The Procedures Available For Liquidation of A Company In Uganda Under The Insolvency Act, 2011.

Abstract

The life of limited liability companies in Uganda starts with the registration of the company’s constituting documents.

The end life of a company is depicted by dissolution. In case a company is unable to pay its debts as prescribed under section 3 of the Insolvency Act, insolvency proceedings will be commenced against such a company.

Generally, liquidation is the process by which a company’s or other type of corporation is brought to an end, in otherwise, a company ceases to exist as a corporate entity. The process of liquidation involves appointment of liquidator who is tasked with closing down or selling off the corporation’s business, realizing all its assets.

It should be noted that liquidation is a process that starts with winding up and ends with dissolution of a company. A company may go through liquidation, but does not go up to winding up, a case in point was Equity Bank. It follows that liquidation is a step to winding up, after a liquidator has sold off everything and paid everyone, if the company is still a going concern, then it will not go into winding up.

Introduction

The Black’s law Dictionary defines liquidation to mean an act of settling a debt by payment or other satisfaction or the act or process of converting assets into cash especially to settle debts.[1] Liquidation can either result from a winding up order made by the court, which is called compulsory liquidation, or a shareholder resolution which is called a voluntary liquidation.[2] Therefore after the directors have decided to choose any means of winding up available to them, a receiver is appointed.

Therefore, by the operation of Section 272,[3] it allows the Insolvency Act 2011 to be used and the procedures available for liquidation of a company there under, are provided as follows;

There are three modes of liquidation, provided for under section 57 of the Insolvency Act 2011. These include; Voluntary liquidation (both by members and creditors),[4] Liquidation subject to supervision of court,[5] and Liquidation by Court.[6] All these methods apply to both domestic and foreign companies, as stated by section 56 of the Insolvency Act.

• Voluntary Liquidation

A voluntary liquidation is set in motion by a resolution of the members of the company. It may be either a members’ voluntary liquidation or a creditors’ voluntary liquidation; in the case of an insolvent company, it will have to be a creditors’ voluntary liquidation. The distinction is that in a creditors’ voluntary liquidation, the creditors have ultimate control over the conduct of the liquidation.

Under section 58,[7] a company may voluntarily pass a special resolution to the effect that due top it’s liabilities, it cannot continue with business and therefore needs to liquidate. Upon such a resolution, the liquidation process shall be taken to have commenced. This mode of liquidation includes member’s voluntary liquidation which is commenced upon the resolution of the members of the company and creditor’s voluntary liquidation which is commenced upon the resolution of the creditors of the company.

On passing a resolution for voluntary liquidation, a company is required under section 59[8] to give notice of the resolution in the gazette and newspapers of wide circulation, register the resolution with the registrar of companies and send a copy to the official receiver.

Under section 62,[9] it is provided that in case of member’s voluntary liquidation, the shareholders of the company or any authorized member under the memorandum and articles of association may by a special resolution appoint one or more liquidators and fix the remuneration.

The powers of the directors shall cease upon the appointment of the liquidator.In Ayerst (Inspector of Taxes) v C& K (Construction) Ltd,[10] Lord Diplock between pages 240 and 241 said; the company itself as a legal person, distinct from its members, can never be entitled to any part of the proceeds. On completion of the winding-up, it is dissolved as per section 274. It was held that the appointment of a liquidator ends the directors own powers to control the company’s affairs and brings into effect a statutory trust over its assets for their realization and distribution in accordance with the scheme of the legislation.

Three months from the date of registration of a return, the company shall be taken to be dissolved (Section 67(6) of the Insolvency Act, 2011). This process can be completed within a period of six months.

In the event of creditor’s voluntary liquidation, the law requires under section 69,[11] that the company shall cause a meeting of the creditors on the same day as the meeting for the resolution for liquidation is to be proposed or the following day. The notices for the said meetings must be sent to the creditors and be advertised once in the gazette and in a newspaper of wide circulation.

The creditors meeting is presided over by the Director of the company appointed from amongst the directors during which him or her shall present a full statement of the position of the company’s affairs, a list of the creditors and the estimated amount of the creditors’ claims. In Stichting Shell Pensioenfonds v krys & Anor.[12], it was noted that court will, where necessary, issue anti-suit injunctions to prevent creditors who are amenable to its jurisdiction from taking action which interferes with the proper execution of the scheme- for example by seeking to attach assets of the company which are outside the jurisdiction.

