WINDING UP & LIQUIDATION
Liquidation is a process where the company’s assets are seized and realised, with the resulting proceeds used to pay off its debts and liabilities.
Any surplus is then distributed among the contributories of the company according to their rights and interests, or otherwise dealt with as the constitution of the company directs.
Upon the completion of the liquidation, the company goes into dissolution and it ceases to exist.
The difference between winding-up a company and liquidation is:
- Winding up a company: This deals with ending business affairs and terminating company obligations before liquidation.
- Liquidation: This deals with the sale of the company’s assets once it has closed.
The purposes of liquidation are:
- to ensure a just distribution of the company's assets among creditors and contributories
- to terminate the company's existence by its eventual dissolution
Just distribution of assets
When a company is being wound up, the company’s business ceases to operate and its assets and affairs are handed over to an independent liquidator whose powers, duties and functions are regulated by the Companies Act 2013.
The rights of unsecured creditors over the company's assets are virtually "frozen" upon the commencement of the liquidation to avoid a further deterioration of the company's financial position and proliferation of its liabilities.
Unsecured creditors are paid on a pari passu basis, i.e. they are paid out of the company's assets equally. Any surplus is then distributed among the contributors of the company.
Reasons for winding up a company
- Company has ceased business activities
- Management deadlock
- Corporate or financial restructuring of the group to which the company belongs
- Minimize tax liabilities or maximize tax advantages for the group to which the company belongs
- Breach of statutory provisions, including offenses committed
- Company acting outside its scope of activities
What are the various types of winding up?
1. Members' voluntary winding up
The company’s contributories (also known as members or shareholders) may pass a resolution that the company be wound up and that a liquidator be appointed.
The liquidation commences at the time of passing the resolution. It is adopted where the company is able to pay its debts in full within 12 months after the commencement of winding up. The directors of the Company are required to file a declaration of solvency.
2. Creditors' voluntary winding up
If the company is not able to meet its liabilities, the company can convene a meeting with its creditors to consider its proposal for a voluntary winding up of the company.
If a resolution is passed in favor of the winding up, the company will appoint a liquidator, subject to any preference the creditors may have as to the choice of liquidator.
What effects does liquidation have on the company and creditors?
a) Proceedings against the company
An application may be made to the Court to stay or restrain pending proceedings against the company at any time after the presentation of a winding up application and before a winding up order has been made.
No action or proceeding shall be proceeded with or commenced against the company except with the Court's leave after a winding up order has been made.
b) Disposition of company assets
Any disposition or sale of the company’s assets, transfer of shares or alteration in the status of company’s contributories made after the commencement of the winding up by the Court is void without the Court's sanction or approval.
The Court may allow the disposal of property for continuation of business or in the ordinary course of business, which may be beneficial not only to the company but also to the unsecured creditors. For example, sale of assets at full market value may also be validated if the transaction does not involve dissipation of the company's assets.
A disposition or sale carried out in good faith in the ordinary course of business at a time when parties are unaware that a winding up application has been presented may be validated by the Court unless there were grounds for thinking that the transaction might involve an attempt to prefer the buyer.
c) Execution proceedings
After a winding up application has been presented, no creditor is allowed to take out or continue attachment or execution proceedings against the company. A creditor must complete execution before the winding up application has been presented. Otherwise, a creditor cannot retain the goods.
For example, goods under a writ of seizure and sale must be seized and sold; garnishee proceedings are completed on receipt of the debt. Landlords may not distrain for rent after the winding up application has been presented. However, if distress proceedings are completed before that date, landlords are entitled to net proceeds of sale of up to 12 months' rent.
d) Floating charges
Section 332 Where a company is being wound up, a floating charge on the undertaking or property of the company created within the twelve months immediately preceding the commencement of the winding up, shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, except for the amount of any cash paid to the company at the time of, or subsequent to the creation of, and in consideration for, the charge, together with interest on that amount at the rate of five per cent. per annum or such other rate as may be notified by the Central Government in this behalf.
e) Secured creditors
The rights of the secured creditor to deal or realize security over company assets are not affected by the winding up order. However the secured creditor is not entitled to interest on the debt if the security is not released within six months of winding up or such further period as allowed by the Official Receiver.