BMGT 323: COMPANY LAW

WINDING-UP OF COMPANIES
 The principal sources of law on winding up of companies are the Companies Act, the
companies (winding up) rules and the common law.

 Students are particularly advised to consistently and regularly read the rules above
mentioned as they contain important procedural aspects in the winding up proceedings.

MODES OF WINDING UP S. 212:

 By the court or

 Voluntary, or

 Subject to the supervision of the court

CONTRIBUTORIES:

 A contributory is every person who is liable to contribute to the assets of a company in

the event of its being wound up (see s. 214). A list of contributories should be prepared.
 Where a company is being wound up, every member present and past shall be liable to
contribute to the assets of the company to an amount sufficient for payment of its
debts, liabilities, and the costs, and charges of winding up (see s. 213).
 This will also include for adjustments of the rights of contributories among themselves,
subject to the some qualifications.
 In the event of death Personal Representatives are liable (see s. 216) and in the event of
bankruptcy the Trustee In Bankruptcy is liable (see s. 217).

QUALIFICATIONS:

 A past member not liable if he had ceased to be a member over one year.
 Past member not liable for debts contracted after he ceased to be a member.
 Past member not liable unless court is shown that the existing members are unable to
satisfy the contributions required to be made by them.
 Liability is however limited by member’s shares or guarantee if the company is limited
by shares or guarantee respectively.

WINDING UP BY THE COURT:

 The high court shall have jurisdiction to wind up any company registered as such in
Kenya (see s. 218).
 A company may be compulsorily wound up by the court in the following instances (see s
219):
 Company has by special resolution resolved that it be wound up by the court.

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  Where default is made on delivering the statutory report or holding of the statutory
meeting (pursuant to s. 130).
 Where the company does not commence its business within one year from its
incorporation or suspends its business for a whole year.
 Number of members reduced below two or seven for private & others respectively.
 Company is unable to pay its debts.
 Court is of the opinion that it is just and equitable that the company be wound up.
 For a company incorporated outside Kenya and carrying on business in Kenya winding
up proceedings have been commenced in the country of incorporation.

When is a company deemed unable to pay its debts?(see s 220).

 A creditor to whom the company owes more than Kshs: 1,000/- has served a written
demand for payment on the company by leaving it at the company’s registered office,
and three weeks later, the company has neither paid nor given the creditor a security
which he finds acceptable
 Execution issued on a court judgment in favour of a creditor of the company is returned
unsatisfied in whole or in part
 It is proved to the satisfaction of the court that the company is unable to its debts as
they fall due. The court takes into the contingent and prospective liabilities of the
company.

What are the instances when the court can declare that it is just and equitable that the
company be wound up?

 In considering whether it would be just and equitable to wind up a company, the court
has enormous discretion.
 The reason is that the position is purely a question of fact with each case depending
upon its own circumstances.
 Over the years the courts have wound up companies on the following grounds amongst
others:
 That the substratum of the company has failed
 Where there is a deadlock in the management of a small company
 Where there is a justifiable lack of confidence in the management
 Where the company was formed for fraudulent purposes

Application to court for winding up (see s. 221):

By who?

 Company
 Creditor or creditors
 Contributory or contributories
 By all or of the above parties together or separately
 Others like the A-G (case under s. 170(2)) and the official receiver (if petition is under
ground g of s. 219).

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  Official receiver and any person authorised in that behalf where a company is ‘wound
up voluntarily’ or ‘subject to supervision’.

How?

 Application shall be made by way of a petition accompanied by a verifying affidavit.

Should be advertised in the Gazette for 7 days before hearing. Advert should be in Form
no. 6 or 7 (see rule 23)
 The heading of the petition and any other documents in winding up proceedings should
be in the Form no. 1 (see rule 8).
 The petition shall be in Form no. 3, 4 or 5 with such variations as circumstances may
require (see rule 21) verifying affidavit shall be in Form no. 10 or 11 (see rule 25).
 The petition shall be served upon the company and an affidavit of service filed. The
affidavit should be in Form no. 8 or 9 (see rule 24).

Powers of court on hearing the petition (see s. 222):

 Dismiss it

 Adjourn the hearing conditionally or unconditionally

 Make any interim order

 Any other order that it thinks fit

 Winding up order

Commencement of winding up (see s. 226):

 For voluntary winding up it commences when a resolution is passed by the company

before the presentation of a petition
 For winding up by court order it commences when the petition is presented

Winding up order:

 The order shall be in Form no.17 (see rule 36).

Effect of the order:

 Any disposition of company’s property including things in action, transfer of shares,

alteration of member’s status made after the commencement of winding up is void
unless the court orders otherwise (see s. 224).
 Any attachment or execution against the company after commencement of winding up
is void (see s. 225).

