Company Liquidation by Court (Section 219)- Insolvency Act 2015 Kenya
This is also known as compulsory winding up. This may occur in the following circumstances:-
(a) Special resolution of the company: – If the company has by special resolution resolved that it may be wound up by the court, the court may pass a winding up order. The power of the court in such a case is discretionary. The court may refuse to order winding up where it is opposed to public or company’s interest.
(b) Default in holding statutory meeting or in delivering the statutory report to the registrar: – If a company defaults in delivering a statutory report to the registrar or in holding the statutory meeting, the court may order winding up of the company either on the petition of the registrar or on the petition of a contributory. The petition must not be filed before expiry of 14 days after the last day in which the statutory meeting ought to have been held. However, the court may instead of making a winding up order, direct the statutory report to be delivered or that a meeting shall be held.
(c) Failure to commence or suspension of business: – Where a company does not commence its business within one year from its incorporation, or suspends its business for a whole year, the court may order for is winding up.
The court exercises power in this case only if the company has no intention of carrying on its business or if it is not possible for it to carry on its business.
Where the suspension of business is temporary or can be satisfactorily accounted for, the court will refuse to make an order.
If a company has not begun to carry on its business within a year from its incorporation, or suspends its business for a whole year, the court will not wind up if:
- There are reasonable prospects of the company starting business within a reasonable time.
- There are good reasons for the delay, that is, the suspension of business is satisfactorily accounted for and appears to be due to temporary causes.
Case Law: Middleborough Assembly Rooms Company (1880)
A company suspended its business for more than 10 years due to depression in trade. A shareholder presented a petition for the winding up of the company a year later. 4/5th in value of the shareholders opposed the petition. The company intended to continue its operations when trade prospects improved. The petition was dismissed.
(d) Reduction of members below Minimum: –In the case of a Public company below seven members
If the company carries on business for more than six months while the number is reduced, every member who is cognizant of the fact that it is carrying out business with members fewer than the statutory minimum, will be severally liable for the payment of the whole of the debts of the company contracted after six months.
This is an area in the company where corporation veil is lifted.
(e) Inability to pay debts: – That is,
- A creditor to whom the company owes more than Sh. 1,000 has left at the registered office, demand under his hand for the payment of the sum due, and the company has for 3 weeks thereafter reflected to honor the sum.
- Execution or other process in favor of the creditors of a company is returned unsatisfied in whole or in part.[/su_list]
iii. If it is proved to the satisfaction of the court that the company is unable to pay its debts.[su_list icon=”icon: check-circle” icon_color=”#0095f2″]
- The court will not prove whether assets exceed liabilities, rather whether the company is unable to meet its current demands.
(f) Just and equitable: – This is when the court is of the opinion that it is just and
equitable that the company should be wound up. This clause gives the court very wide powers to order winding whenever the court considers it just and equitable to do.
The following are the instances where the court can issue a winding up order under the clause, “just and equitable”: –
- Where there is a deadlock in management.
- Where it is impossible to carry on the business of the company except at a loss.
- Where the company has engaged in illegal business.
- Where the object for which the company is formed is impossible of further pursuit.
- Where the minority is being disregarded or oppressed.
- Where there is lack of confidence in directors.
- Where the company has been conceived and brought forth in fraud.
Just and Equitable clause
The court must be over-cautious before admitting a petition for winding up on the just and equitable clause. It should be allowed as a last resort.
Just and equitable clause depends upon the facts of each case. The court may order winding up under this clause when:-
(a) The substratum of the company is gone
Substratum of a company is said to have disappeared only when the object for which it was incorporated has substantially failed or when it is impossible to carry on business except at a loss, or the existing assets are insufficient to meet the existing liabilities.
Before the court makes a winding up order under this, the court should consider the interest of shareholders as well as creditors.
The substratum of a company disappears when:-
(i) The subject matter is gone.
Case Law: Pirie vs. Stewart
A shipping company lost its only ship, the remaining assets being a paltry sum of £363. Majority shareholders filed a petition for winding up but minority shareholders opposed this and desired to carry on business.
It was held that it was just and equitable that the company be would up.
(ii) When the main object of the company has substantially failed or become impractible
Case Law: German Date Coffee Company (1882)
The object clause of the German Date Coffee Company stated that it was formed for a German patent which would be granted for making a partial substitute for coffee from dates and for acquisition of incidental there and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work on a Swedish patent and carried on business at Hamburg where substitute for coffee was made from the dates, but not under the protection of a patent.
A petition was filed by two shareholders that the main object could not be achieved, and therefore it was just and equitable that the company should be wound up.
(iii) The company carries on business at a loss and there is no reasonable hope that the object of trading can be attained: – Where majority shareholders are against it, the court cannot order a company to be wound up merely because it is making a loss.
(iv)Wherethe existing and probable assets of the company are insufficient to meet its existing liabilities. Where the company is totally unable to pay off creditors and there is increasing burden of interest and deteriorating state of management and control of business owing to sharp differences between shareholders, the court will order winding up.
(b) When the management is carried on in such a way that the minority is disregarded or oppressed: – This is prejudicing the interests of minority shareholders by majority shareholders.
Case Law: Re Garnets Mining Company Ltd (1977)
The petitioner was Mrs. Beth Wambui Mugo. She wanted the company to be wound up on the “just and equitable” ground. Her reasons were as follows:-
(i) That the affairs of the company were being conducted in a manner which was oppressive to her. Despite her 50% shareholding, she was treated at most times as decorating figure because she was excluded from both the company and board meetings, but nevertheless expected to sign or approve most of the resolutions. When she suggested transferring her shareholding, she was out voted.
(ii) The substratum of the company had gone and that the company had no alternative business to engage in. A company had been incorporated to “mirie rubbis”. This business collapsed because Mugo influenced the government to withdraw the mining license as a way of revenging against the Greek directors.
(iii) Because of the differences between her and the rest of the Greek members, the management of the company had broken down completely and consequently there was loss of confidence and proximity in each other to the extent that the company could no longer be managed at all
It was held that though Mugo (petitioner) was partly to blame for sabotaging the business, she was entitled to this order under Section 215.
(c) Where there is deadlock in management of the Company: – When shareholding is equal and there is a case of complete deadlock and there is no hope or possibility of smooth and efficient continuance of the company as commercial concern.
Case Law: American Pioneer Leather Company (1918)
There were only three directors and shareholders in a private company. One of them left the country and the remaining two quarreled among themselves and as a result there was a complete deadlock.
It was held that it was just and equitable that the company be wound up.
(d) When the company was formed to carry out fraudulent or illegal business, or when the business of a company becomes illegal.
Case Law: Brinsmead (Thomas Edward) & Sons (1897)
Thomas Edward and two of his sons were employed by John Brinsmead & Sons Ltd in the business of piano manufacturing. They left John Brinsmead & Sons Ltd and started a company called Thomas Edward Brinsmead & Sons Ltd for carrying on similar business. They were restrained by a court injunction from using the name Brinsmead on the ground of fraud. A petition for compulsory winding up of the company was presented.
Held that the company was formed to carry out fraud and, therefore, it was just and equitable to be wound up.
(e) In the case of a company incorporated outside Kenya and carrying on business in Kenya, winding up proceedings have been commenced in respect of it either:-
(i) In the country of incorporation.
(ii) In any country in which it has established place of business (Section 219).