At this point a liquidator is appointed as section 70 (1),[13] the creditors and the company at their respective meeting under section 69, may nominate a person to be liquidator for the purpose of liquidating the affairs and distributing the assets of the company, and if the creditors and the company nominate different persons, the person nominated by creditors shall be the liquidator, and if the creditors do not nominate any person, the person nominated by company shall be the liquidator.

Then section 70(2)[14] provides that where different persons are nominated by the company and the directors, any director, member or creditors of the company may, within seven days after the nomination by the creditors, apply to court for an order directing that the person nominated as liquidator by the company shall be liquidator instead of or jointly with the person nominated by the creditors or appointing another person to be liquidator instead if the person appointed by the creditors.

• Under creditor’s voluntary liquidation, the creditors may as provided for under section 71,[15] appoint not more than five persons to be members of a committee of inspection. The company may also appoint any members to be part of the committee but if the creditors do not approve of the members appointed by the company, they may pass a resolution that all or some of the nominated members shall not be part of the committee. Under section 79,[16] the assets of a company shall then on its liquidation be applied in satisfaction of its liabilities simultaneously and equally.

Under section 115,[17] the liquidator may also upon the request of any two or more creditors or more shareholders call for meeting where members will vote on the proposal to have a committee of inspection to work with the liquidator. Under section 116, the committee shall consist of not less than five persons and has the power to call for reports on the progress of the liquidation from the liquidator, call a creditors’ or shareholders’ meeting, apply to court for supervision order under section 117 or enforcement of liquidator’s duties under section 118 and assist the liquidator as appropriate in the conduct of liquidation.

Literally, the consequences of this voluntary liquidation are; the corporate status and powers of the company continue until it is dissolved as per section 60(2), also upon commencement of voluntary liquidation, company ceases to carry on business except so far as may be required for the beneficial liquidation of the company as per section 60(1), and n0 transfer in the status of the members of the company is to be made after the commencement of the voluntary liquidation except with the sanction of the liquidator as per section 61.[18]

• Secondly, is the liquidation subject to the supervision of Court. This is where a company passes a resolution for voluntary liquidation. As per section 87,[19] the court may make an order that the voluntary liquidation shall continue subject to the supervision of court. This gives the stakeholders (creditors, contributories or other interested parties) an opportunity to apply to court on such terms and conditions as the court may think just.

Where an order is made for a liquidation subject to supervision, the court may, by that order or any subsequent order, appoint an additional liquidator. Where an order is made for liquidation subject to supervision, the liquidator may, subject to any restrictions imposed by the court, exercise all their powers without the sanction or intervention of the court, in the same manner as if he or she was duly appointed under the Insolvency Act with respect to the appointment of liquidators under voluntary liquidation. The court has powers to remove any liquidator appointed by court or fill any vacancy of the same occasioned by removal, death or resignation.

According to section 90 of the Act, where an order is made for liquidation subject to the supervision, the liquidator may, subject to any restrictions imposed by the court exercise all his or her powers without the sanction or intervention of the court, in the same manner as if the company were being liquidated voluntarily.

And also, where the order for liquidation subject to supervision is made in relation to a creditor’s voluntary liquidation in which a committee of inspection has been appointed, the order shall be taken to be an order for liquidation by court for the purpose of section 71.

• Lastly, it is the Liquidation by court, If satisfied that the company is unable to pay its debts within the meaning of section 3 of the Insolvency Act, The High Court may appoint a liquidator on the application of the company, a director of the company, a shareholder of the company, a creditor of the company, a contributory, or the official receiver if it is satisfied that the company is unable to pay its debts, as reflected on by section 92[20]

Liquidation of a company by court is taken to commence at the time of the presentation of the petition for liquidation however where before the presentation of a petition for liquidation of a company by the court, a resolution is passed by the company for voluntary liquidation, this shall be deemed to commence when the resolution is passed and unless the court on proof of fraud or mistake, thinks fit and directs that all proceedings of the voluntary liquidation shall be valid.

The liquidation in all liquidation matters lies with the High court, as provided for by section 91.[21] Under section 92, court may on hearing the liquidation petition dismiss it or adjourn the hearing conditionally or unconditionally or make any interim order or any other order that it thinks fit. Upon making such orders, the court shall appoint the official receiver or any insolvency practitioner the court considers fit as provisional liquidator of the company, for the preservation of the value of the assets owned or managed by the company.

