WINDING UP OF COMPANIES

We have talked about the history of company, setting up a company, the various ways a company is managed either at the board level or at the shareholder level, the market of corporate control (how shares are issued and managed), situations of dispute amongst shareholders and the various options the shareholders have in instituting actions (personal action, representative action, derivative action, petition for unfairly prejudicial conduct).

There are situations that at the end of it all, the life of this artificial entity would come to an end notwithstanding that the shareholders of the company intended it to exist in perpetuity. This is why one of the principles about Salomon v Salomon is that the natural beings that set up this company are separate and distinct from the company. The natural shareholders come and go or die but the company would remain in existence. Even where all the shareholders of a company are dead, the company would not cease to exist; the PR of the shareholders would continue with the ownership of the company. 
Essentially, winding up is the process by which the existence of a company is brought to an end. What would happen after winding up is that the business of the company is terminated and a liquidator is appointed mainly to shepherd the process of winding up, collate and get together all the assets of the company and distribute those assets to the creditors and if there is surplus to the contributories (members) of the company. 
Please note that the above definition makes reference to a ‘liquidator’. A liquidator must be distinguished from a receiver or a receiver manager. While you may think there are similarities, there is a fundamental difference between these concepts. A liquidator is someone appointed to manage the winding up of a company and clearly when a company is in a state of winding up, there is a clear intention of either the owners or the creditors of the company to bring the life of the company to an end. This is the whole point of winding up. The main function of the liquidator is to gather all the assets of the company, pay the creditors whatever is due to them and if there is any surplus it goes to the shareholders. It is after this process that the company becomes dissolved. But in the case of a receiver, the first thing is that there must have been a secured creditor. This means that there must have been either a legal mortgage, fixed charge or floating charge over the assets of the company and because the company is unable to pay its debt, the debenture gives the creditor the right to appoint a receiver over either a specific asset or all the assets of the company. Mainly, the job of the receiver is not to bring the life of the company to an end but to go into the company, take over the affairs of the company or the particular asset he has been appointed to act as a receiver with a view to selling those assets to satisfy the creditors that have appointed him. The receiver manager does the same thing but he has additional power to manage the affairs of the business for the purpose of making profits so that the creditors can be paid back. Thus, we can either have a receiver or a receiver manager. 
In England where their insolvency laws are much advanced than what we have here, they have clear and specific provisions about a company being in administration. Also, in the USA, there exists what is known as rule 11 of their bankruptcy law. This provision in the states is such that if the managers of the business come to the realization that the business has financial difficulties and that they might not be able to meet their obligations, it is the company itself that would declare temporary bankruptcy and protection under order 11 so that the creditors immediately can’t storm the company to take over the affairs of the company. Once a court is clear that the company is just going through a difficult patch, the court would give the company order 11 protection. Also in England, a petition may be sent to the court that the company be put in administration. The court would then appoint administrators of the business who function is very similar to that of the receiver manager in the sense that a top accounting firm would be appointed to run the affairs of the company during the period of administration with the hope to make profit or to sell and or distribute some assets to be able to pay the creditors. Once the administration is finished, the administrators would be paid off and the company would be handed over to the shareholders.  
Winding up is essentially a process and until it is completed the company remains a legal entity. But note that the grant of a winding up petition does not ipso facto terminate the life of a company. The company ceases to exist in law only by the formal act of dissolution which occurs after the winding up procedure has been completed. Winding up is simply the process of settling accounts and liquidating assets in anticipation of a company’s dissolution. So in a sense, winding up and liquidation are synonymous. 
There is also the distinction between winding up of a company and the provisions of the Bankruptcy Act. The Bankruptcy Act applies to individuals and not companies. Thus, whilst under the act, the court may declare Wale Olawoyin bankrupt, you can’t do that for Wale Olawoyin & Co. Ltd. because it is a limited liability company. By virtue of it being a company, the petition must be brought under the CAMA rather than under the Bankruptcy Act. 
So what are the different modes of winding up a company? S. 401 CAMA tells us the different modes of winding up:
(a) by the court; or
(b) voluntarily; or
(c) subject to the supervision of the court.
S. 408 CAMA lists the circumstances in which a company may be wound up by the court. Apart from the winding up of a company by the court, there is the voluntary winding up of a company where the members of a company voluntarily pass a special revolution that the company should be wound up. A typical situation where we would have this type of scenario is if the company was set up for a particular purpose and that purpose has been completed so that there is really no basis to have that company in existence. For example, a company is set up for the particular purpose of implementing the Olympic games. Upon the end of the Olympic games, the members of the company may pass a special resolution to the effect that the company should be wound up since there is no need for the company to continue in existence. The court would grant the petition provided the assets of the company outweigh the liabilities of the company. But where would winding up under the court’s supervision arise. If during the voluntary winding up of the company for example, where some members are not happy with the way the liquidator or the entire winding up process is being carried out. In such a situation, we submit that the members may go to court and petition that the winding up should continue under the supervision of the court. This is a situation where the process has started without going to the court but because of the way and manner the process is being done, a contributory or shareholder may apply to the court that for xyz reason the winding up should continue under the supervisory powers of the court so that whatever step intends to be taken, it must be confirmed by the court rather than just a voluntary process. 
As you must have noted that we have made reference to the word ‘contributory’ above. What does this word mean? S. 403 CAMA contains the definition of the word ‘contributory’:
“The term ‘contributory’ means every person liable to contribute to the assets of a company in the event of its being wound up and for the purposes of all proceedings for determining and all proceedings prior to the final determination of the persons who are to be deemed contributories, the expression shall include any person alleged to be a contributory.”

