KIBABII UNIVERSITY

Name : Wasike Rose

Reg no: BCO/0525/19

CAT assignment

Unit code: BCO 413

Unit Title: COMPANY LAW

Question One.

a) Using Section 212 of the Companies Act as a guide, explain how a company can be wound
up. (10 points).

b) Describe briefly the rules for distributing a company's assets in the event of an insolvent
company's liquidation.

(8 points).

Question two.

a) "An auditor is a watch dog, not a bloodhound." Discuss this statement in detail,
paying special attention to an auditor's duties, rights, and liabilities. (12 Points).
 a) Using Section 212 of the Companies Act as a guide, explain how a company can be
wound (10Marks).
Introduction

A company's winding up is defined as the condition in which the company's life is brought to 
an end. 
The company's assets are managed for the benefit of its shareholders and creditors. 
Section 212 states that a company may be wound up: 
(a) by the court
(b) voluntarily, or 
(c) under the supervision of the court.

a) The Court's Winding Up

A company can be wound up by the High Court at the request of any member or creditor of
the company. The Court appoints the liquidator, who becomes an officer of the Court and
works under its supervision.

Cases in which a company may be wound up by a court.

A company may be wound up by the court if:

(a) the company has resolved by special resolution that the company be wound up by the
court; (b) a default is made in delivering the statutory report to the registrar or in holding the
statutory meeting

(c) the company does not commence its business within a year of its incorporation or
suspends its business for a full year

(d) in the case of a company incorporated outside the United Kingdom

 (b) Compulsory Winding Down

Under the following conditions, a company may be voluntarily dissolved:

i.In the context of the company's winding up, an ordinary resolution is passed in the general
meeting:

• If the period specified in the company's articles of incorporation has expired.

• If, according to the company's articles of association, an event occurs that necessitates the
dissolution of the company.

ii. If the members of the company pass a special resolution authorizing the voluntary
liquidation of the company.

iii. A general meeting must be convened with at least 21 clear days' notice.

iv. With the consent of the members, a general meeting can be called with less notice.

v. A voluntary winding up is initiated immediately after the above-mentioned resolution is

passed.

vi. The commencement of a company's liquidation must be announced in an official gazette,

i.e., by applying to the registrar of companies within 14 days of the commencement of the
liquidation.

vii. Once again, the notice of the company's insolvency must be published in a newspaper in

viii. Following the start of the winding up process, the company is unable to conduct any
commercial business activities.

ix.However, business can be conducted for the benefit of the company's winding-up process,
such as paying debts to creditors, and so on.

x.The corporate state and its corporate power will exist until the company is finally dissolved.
 (c) Completing Under the Court's Surveillance

When a company passes a resolution for voluntary winding up, the court may make an order
that the voluntary winding up continue, but under the supervision of the court, with the ability
for creditors, contributors, or others to apply to the court, and generally on such terms and
conditions as the court deems just.

Describe briefly the rules for distributing a company's assets in the event of an insolvent
company's liquidation.

(8 points).

When a company is wound up, its assets and liabilities are handled, and the corporation is
removed from the Companies House registry. As part of this process, all of the company's
assets will be liquidated. This implies that they will be sold to raise as much money as
possible, which will be used to pay the company's outstanding creditors or, in the case of a
solvent liquidation, allocated to the shareholders.

Selling the assets

Assets are frequently sold to unrelated third parties, including competitors; however, a
director may wish to retain some or all of the company's assets in certain circumstances. This
could be due to sentimental value, the director's desire to keep them for personal use, or the
director's desire to use them in the future for a business venture.

Priority of payment

If all creditors are unable to be paid in full, the appointed insolvency practitioner must ensure
that creditors are paid in accordance with a predetermined hierarchy. This is how it goes:

1. Securing creditors – Secured creditors are first in line for payment. Those who have a
registered charge on a specific asset or class of assets. This usually includes real estate,
automobiles, and plant machinery.

Secured creditors are classified into two types: those who hold a fixed charge and those who
hold a floating charge. When it comes to distributing funds after a liquidation, this distinction
is critical.
a. Fixed charge - This category frequently includes banks, asset-based lenders, and purchase
hire providers. They have a charge over a fixed asset, such as a vehicle or real estate. They
will be paid first after the sale of the asset over which they have a claim.

b. Floating charge – Floating charges can be applied to movable and tradable assets like
stock, the company's debtor book, and fixtures and fittings. Those who have a floating charge
have a reasonable chance of recouping some of the money owed to them; however,
preferential creditors (detailed below) will be able to stake their claim first.

Because secured creditors have a claim on a valuable and resalable asset, they have a better
chance than most of receiving the money owed to them by the insolvent company.

2. Preferential creditors – This category of creditors typically includes insolvent company

employees. Employees can file a claim with the company for unpaid wages and holiday pay.
As a result of the Finance Act 2020, HMRC is now classified as a preferential creditor.

