Running Head: COMPANY LAW

KIBABII UNIVERSITY
Name : Wasike Rose

Reg no: BCO/0525/19

CAT assignment

Unit code: BCO 413

Unit Title: COMPANY LAW

Question One.

a) With specific reference to section 212 of the Companies Act, discuss the ways by which a
Company may be wound up. (10 Marks).

b) Briefly state the rules according to which the assets of a company are to be distributed in
the winding up of an insolvent Company. (8 Marks).

Question two.

a) “An auditor is a watch dog and not a blood hound”. Discuss this statement with special
reference to an auditor’s duties, rights and liabilities. (12 Marks).

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 Running Head: COMPANY LAW

With specific reference to section 212 of the Companies Act, discuss the ways by which a
Company may be wound up. (10Marks).

Introduction

Winding up of a company is defined as the condition when the life of the company is brought
to an end. The properties of the company are administered for the profit of its members and its
creditors. According to section 212 The winding up of a company may be either

(a) by the court;

(b) voluntary;

(c) subject to the supervision of the court.

a) Winding Up by the Court

A company can be wound up by the High Court at the instigation principally of any member
or creditor of the company. The Court appoints the liquidator and he/she becomes an officer of
the Court and works under its supervision.

Cases in which Company may be Wound Up by Court.

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 registrar or in holding the
statutory meeting;

(c) the company does not commence its business within a year from its incorporation or
suspends its business for a whole year;

(d)In the case of a company incorporated outside Kenya and doing business in Kenya,
winding-up proceedings have been initiated in the country or territory of its incorporation or in
any other country or territory. Country or territory in which it has a presence of commerce.

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Running Head: COMPANY LAW

(b) Voluntary Winding Up

A company may be wound up voluntarily under the following circumstances −

i. An ordinary resolution is passed in the general meeting of the company on the context
of winding up:

 If the period pre-fixed by the articles of association of the company has been
expired.
 In case of an event according to the articles of association of the company, under
which the company needs to be dissolved.

ii. If a special resolution is passed by the members of the company for the voluntary
liquidation of the company.
iii. A minimum notice of 21 clear days must be given in order to convene a general
meeting.
iv. However, with the consent of the members, a general meeting can be convened with a
shorter notice.
v. A voluntary winding up is commenced just after the above-mentioned resolution has
been passed.
vi. The notice for the beginning of the winding up of a company must be made in an
official gazette, i.e., by applying to the registrar of companies within 14 days of
commencement of the liquidation.
vii. Again, the notice of the winding up of the company must be published in a newspaper
in the place where the registered office of the company is situated.
viii. The company becomes unable to conduct any commercial business activities after the
commencement of the winding up.
ix. However, business can be conducted for the benefit of the company’s winding up
process, i.e., paying debts to the company’s creditors, etc.
x. The corporate state and its corporate power continue to remain in existence until the
company is finally dissolved

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 Running Head: COMPANY LAW

(c) Winding Up Subject to Supervision of Court

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

Briefly state the rules according to which the assets of a company are to be distributed in
the winding up of an insolvent Company. (8 mks)

When a company is wound up, it is officially closed down, its assets and liabilities are
handled, and the corporation is removed from the Companies House registry. All of the
company's assets will be liquidated as part of this process. This implies they will be sold in order
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; nevertheless, a
director may desire to keep some or all of the company's assets in specific instances. This could
be due to sentimental value, the director's want 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 cannot be paid in full, the appointed insolvency practitioner will have to ensure
that creditors are paid according to a designated hierarchy. This is as follows:
1.  Secured creditors – First in the line for payment are secured creditors. These are those
who have a registered charge against a specific asset, or class of asset. This typically includes
property, automobiles, and plant machinery.
Secured creditors can be divided into two groups – those that hold a fixed charge and those
with a floating charge. This distinction is important when it comes to distributing funds
following liquidation.
a.      Fixed charge - Banks, asset-based lenders, and purchase hire providers often fall into
this category. They hold a charge over a fixed asset such as a vehicle or property. They will
get paid first following the sale of the asset they have a claim over.
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Running Head: COMPANY LAW

   b.      Floating charge – Floating charges can be applied to moveable and tradable assets
such as stock, the company’s debtor book, and fixtures and fittings. Those with a floating
charge, do stand a moderate change of recouping some of the money they are owed, however,
preferential creditors (detailed below) will be able to stake their claim first.
As secured creditors have a claim over a valuable and resalable asset, they stand a greater
chance than most of receiving the money they are owed from the insolvent company
2.  Preferential creditors – This class of creditors typically includes employees of the
insolvent company. Employees are able to claim for unpaid wages and holiday pay direct
from the company. HMRC are now also classed as a preferential creditor as a result of
the Finance Act 2020.
3.  Unsecured creditors – These are typically the largest pool of creditors, and unfortunately,
they are often left out of pocket when an insolvent company enters liquidation. Examples of
unsecured creditors are suppliers who have not received payment for the goods they have
provided, customers who may have paid for a service or product that was never delivered, and
finance providers who lent on an unsecured basis.

