its
creditors.

• Winding-up serves the community at large as it

is not good for society that companies which are
insolvent are able to continue to trade.

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• Liquidation is designed to allow for an
investigation of the company’s affairs by an
independent and appropriately qualified person
(appointed by court or co. depending on the
category of W-up)
• Investigations during the winding-up may
reveal improper or dishonest conduct by
officers(directors, auditors, secretary) of the
company and any unfair dispositions of
property.
• To prepare companies for the end of their
existence by eventual dissolution. 14
• In a w-up, a liquidator is appointed,
– He takes possession of the Co’s assets
– He collects the assets
– Pays the cost of the w-up and the creditors
– And distribute any surplus among the
members (based on articles)
– The Co. is then dissolved until it is so
dissolved its corporate state continues,
– However the powers of directors ceased.
(when the W-up process is started)
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POWERS OF LIQUIDATOR TO ENFORCE
LIABILITY OF SHAREHOLDERS AND FORMER
SHAREHOLDERS

• 268. (1) The liquidator may –

• (a) if a shareholder is liable to call, make
calls on the shares held by that shareholder;
• (b) if a shareholder or former shareholder is
otherwise liable to the company, liquidator
can enforce that liability.

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MODES OF WINDING-UP

• 267. (1) The winding up of a company may

be either –
• (a) by the court;
• (b) voluntary; or
• (c) subject to the supervision of the court.

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COMPULSORY WINDING-UP

• An application for the winding up of a

company shall be by petition presented
(subject to the provisions) to the court
(commercial high court)

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CASES (GROUNDS) WHICH COMPANY MAY
BE WOUND UP BY THE COURT -

• Sec. 270
COMPULSORY W-UP

• (a) the company has by passing special resolution

resolved that the company be wound up by the
court;
• (b) the company does not commence its business
within a year from its incorporation or suspends it
business for one year;
• (c) if the number of the members(SHs) falls below
the minimum number (one or no) required under
subsection (2) of section 4 of this Act; 19
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 JUST & EQUITABLE W-UP
Introduced by COMMON LAW :
•Where the objects of the co. are fraudulent (company has formed for a
fraudulent purpose)
•The co. is a babble (no company – artificially made)
•The company is in substance a partnership (in effect an incorporated
partnership) and there are grounds to dissolved partnership
•Where there is a deadlock in the co. mgt (no communication between directors)
•Expulsion from office or exclusion from participation
•Justifiable loss of confidence (between the parties )
•Co. has never been able to or no longer be able to carry out the
businesses for the purposes(of promoters) it was formed
Unreasonable conduct of the petitioner will disqualify him from a w-up order.
Court will not grant the order if it appears that the petition has made to
facilitate an improper purpose.
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 INABILITY TO PAY DEBTS
• Sec. 271- grounds
• If the co. is unable to settle a sum exceeding Rs. 50,000/=
within 3 weeks of making such a demand by a creditor. (can
file a W-up petition)
• If a judgment is entered against the co. in favor of the creditor
of the co. and the co. is unable to satisfy such judgment in
whole or in part.
• If it is proved to the satisfaction of court that the co. is unable
to pay its debts.

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Tests on the inability to pay debts

1.C ash flow test/ commercial insolvency – inability of the

co pay its debts. The status of the assets is not relevant.
If the co cannot pay its way in the conduct of its
business it is insolvent

2.Balance sheet test – where the co assets is insufficient

to dischage its liabilities

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WHO MAY ENTITLE TO FILE A PETITION (W-
UP)
• Sec. 272 – petition for winding up can be
made
– by the company
– by any creditor or creditors (including any
contingent or prospective creditor or creditors),
– By any contributory (SH- existing and past –
within last 6 months) or contributories (SHs), or
by all or any of those parties, jointly or separately.
• Registrar may present a winding-up petition in
the case of a company referred to in subsection
(3) of section 177. 24
• Sec. 272 (1) (a)- any contributory cannot present a W-up
petition unless,
• (i) the number of members falls below the minimum number
required under subsection (2) of section 4 of this Act; or
• (ii) the shares in respect of which he is a contributory or some
of them, either were originally allotted to him or have been held
by him and registered in his name, or at least six months during
the eighteen months immediately preceding the date or
commencement of the winding up or have developed on him
through the death of a former holder (a contributory cannot
file a w-up petition unless he has had shares for 6-18
months) 25
• Contributory means every shareholder of the co and every
other person liable to contribute to the assets of the co in
the event of being wound up.