Jurisdiction as to Winding Up
By virtue of S. 407 (1) CAMA, the court having jurisdiction to wind up a company shall be the Federal High Court within whose area of jurisdiction the registered office or head office of the company is situate. In other words, the FHC, in the area of jurisdiction where the registered or head office of the company is situated, has exclusive jurisdiction to wind up a company. For the purpose of jurisdiction, ‘registered office’ or ‘head office’ means the place which has longest been the registered office or head office of the company during the six months immediately preceding the presentation of the petition for winding up. 
In Medicore Nig. Ltd. v Lasbwares Nig. Ltd, the registered office of the company was in Ilorin and a winding up petition was filed at the Lagos division of the Federal High Court. The petition was held to be incompetent. Also, in IMB Nig. Ltd v LOMAY Nig. Ltd, where a petition was brought in Lagos whilst the registered office of the company was in Jos, the petition was held to be incompetent.  
S. 408 CAMA sets out the circumstances in which a company may be wound up by the courts. It sets out five different instances. A company may be wound up by the court if‐
(a) the company has by special resolution resolved that the company be wound up by the court;
(b) default is made in delivering the statutory report to the Commission or in holding the statutory meeting;
(c) the number of members is reduced below two;
(d) the company is unable to pay its debts;
(e) the court is of opinion that it is just and equitable that the company should be wound up.
First, there must be a debt exceeding two thousand naira (#2000). Secondly, a demand must have been made by the creditor. Thirdly, that demand must have been served at the registered or head office of the debtor company. Where it is served at the branch or representative office, compliance hasn’t been made. Fourthly, that demand must have been under the hand of the creditor, that is, the demand must have been signed by the creditor themselves and not someone else on their behalf. Fifthly, the company must have three weeks thereafter still failed to pay the sum or taken steps to secure the payment of that sum to the satisfaction of the creditor. Please note that even though the section talks about there being a debt, the inability to pay the debt alone has been held to be sufficient to enable the court make a winding up order. See Uniform Industries Ltd v Oceanic Bank Intl Ltd. 
We have also talked about the demand being served at the registered or head office signed under the hand of the creditor. There are authorities to the effect that this demand need not be in any special form; it could be a letter stating the debt and the demand that the sum be paid within a specific period of time. Essentially, whichever form a demand takes, it just expressly states the sum claimed and the period for the company to pay that the debt. The letter need not contain the word ‘demand’ as long as it is clear that the creditor is requesting the payment of the sum within a certain period. See Capital Investment & Trust Ltd v 150 Estates Ltd.
On the point about the demand being under the hand of the company, it means that the demand must have been either signed by an authorized officer of the company or the seal of the company must have been appended to the document. There must be something that authenticates the document as emanating from the company with authority. If the document is signed by the MD of the company for and or behalf of the company, apart from the fact that the MD has ostensible authority to act for and on behalf of the company, there would also be express authority in that regard. The demand can’t be signed by the external solicitors of the company otherwise the document would be deemed defective; this defect renders the entire process compromised. See Tate Industries Plc v Devcom Merchant Bank. See also C & I Leasing Plc v Indemnity Finance Co Ltd. 
Still under S. 408(d) CAMA. In practice, this part has been used by companies and banks to try to recover debts and you would see a few things from the cases. First, a winding up procedure is not the proper procedure to recover debt. Secondly, in the event that the debt is disputed, a court would not grant winding up rather the court would have one go and prove the disputed debt by instituting a writ of summons which mainly is to sue the company for recovery of the debt, establish the debt and get a judgement in that amount. See Air Via Ltd v Oriental Airlines ltd. See also In the matter of Yanju Intl Hotel Ltd. The FHC held that it is an anomaly for a petitioner to petition for the winding up of a company and at the same time to ask it to pay the debt for which the company was to be wound up. These are the important elements of S. 408(d)CAMA. 
There is an additional requirement under the winding up rules which is to the effect that before a petition can be heard, the winding up petition must be advertised in two national dailies. Also, one of the grounds especially where the debt is disputed and one can show satisfactorily to the court the company has disputed this debt, the court would refuse to allow the creditor to advertise the winding up petition in the newspaper. 
The last one is S. 408(e) which is that a company may still be wound up if the court is of the opinion that it is just and equitable that the company is wound up. Any of the persons listed in S. 410 can bring a petition under the just and equitable ground. These persons include:
(a) the company;
(b) a creditor, including a contingent or prospective creditor of the company;
(c) the official receiver;
(d) a contributory;
(e) a trustee in bankruptcy to, or a personal representative of, a creditor or contributory;
(f) the Commission under section 323 of this Act;
(g) a receiver, if authorized by the instrument under which he was appointed; or
(h) by all or any of those parties, together or separately.
