WINDING UP: EFFECTS AND IMPLICATIONS
One of the major themes of the Easter season in Christian tradition is the concept of death. In this week’s newsletter, we shall be talking about death, not the death of Jesus though. We are talking about a different kind of death: the death of a company. A company, much like an individual, goes through different stages in its life cycle. From incorporation (birth) to its operational stage, and unfortunately in some cases, winding up (death). Winding up is simply the process of liquidating a company’s assets and bringing the life of the company to an end. It typically occurs when a company can no longer support its debts or becomes insolvent. During the process of winding up, the company’s primary focus shifts from maximizing profits and increasing revenue to selling off its assets, paying off creditors and distribution of the remaining assets to members and shareholders. Generally, companies are not incorporated with the intent of someday dissolving them, however, varying circumstances may necessitate the termination of the life cycle of a business.
The process of winding up of a company is usually governed by the provisions of various laws and regulations. In Nigeria, the laws which regulate the winding up process include: the Companies and Allied Matters Act (CAMA)2020, the Companies Proceedings Rules, Companies Winding Up Rules, the Federal High Court (Civil Procedure) Rules and the Investment and Securities Act. Other sector specific laws such as the Banks and Other Financial Institutions Act and the Insurance Act also apply to the process of winding up, depending on the type of company being wound up.
In Nigeria, there are three ways through which the winding up of a company may be done. It may be carried out through a voluntary winding up process, by the order of court or subject to the supervision of the court. Section 620 of CAMA provides the instances in which a company may be voluntarily wound up. A company may be voluntarily wound up where the period fixed for the duration of the company expires. This is usually the case with business arrangements like Joint Ventures or Special Purpose Vehicles (SPVs) where parties pool resources together, and leverage expertise to achieve a defined purpose. Once the JV has reached its goal, the arrangement may be liquidated in accordance with the terms agreed upon at the inception of the business. The company may also choose to voluntarily wind up its business and effect this through a Members Voluntary Winding up or a Creditors Voluntary Winding up. In a Members Voluntary Winding up, the members of the company which is solven, pass a special resolution to bring the company’s business to an end. The company is required to submit a statutory declaration of solvency within 5 weeks preceding the date of passing the resolution and give notice of the resolution to the Corporate Affairs Commission (CAC) within 14 days of passing the resolution. In a voluntary winding up initiated by the company’s creditors, both the company and its creditors are required to hold separate meetings to propose the winding up of the company. Both parties are required by CAMA to appoint a liquidator who shall be in charge of the company’s affairs till it is finally wound up.
A company may also be wound up by the court. Section 571 of CAMA provides that a company may be wound up by an order of court in the following instances:
The company has by special resolution resolved that the company be wound up by the Court.
Default is made in delivering the statutory report to the Commission or in holding the statutory meeting.
The number of members is reduced below two in the case of companies with more than one shareholder.
The company is unable to pay its debts.
The condition precedent to the operation of the company has ceased to exist.
The Court is of opinion that it is just and equitable that the company should be wound up.
The company is deemed unable to pay its debt where a creditor to whom the company is indebted to a sum exceeding N200,000, has served on the company a demand for the said sum and the company has for three weeks thereafter neglected to pay the sum, or where judgment is issued in favour of a creditor of the company and remains unsatisfied in whole or in part ; or the Court, after taking into account any contingent or prospective liability of the company, is satisfied that the company is unable to pay its debts.
A company may also be wound up subject to the supervision of the court. Winding up subject to the supervision of the court is typically a fallout from a company’s voluntary winding up. Section 649 of CAMA provides that if a company passes a resolution for voluntary winding-up, the Court may on petition, order that the voluntary winding-up shall continue but subject to the supervision of the Court. The Court may also appoint a liquidator and impose such terms and conditions on the winding up process as it deems fair. Winding by the court is often initiated by an action brought by the company’s creditors. For example, where the company’s creditors have remained unpaid for a significant amount of time, this will likely signal that the company is insolvent and move the creditors to initiate winding up proceedings to recover their money.
Much like any other process involving a company, the winding up process has its own peculiar effects on the business of the company. Seeing as the company is preparing to wrap up its business, it follows that the business operations will no longer be as usual. The most obvious effect of winding up is the loss of control. In all of the above stated methods of winding up a company, a common link between all three is the appointment of liquidators. A liquidator is someone who is appointed by the shareholders or the court to take charge of settling the affairs of the company and is vested with the legal authority to act on behalf of the company. The liquidator assumes the right to act as an agent of the company for the purposes of dealing with the assets and liabilities in receivership, he is also vested with the power to bring or defend any legal proceeding in the name and on behalf of a company, and also run the business of the company prior to the conclusion of the winding up proceedings. Thus, once a liquidator is appointed, power is divested from the board of directors and invested in the liquidators. It is also important to note that a company undergoing the process of liquidation does not lose its legal personality, it only loses its legal personality when it has been fully wound up. Also, an action cannot be commenced by a third party against a company in liquidation. A third party that wishes to bring an action must seek the leave of court before commencing such action against the company.
During the process of liquidation, it is the liquidator’s job to liquidate the company’s assets. The company’s assets will be sold and the proceeds applied to offset the company’s debts to its creditors. There is typically an order of priority in offsetting the company’s obligations. The secured creditors are usually first in line for payment; secured creditors who hold a fixed charge will get paid first following the sale of the asset they have a claim over, followed by secured creditors with a floating charge. Preferential creditors are next inline of priority and then unsecured creditors. Section 657 (4) of CAMA provides that in settlement of claims in the winding-up of a company, claims of the secured creditors, shall rank in priority to all other claims, including any preferential payment or any other debts inclusive of expenses of winding-up and the equity holders shall rank last.
Section 29(4) of The Companies Income Tax Act, as substituted by section 12(b) of the Finance Act of 2019 provides that where a company permanently ceases to carry on a trade or business (or in the case of a company other than a Nigerian company, permanently ceases to carry on a trade or business in Nigeria) in an accounting period, its assessable profits shall be the amount of the profits from the beginning of the accounting period to the date of cessation and the tax shall be payable to the tax authority within six months from the date of cessation (cessation rules). Note however that where the winding up is done by the subsidiary of a company in the process of reorganization of the controlling company, the cessation rules will typically not apply. If the company sells its assets during the winding up process, the proceeds of the sale may be subject to capital gains tax on any profit made from the sale of those assets. The company may also have to account for withholding tax on payments made out to its employees, creditors and shareholders during the winding up process. Although a lot of the company’s processes are halted during the winding up process, the company’s contracts are not automatically terminated by virtue of the commencement of the liquidation process.
Upon the conclusion of the winding up process, the liquidator is required to prepare an account of the winding-up, showing how the winding up has been conducted and the property of the company has been disposed of. The liquidator then calls a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meetings. The liquidator also submits the account to the corporate affairs commission, and at the expiration of three months from the date of registration of the return, the company is deemed dissolved.