• Where a co is insolvent a fully paid shareholder as a

contributor does not have any interest in the co being wound
up. Therefore such a contributory would not be able to
present petition for a winding up unless he shows that there is
a probability that co is solvent and have assets available for
distribution – then he has an interest in the winding up

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 273 /POWERS OF COURT ON HEARING W-

• Sec. 273(1) – commercial high court has

UP PETITION

been given wide powers

– the court may dismiss it or
– Adjourn (postpone) the hearing
conditionally or unconditionally or
– Make any interim order or any other order
that it thinks fit,
Court tries to solve the disputes as possible
and go for a W-up as the last resort.
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POWER TO STAY OR RESTRAIN PROCEEDINGS
AGAINST A COMPANY
Any case against the company in any court
•S 274. At any time after the presentation of a
winding-up petition, and before a winding-up order
has been make, the company or any creditor or
contributory may make an application to the any
other court having jurisdiction to wind up the
company, to restrain further proceedings in such
action or proceeding, and the court to which
application is to make may, as the case may be, stay
or restrain the proceedings accordingly on such
terms as it thinks fit.
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 CONSEQUENCES OF A WINDING UP ORDER
1. Avoidance of disposition (transfer) of property of the
co after commencement of winding up
• 275. In a winding up by the court, any disposition of
the property of the company, including things in
action (intangible things – eg: cheques, loans/debts,
judgments given by the court) and any transfer of
shares or alteration in the status of the members of
the company(can’t appoint new directors) of the
company made after the commencement of the winding
up, shall unless the court otherwise orders, be void.

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2. Appointment of a provision liquidator
3. The official receiver becomes the provisional
liquidator and continues until another liquidator is
appointed.
4. Any attachment(right to lien), sequestration,
distress or execution put in force against the co after
the commencement is void (when the company is
being wound up, anything cannot be done to the
property)
5. On appointment of liquidator, the powers of the
directors ceased (in a court W-up)- at a voluntary W-
up, directors can do unfinished works
6. On a winding up order being made, the servants of
the co are dismissed and employment terminated

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 COMMENCEMENT OF WINDING UP – DEPENDS ON
THE TYPE OF W-UP S 277

• Where before the presentation of a petition for the winding

up of a company by the court, a resolution has been passed by
the company for voluntary winding up, the winding up of the
company shall be deemed to have commenced at the time
of the passing of the resolution (voluntary W-up) and unless
the court, on proof of fraud or mistake thinks fit otherwise to
direct, all proceedings taken in the voluntary winding up shall
be deemed to have been validly taken.
• court W-up- In any other case, the winding up of a
company by the court shall be deemed to commence at the
time of the presentation of the petition for the winding up.

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VOLUNTARY WINDING UP
Sec. 319(1)
A company may be wound up voluntarily –
• (a) when the period if any, fixed for the duration of the
company by the articles expires or the event if any, occurs
on the occurrence of which the articles provide that the
company is to be dissolved, and the company at a general
meeting has passed an ordinary resolution requiring the
company to be wound up voluntarily
•(b) where the company resolves by special resolution that
the company be wound up voluntarily;
•(c) when the company resolves by special resolution to the
effect that it cannot by reason of its liabilities continue its
business and that it is advisable to wind up.
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 324.DECLARATION OF SOLVENCY
• Where it is proposed to wind up a company voluntarily, the directors of
the company or in the case of a company having more than two
directors the majority of the directors may at a meeting of the directors,
make a statutory declaration to the effect that they have made a full
inquiry into the affairs of the company and that they are of the opinion
that the company will be able to pay its debts in full within such period
not exceeding twelve months (one year), from the date of
commencement of the winding up (statutory declaration) as may be
specified in the declaration – there is no reason for creditors to worry –
SH voluntary W-up

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A SHAREHOLDERS’/CREDITORS’
VOLUNTARY WINDING UP
• A winding up in the case of which a declaration has
been made and delivered in accordance with the
provisions of this section, is in this Act referred to as
“a shareholders’ voluntary winding up”,
• and a winding up in the case of which a declaration
has not been so made and delivered, is in this Act
referred to as “a creditors’ voluntary winding up”.
They have the powers to appoint a liquidator.

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• 351. When a company has passed a resolution for
voluntary winding up, the court may make an
order that the voluntary winding up shall continue
but subject to such supervision of the court, and
with such liberty for creditors, contributories or
others to apply to the court, and generally on such
terms and conditions as the court thinks just and
fair.
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 PROOF AND RANKING OF CLAIMS
• Admissible claims
• S 356. A debt liability present or future, certain or
contingent, whether it is an ascertained debt or
liability or a liability for damages, may be admitted
as a claim against a company in liquidation.
• Company(BOD) can appoint an administrator
instead of a liquidator (W-up) – sell the company as
a going concern (as a whole)
• If the company decided to appoint an administrator,
it cannot be reversed without a court permission

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RIGHTS AND DUTIES OF SECURED CREDITORS

• 358. (1)
A secured creditor may—
(a) seize, attach and realise, issue execution against or appoint a receiver in respect of
property subject to a charge, if entitled to do so;
(b) value the property subject to the charge and claim in the liquidation—
(i) as a secured creditor for the amount of his claim, up to the value of the
security; and
(ii) as an unsecured creditor for the balance due, if any; or
(c) surrender the charge to the liquidator for the general benefit of creditors and claim in
the liquidation as an unsecured creditor for the whole debt.

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DISTRIBUTION OF ASSETS

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• Secured creditors with fix charge.
• W-up cost (=remuneration of the liquidator and any
court expenses)
• Preferential debts (salaries of employees, utility
bills, EPF & ETF)
• Creditors with floating charges
• Unsecured creditors
• Debts due to members as members
• Repayment of paid-up capital (SHs)
• Surplus to members (based on articles and
agreements between co. and SHs)
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GOOD LUCK!

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