This head of winding up has its roots in partnership law and the law of equity. In this instance, you need not raise the issue of fraud, ultra vires or even the inability of the company to pay its debt; in fact, it may well be that what is being done in the company is actually in accordance with the law but because of certain equitable considerations, a petition may be brought before the court for the winding up of the company. The most popular case in this regard is the English case of Ebrahimi v Westbourne Galleries. Before the unfairly prejudicial conduct was introduced, the only remedy available was winding up under the just and equitable ground because the other remedy that was available was the oppressive conduct remedy. To prove oppression, a certain unconscionable conduct must be discernible. When you look at the facts of Ebrahimi, you’d see that there was no way he could have gotten remedy under this head. His only remedy was to go through under the just and equitable ground because there was nothing unconscionable about what the other shareholders did to him (the act fell within the ambit of the law thereby making it a valid exercise). His saving grace was the prior agreement they all had to the effect that the three of them would always participate in the management of the business thereby making it a quasi-partnership sort of thing. Because that remedy was the only one available to him, the House of Lords granted the order despite the fact that the company was functioning optimally. It was cases like this one that made the parliament insert another remedy, the unfairly prejudicial conduct remedy. The implication of this that where the remedy of winding up is considered in the circumstances, the court has the discretion to grant another remedy. We hold the view that should a case similar with Ebhrahimi’s be presented before the courts today, it is very unlikely that the court would grant winding up. If for example, we have the same Ebrahimi situation today and Ebrahimi walks up to you insisting he wants the company wound up, what would be your advice to Mr. Ebrahimi? 
Circumstances in which we can plead the just include: 
Expulsion from office: This is a typical Ebrahimi’s case. But note that in Ebrahimi’s case, due process was followed but essentially what they did was in a sense in contravention of a prior understanding between them. Please also bear in mind that it is not in all quasi-partnership kind of company that one can talk about the doctrine of legitimate expectation. This is because the House of Lords noted in Ebrahimi’s case (that it was mainly) because of that prior understanding between the partners that all of them would manage the business, Mr. Ebrahimi had a legitimate expectation to continue to be part of the management of the business and as a result of this equitable consideration, the acts of the other partners though legitimate, Mr. Ebrahimi was nevertheless given the remedy. 
Where there is total loss of confidence amongst the promoters and owners of the business. See General & Aviation Services Ltd v Thahal
 Where there is a deadlock. For example, two directors own the same number of shares and both can’t reach an agreement and decisions can’t be made for the advancement of the company. See Re Yenidje Tobacco Co. In this case, Yenidje Tobacco Company Limited had two shareholders with equal shares and each were directors. They could not agree how the company could be managed. There was no provision for breaking the deadlock. The Court held the company could be wound up as just and equitable as the only way to break the deadlock. 
Where there is a failure of the substratum. Here, a company has outlived the purpose for which it was set up. In Re German Date Coffee, the objects of the company were specific in that it was to make coffee from dates using a German patent. The patent was never granted and coffee was made with a Swedish patent. The company was solvent and the majority of shareholders wanted it to continue. However, two shareholders petitioned for a winding up on the grounds that its objects had failed. The court held that the substratum had failed as it was impossible to carry out the objects for which the company was formed.
The basis of this case is that the members banded together for a very specific purpose, and once that purpose failed they were entitled to pull out of the enterprise. In addition, a company may also wound up if it engages in acts which are entirely outside what can fairly be regarded as having been within the general intention and common understanding of the members when they became members.
The impossibility of carrying on business. Where it is impossible for the company to carry on business at all, the court has the jurisdiction to wind up the company under the just and equitable ground. But please note the Nigerian authority for the view that the court may refuse winding up if there is an alternative remedy (CBDT v COBEC). 

Voluntary Winding Up
S. 457 CAMA provides that a company may be wound up voluntarily. The section contains the elements of a voluntary winding up under CAMA. The most important element is a declaration of solvency. The Board must sign a declaration of solvency which essentially means that the assets of the company far outweigh its liabilities. 
There seems to be an argument that the court still has a role to play in a voluntary winding up. We do not support this view because once the members are able to pass the special resolution and the directors are able to sign the declaration of solvency, all that needs to be done is to appoint a liquidator who gathers together all the assets of the company and pay off the creditors and whatever surplus is left is distributed between the shareholders. See Corporate Affairs Commission v Davies.
Ultimately, read S. 425 CAMA regarding the powers of liquidators. In terms of additional reading, read Professor Abugu’s textbook titled, Principles of Corporate Law In Nigeria. There are some Nigerian cases which Prof has made reference to. Read them.

Comments

Popular posts from this blog

PROMOTERS AND PREINCORPORATION CONTRACTS

CORROBORATION

LAW AND REVOLUTION