Consequences of the order:

 A copy of the order is forwarded by the company to registrar for registration (see s.
227).

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  No action shall be commenced against the company except by leave of the court (see s.
228).
 It operates in favour of all creditors and contributories as if made on a joint petition of
both (see s. 229).
 See rule 37 on transmission and advertisement of winding up order which is largely the
work of the official receiver.

Official receiver (OR):

 The court also appoints on official receiver for purposes of the winding-up (see s. 231).
 The OR is the officer attached to the court for bankruptcy purposes but the court may in
appropriate cases appoint another officer. (See s. 230).
 The director and secretary to the company should after winding-up order is made
submit a statement of affairs of the company in the prescribed form (form no. 21) to
the OR,
 It is verified by an affidavit, showing particulars of assets, debts and liabilities, names,
postal addresses and occupations of creditors, the securities held by them, dates when
securities were given and any information that may be prescribed or the official receiver
may require (see s. 232).
 After the statement of affairs, the official receiver should submit his report.
 The report shows the amount of capital issued, subscribed and paid and the estimated
amount of assets and liabilities and if the company has failed, the causes of the failure
and whether in his opinion further inquiry is desirable to any matter relating to the
promotion, formation or failure of the company or the conduct of the business thereof
(see s. 233 (1)).
 The OR may make a report where he thinks fraud was committed in the formation of the
company. Such report must go for public examination (see s. 233 (2) and rules 53-59).

Liquidator:

 The court may further appoint a liquidator and may appoint the official receiver to be
the provisional liquidator after presentation of a winding-up petition and before the
making of a winding-up order (see s. 234 & 235)
 The official receiver becomes the provisional liquidator when a winding up order is
made (see s 236(a)).
 He should summon separate meetings of creditors and contributories of the company to
determine whether or not an application is to be made to court to appoint a liquidator
in place of official receiver (see s. 236(b)).
 The order for appointment of a liquidator shall be in Form no. 22 (see rule 47(2)(a)).
 The appointment has to be notified to the registrar in form no. 24 (see s. 237 and rule
47(5)).
 See s. 241 for the vast powers of the liquidator which must be sanctioned by the court
or committee of inspection.

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  The liquidator should summon a general meeting of creditors or contributories or
committee of inspection for purpose of ascertaining their wishes by resolution either at
the meeting appointing liquidator or at other time.
 The liquidator should have regard to the directions of creditors or contributories at any
general meeting or by the committee of inspection.
 However, if the directions conflict, the one of creditors and contributories should prevail
(see s. 242).

Committee of inspection (COI):

 In the separate meetings of creditors and contributories under s. 236(b) summoned by

OR to determine whether or not an application should be made to court for appointing
a liquidator in place of OR, they may determine whether or not an application is to be
made to court for appointment of a committee of inspection to act with the liquidator.
 They also determine who shall be the members of the COI (see s. 248). See s. 249 on
constitution and proceedings of the COI.
 See sections 251- 269 on the general powers of the court in a winding up by the court.
 Appeals lie to the Court of Appeal (see s. 270).

VOLUNTARY WINDING UP:

This can be either a members’ voluntary winding-up or a creditors’ voluntary winding-up.

Creditors’ voluntary winding-up:

 Although somewhat inappropriately termed a voluntary winding-up by creditors, this
type of winding-up is initiated solely by resolution of members.
 A creditors’ voluntary winding-up is initiated by a special resolution, just like the
members’ voluntary winding-up (see s. 271).
 The resolution should state whether it will be a voluntary winding-up by members or
creditors. The company must give notice of the voluntary winding-up resolution in the
official gazette within fourteen days after the resolution (see s. 272).
 A voluntary winding-up commences when the resolution for voluntary winding-up is
passed (see s. 273).

Consequences of commencement of voluntary winding up:

 The company ceases to carry on its business, except for purposes of winding-up (see s.
274).
 Any transfer of shares not sanctioned by the liquidator is void (see s. 275).

Declaration of solvency:

 Directors make a declaration of solvency in form no. 27 to the effect that the company
will be able to pay its debts in full within 12 months from commencement of winding up
(see s. 276(1) and rule 50).

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  Should be made within 30 days before passing of resolution and should be filed with
registrar for registration before that date.

The company should call a meeting of creditors on the day or the day following the day when
the resolution for winding-up is to be proposed and notice of meeting of creditors and that of
company should be sent by post simultaneously. The notice of creditors’ meeting should be put
in the gazette (see s. 286(1) and (2)).

The directors should table a statement of the company’s affairs, together with a list of
creditors and estimated amount of their claims before the creditors (see s. 286 (3)).