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 Running Head: COMPANY LAW

“An auditor is a watch dog and not a blood hound”. Discuss this statement with special
reference to an auditor’s duties, rights and liabilities. ( 12 mks)

Introduction
An auditor is a person authorized to review and verify the accuracy of financial records and
ensure that companies comply with tax laws.
Duties of An Auditor
An auditor is a qualified individual who reviews and verifies the accuracy of financial records
and ensures that businesses adhere to tax regulations. Their primary goal is to protect businesses
from fraud, as well as to highlight any discrepancies in accounting methods.
a) Write an audit report.

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

charge of preparing an audit report based on the financial statements of the company.
b) Ask for information.

One of the most important responsibilities of the auditor is to ask questions as and when he
sees fit. Among the questions are the following: - \s- Whether or not security-based loans and
advances are properly secured, and whether or not the terms governing them are reasonable. If
any personal expenses (i.e., non-business spending) are charged to the Revenue Account.
c) Adhere to Auditing Standards

The Auditing Standards are issued by the Central Government in collaboration with the
National Financial Reporting Authority. These standards make auditing tasks easier and more
accurate for the auditor. It is the auditor's responsibility to follow the standards while carrying
out his duties, as this increases his efficiency.
d) Detection and reporting of fraud

In general, while performing his or her duties, the auditor may have suspicions about fraud
within the organization, 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 the manner, prescribed by the Act.

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Rights of An Auditor.

i. Right to Access to Books of Accounts

The auditor has a right of access to books of account, vouchers, and relevant documents of the
company at all times during his term of office. Therefore, the auditor can even pay a surprise
visit and check the entries in the books of accounts. But usually the auditor does not make such
visits.

ii. Right to Obtain Information and Explanations

The auditor has a right to obtain whatever information or explanation he requires in

performing his duty. The person from whom the auditor requires such explanation must provide
the same. The person may be the Managing Director, Director, Manager or any other officer or
employee. If any information sought by the auditor is refused, he should report the matter to the
members.

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 Running Head: COMPANY LAW

iii. Right to make Suggestions to the Board

The auditor is also having a right to suggest suitable modifications in the method of
accounting followed by the management. The directors, if a suggestion is made, should comply
with it. If not, the auditor should report the same to the members. But he has no right to make
any alteration in the accounts of the company on his own accord.
iv. Right to Sign the Audit Report

Only the auditor can 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 particular part of the Statutory
Report. Besides he has a right to sign and authenticate any other document, which the Act
requires to furnish.

Liabilities of An Auditor

a) Civil Liability:

Liability for Negligence:

Negligence means breach of duty. An auditor is an agent of the shareholders. He has to
perform his professional duties. He should take reasonable care and skill in the performance of
his duties. If he fails to do so, liability for negligence arises. An auditor will be held liable if the
client has suffered loss due to his negligence. It should be noted that an auditor will not be liable
to compensate the loss or damage if his negligence is not proved.

Liability for Misfeasance:

Misfeasance means breach of trust. If an auditor does something wrongfully in the
performance of his duties resulting in a financial loss to the company, he is guilty of
misfeasance. In such a case, the company can recover damages from the auditor or from any
officer for breach of trust or misfeasance of the company. Misfeasance proceedings can be
initiated against the auditor for any untrue statement in the prospectus or in the event of winding
up of the company

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b) Criminal Liability under Indian Penal Code

If any person issues or signs any certificate relating to any fact which such certificate is false,
he is punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the
auditor is similarly liable for falsification of any books, materials, papers that belongs to the
company.
c) Liability towards Third Parties

There are number of persons who rely upon the financial statements audited by the auditor
and enter into transactions with the company without further enquiry viz. creditors, bankers, tax
authorities, prospective shareholders, etc.
Liability for Negligence:
It has been held in the court that auditor is not liable to third parties, as there is no contract
between auditor and third parties. He owes no duty towards them.
Liability for Frauds:
The third parties can hold the auditor liable, if there is fraud on the part of auditor even if
there is no contractual relationship between auditor and third parties. In certain cases, negligence
of auditor may amount to fraud for which he may be held liable to third parties. But it must be
proved that auditor did not act honestly and he knew about it.

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References

M Stokes: “Company Law and Legal Theory" in W Twining (ed), Legal Theory and Common
Law (1986), 155 – 183
G. Morse, Partnership Law (Blackstone) 6th Edition chapters 1 and 9 6.
Hicks and Goo 6th edition pp 33-40 and 91-95. 7.
V. Finch and J. Freedman, “The Limited Liability Partnership: Pick and Mix or Mix Up?”
(2002) Journal or Business Law 475-512 – hard copy and through Westlaw

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