The powers and functions of the provisional liquidator are limited to selling or disposing off any perishable and any other goods, the value of which is likely to diminish if they are not disposed off, unless court limits the places conditions on the exercise of the powers. The provisional liquidator is required by law to within 14 days after the commencement of liquidation give public notice of the commencement of liquidation and call a shareholders’ meeting during which the liquidator is appointed.

The liquidator shall, within five working days after their appointment, give notice in the Gazette and a newspaper of wide circulation of the date of commencement of the liquidation.

Within 40 working days of the commencement of the liquidation or a longer period as the court may allow, a liquidator shall prepare a preliminary report showing the state of the company’s affairs, proposals for conducting the liquidation and the estimated date of its completion, and the right of any creditor or shareholder to require the liquidator to call a creditors’ meeting, and shall make the report available at their address for inspection by every known creditor, shareholder or contributory.

A liquidator shall, within 20 working days after the end of every six month period during the liquidation, make an interim report and give public notice of the progress of the liquidation during the preceding six months, as well as the liquidator’s further proposals for the completion of the liquidation.

The liquidation of a company is complete when the liquidator delivers to the official receiver a final report and final accounts of the liquidation and a statement indicating that all known assets have been disclaimed, realized or distributed; all proceeds of realization have been distributed; and that in the opinion of the liquidator, the company should be removed from the register.

Conclusion

In conclusion, it is noteworthy to also assert that the voluntary winding up of a company does not bar the right of any creditor or contributory to have it wound up by the court. The court should not make an order unless it is satisfied that the voluntary winding up cannot be continued with due regard to the interests of the creditors and contributories. Creditors are only likely to seek conversion of the liquidation into a more expensive compulsory one where they are dissatisfied with the progress of the voluntary liquidation or feel that additional investigation is necessary.

In Re Inside Sport Ltd,[22] it was suggested that where the real dispute was as to the identity of the liquidator, it might be more appropriate to apply to the court in order to replace the liquidator.

The general rule is that the court will follow the wishes of the majority in value of the creditors. In Re JD Swain,[23] Harman J said that where a liquidation in progress was supported by the majority of creditors, it was necessary for a petitioner to show some reason why the majority of the class should not prevail over the minority.

The cases show that the court will give greater weight to the wishes of independent creditors than to creditors who also happen to be connected with the company.

By

ARYAMANYA RODRICK,

LLB-3, BSU-FACULTY OF LAW,

aryamanyarodrick21@gmail.com

BIBLIOGRAPHY

STATUTES

- The Insolvency Act, 2011

- The Companies Act, 2012

- The Insolvency (Regulations) Act, No.36 of 2013

CASES

- Ayerst (Inspector of Taxes) v C& K (Construction) Ltd, [1975] 2 ALLER 537

- Stichting Shell Pensioenfonds v krys & Anor., [2015]AC 616 (PC)

- Re Inside Sport Ltd, [1999] 1 BCLC 302

- Re JD Swain, [1965] 1 WLR 909.

TEXT BOOKS

- Black’s Law Dictionary, Bryan A. Garner, page 2960 Eighth edition, Thomson Reuters 2009.

- An Introduction to Corporate Insolvency law, Hamish Anderson, Plymouth law and Criminal Justice Review (2016)

- Corporate Insolvency, Law and Practice, Sumant Batra.

- The Law of Company Liquidation, 4th Edition, McPherson & Keay, Sweet & Maxwell

- Corporate Insolvency: Law and Practice, Milman, David.

[1] Bryan A. Garner’s Black’s Law Dictionary, page 2960 Eighth edition, Thomson Reuters 2009. [2] Hamish Anderson, An Introduction to Corporate Insolvency law, Plymouth law and Criminal Justice Review (2016) [3] The Companies Act, 2012 [4] Section 58, Insolvency Act, 2011. [5] Section 87, Insolvency Act, 2011. [6] Section 91 and 92, Insolvency Act, 2011. [7] Insolvency Act, 2011 [8] Insolvency Act, 2011 [9] Ibid [10] [1975] 2 ALLER 537 [11] ibid [12] [2015]AC 616 (PC) [13] Insolvency Act cap 14, 2011 [14] Ibid [15] ibid [16] ibid [17] Insolvency Act, 2011 [18] ibid [19] Ibid [20] Insolvency Act, 2011 [21] ibid [22] [1999] 1 BCLC 302. [23] [1965] 1 WLR 909.