3. Unsecured creditors – Unsecured creditors are typically the largest pool of creditors, and
they are frequently left out of pocket when an insolvent company enters liquidation. Suppliers
who have not received payment for goods provided, customers who may have paid for a
service or product that was never delivered, and finance providers who lent on an unsecured
basis are all examples of unsecured creditors.
 a) "An auditor is a watch dog, not a bloodhound." Discuss this statement in detail,
paying special attention to an auditor's duties, rights, and liabilities. (12 Points).

Introduction

An auditor is a person who is authorized to review and verify the accuracy of financial
records as well as ensure that businesses follow tax laws.

Auditor's Responsibilities

An auditor is a trained professional who examines and verifies the accuracy of financial
records and ensures that businesses follow tax regulations. Their primary goal is to protect
businesses from fraud and to highlight any inconsistencies in accounting methods.

a) Prepare an audit report.

An audit report is a financial assessment of a company in layman's terms. The auditor is in

charge of preparing an audit report based on the company's financial statements.

b) Request information.

One of the auditor's most important responsibilities is to ask questions as and when he sees
fit. The following are some of the questions: + - s- Whether or not security-based loans and
advances are properly secured, as well as whether or not the terms that govern them are
reasonable. If you charge any personal expenses (i.e., non-business spending) to the Revenue
Account.

c) Comply with Auditing Standards

The Central Government issues the Auditing Standards in collaboration with the National
Financial Reporting Authority. These standards make the auditor's job easier and more
accurate. It is the auditor's responsibility to adhere to the standards while performing his
duties, as doing so increases his efficiency.

d) Fraud detection and reporting

In general, the auditor may have suspicions about fraud within the organization while
performing his or her duties, such as when the financial statements and data contained within
do not add up. If he finds himself in this situation, he must notify the Central Government as
soon as possible and in accordance with the Act.
 An Auditor's Rights

i. Right to Examine Account Books

During his term of office, the auditor has unrestricted access to the company's books of
account, vouchers, and relevant documents. As a result, the auditor can pay a surprise visit
and review the entries in the books of accounts. However, the auditor does not usually make
such visits.

ii. The Right to Information and Explanation

The auditor has the right to obtain any information or explanation he requires in order to
carry out his duties. The person from whom the auditor seeks such an explanation must
provide it. The individual could be the Managing Director, Director, Manager, or any other
officer or employee. If the auditor is denied access to information, he must notify the board of
directors.

iii. Possession of the Right to Make Suggestions to the Board

The auditor also has the authority to recommend appropriate changes to the management's
accounting method. If a suggestion is made, the directors must follow it. If this is not the
case, the auditor should inform the members. However, he has no authority to make changes
to the company's books on his own.

iv. Right to Sign the Audit Report

Only the auditor has the authority to sign the Auditor's Report. If a firm is appointed, any
partner practicing in India can sign. The first auditor should sign and authenticate a specific
section of the Statutory Report. In addition, he has the authority to sign and authenticate any
other document required by the Act.

Auditor's Liabilities

a) Civil Liability

Negligence Liability:

Negligence is defined as a breach of duty. An auditor acts as a proxy for the shareholders. He
must carry out his professional responsibilities. He should exercise reasonable care and skill
in carrying out his responsibilities. If he fails to do so, he will be held liable for negligence. If
a client suffers a loss as a result of an auditor's negligence, the auditor will be held liable. It
should be noted that if an auditor's negligence is not proven, he will not be liable to
compensate the loss or damage.

Misfeasance Liability: 

Misfeasance is defined as a breach of trust. Misfeasance occurs when an auditor acts

incorrectly in the performance of his duties, resulting in a financial loss to the company. In
such a case, the company can seek restitution from the auditor or any officer for breach of
trust or misfeasance on the part of the auditor. Misfeasance proceedings can be initiated
against the auditor if there is an untrue statement in the prospectus or if the company is
wound up.

b) Criminal Liability under the Indian Penal Code

If a person issues or signs a certificate relating to a fact that is false, he is punished as if he

gave false evidence. According to Section 197 of the Indian Penal Code, the auditor is
similarly liable for falsifying any books, materials, or papers belonging to the company.

c) Liability to Third Parties

Creditors, bankers, tax authorities, prospective shareholders, and others rely on the financial
statements audited by the auditor and enter into transactions with the company without
further investigation.

Liability for Negligence

The court ruled that the auditor is not liable to third parties because there is no contract
between the auditor and the third parties. He has no obligation to them.

Liability for Frauds:

If there is fraud on the part of the auditor, third parties can hold the auditor liable even if there
is no contractual relationship between the auditor and the third parties. In some cases, an
auditor's negligence may amount to fraud, for which he may be held liable to third parties.
However, it must be demonstrated that the auditor acted dishonestly and was aware of it.
 References

M. Stokes, "Company Law and Legal Theory," in W. Twining (ed. ), Legal Theory and
Common Law (1986), pp. 155–183.

Partnership Law (Blackstone) 6th Edition, Chapters 1 and 9 6. Hicks and Goo 6th Edition,
Pages 33-40 and 91-95. "The Limited Liability Partnership: Pick and Mix or Mix Up?" by V.
Finch and J. Freedman. (2002) Journal of Business Law 475-512 – hard copy and online via
Westlaw