The creditors and the company in their respective meetings appoint a liquidator. If they appoint
a different person the one appointed by the creditors prevails (see s. 287). Appointment should
be notified to registrar in Form no. 29 (see rule 51(1)). The liquidator should put notice of his
appointment in the Gazette in Form no. 29 (see rule 51 (2)).

The powers of directors cease on this appointment (see s. 290).

The creditors, either in that first meeting or any subsequent meeting, if they think appropriate,
appoint not more than five persons to be members of a committee of inspection (see s. 285).

If the winding-up exceeds one year, the liquidator should call a general meeting of the company
and creditors every year (see s. 293).

Once the affairs of the company are fully wound-up the liquidator makes an account of the
winding-up and calls a general meeting of the company and creditors for purpose of laying the
account before the meetings and giving any explanation.

Each meeting should be advertised in the gazette at least 30 days before the meeting.

Within 14 days after the date of the meetings or after the later meeting where they are not
held together, the liquidator should deliver a copy of the account to the registrar and make a
return of the meetings and of their dates.

On receipt of the account and returns by the registrar, he registers them and the company is
deemed dissolved three months from the date of the registration (see s. 294).

Members’ voluntary winding-up:

 A members’ voluntary winding-up is a procedure that precedes the dissolution of a
company able to pay its debts. No creditor suffers any loss and therefore creditors have
no say in the winding-up procedure.
 The initiative remains with the members’ meeting throughout the procedure; the
procedure is simpler and faster than other types of winding-up and is subject to less
limitations.
 As the rights of creditors are sufficiently protected, no meetings of creditors are held.

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  A members’ voluntary winding-up is initiated by a special resolution, just like the
creditors’ voluntary winding-up (see s. 271).
 The resolution must state whether it will be a voluntary winding-up by members or
creditors. The company must give notice of the voluntary winding-up resolution in the
official gazette within fourteen days (see s. 272).
 A voluntary winding-up commences when the resolution for voluntary winding-up is
passed. (See s. 273).

Consequences of commencement of voluntary winding up:

 The company ceases to carry on its business, except for purposes of winding-up (see s.
274).
 Any transfer of shares not sanctioned by the liquidator is void (see s. 275)

Declaration of solvency:

 Directors make a declaration of solvency in form no. 27 to the effect that the company
will be able to pay its debts in full within 12 months from commencement of winding up
(see s. 276(1) and rule 50).
 Should be made within 30 days before passing of resolution and should be filed with
registrar for registration before that date.
 The company in a general meeting appoints a liquidator for purposes of winding-up the
affairs of the company. Appointment should be notified to registrar in Form no. 28 (see
s. 278 (1) and rule 51 (1)). Upon such appointment the powers of directors cease (see s.
278 (2)).
 If the liquidator is of the opinion that the company is insolvent he should notify the
registrar and summon the meeting of creditors.
 At the meeting he should lay a statement of assets and liabilities of the company in
Form no. 30 (see s. 281 and rule 52).
 If the winding-up exceeds one year, the liquidator should call a general meeting at the
end of every year from the date of commencement of winding-up.
 At the meeting he should lay before it an account of his acts and dealings and the
conduct of the winding up in the preceding year (see s. 282).
 Once the affairs of the company are fully wound-up, the liquidator makes an account of
the winding-up and calls a final general meeting by Gazette notice for purpose of laying
before it the account and giving an explanation thereof (see s. 283 (1)).
 The meeting should be advertised in the gazette at least 30 days before the meeting ().
 Within 14 days after the meeting the liquidator should deliver to the registrar a copy of
the account and should make a return to the registrar of the holding of the meeting and
of its date.
 On receipt of the account and returns by registrar, he registers them and the company is
deemed dissolved three months from the date of the registration (see s. 283).
 Read sections 295-303 on matters applicable to every voluntary winding up.

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WINDING UP SUBJECT TO SUPERVISION OF THE COURT:
 Read sections 304-308 which provide for winding up subject to supervision of the court.
 Read sections 309-317 on matters applicable to every mode of winding up.
 Proceedings under the Act or the Rules shall NOT be invalid by reason of a formal defect
or an irregularity, unless the court is of the opinion that substantial injustice would be
caused by the defect or irregularity and the injustice cannot be remedied by any order
of that court (see rule 202).
 All the proceedings in court over which the court has jurisdiction under the Act or the
Rules, where no other provision is made by the Act or these Rules, the practice,
procedure and regulations in such proceedings shall, unless the court otherwise directs,
be in accordance with the rules and practice of the court.

NB: once again the students are urged to seriously read the companies (winding up) rules for
the reason that the rules have a lot of other procedural aspects that cannot be exhausted in the
lectures.

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