In recent times, there has been an increase in the rate of non-repayment of debts by debtors (including individuals and companies) and creditors have been provided with numerous ways through which to recover the debts owed to them. Some of these means of recovering debt include ADR (Mediation, arbitration), Litigation, Bankruptcy Proceedings and Winding Up (where the debtor is a company)
The machinery of a winding up petition should not be converted to an engine for debt collection in circumvention of the established legal procedure for instituting action in appropriate courts for collection of debts (The Court of Appeal, in the case of Oriental Airlines Ltd. vs. Air via Ltd (1998) 12 NWLR (Pt. 577) 271 at 230-281). This is to say that before any creditor would commence winding up proceedings to recover a debt owed to him by a company, he ought to first, explore and exhaust other means of debt recovery. Therefore, one could call winding up a “secondary” means of debt recovery.
The process of mergers and acquisition under the Investment and Securities Act 2007 is a type of insolvency process which involves a voluntary dissolution of the existing company and absorption of its liabilities into a new entity/company without a formal process of winding-up (Sec. 122 (6) (d) ISA 2007).
WINDING UP TO RECOVER DEBT
Section 401 of the Companies and Allied Matters Act provides the three major ways in which a company may be wound up or liquidated in Nigeria. They are listed as follows:
- Court Ordered winding up
- Voluntary Winding up
- Court Supervised Winding Up
MODES OF WINDING UP
The grounds upon which a company may be wound up were set out in Section 408 (a)-(e) of CAMA and was also restated in the case of O.S.P.M. Ltd v. Nibel Co. (Nig.) Ltd (2017) 3NWLR (pt. 1552) C.A. 207 @pg. 211 Ratio 1 goes thus:
- The company resolved by special resolution to be liquidated by the court;
- The company defaults in holding statutory meetings or filing statutory reports;
- The company has fewer than two members;
- The company is unable to pay its debts; or
- The court finds that it is just and equitable to do so.
Where a winding up petition is presented on the ground that a company is unable to pay its debt, then the winding up proceeding is filed in the court for an order of winding up to be made by the Court.
COURT ORDERED WINDING UP
The members of a company may voluntarily resolve to wind up the company if the fixed term set out in the articles of association expires or the articles allow them to wind up the company voluntarily under certain conditions, provided that the company passes a resolution in the general meeting; or the company resolves by special resolution that it should be wound up voluntarily.
VOLUNTARY WINDING UP
This occurs where a company passes a resolution to wind up the company and makes a petition to the court to supervise the process. The court may order the company to be wound up subject to its supervision and provide creditors, contributories and others with the right to apply to the court. The winding up will be effected on such terms and conditions as the court thinks just.
COURT SUPERVISED WINDING UP
Section 410 of the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004) provides a list of persons eligible to initiate a liquidation procedure, including the company, creditors of the company, the official receiver, contributories, the trustee in bankruptcy, personal representative or creditors and the Corporate Affairs Commission (CAC) – Sec 323 of the Act
WHO CAN COMMENCE WINDING UP PROCEDURES?
For insurance companies, insurers are barred from instituting liquidation procedures. The Insurance Act 2003 provides for the liquidation of insurers on the petition of either 50 policyholders or the National Insurance Commission. Section 33 of the Insurance Act prohibits the voluntary winding up of insurance businesses, except for the purpose of effecting an amalgamation, transfer or acquisition.
The Banks and Other Financial Institutions Act (CAP B3, Laws of the Federation of Nigeria, 2004) prohibits the restructure, reorganization, merger or disposal of interests in banks without the prior consent of the governor of the Central Bank of Nigeria.
The Federal High Court, by virtue of Section 407 (1) of CAMA and Section 251 (1)(e) of the Constitution of the Federal Republic of Nigeria, has the exclusive jurisdiction to determine matters in respect of winding up of a company whose registered or head office is situate within the “territorial” jurisdiction of the Court. However, it has been stated in the recent case of CBN v. Interstellar Comm. Ltd (2018) 7NWLR (Pt. 1618) S.C. 294, that “the Federal High Court has one territorial jurisdiction across the entire country, and its jurisdiction is not restricted to any particular judicial division of the court…”
COURT WITH JURISDICTION
Section 409 of CAMA provides for this and the situations are as follows:
- When a creditor to whom the company is indebted in a sum exceeding #2000, has served on the company a demand letter requiring the company to pay the sum due and the company has for three weeks failed to pay to the reasonable satisfaction of the creditor; or
- When an execution or another process (of enforcing monetary) judgment, Act or order of a Court in favour of a creditor of the company is returned unsatisfied; or
- When 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.
WHEN IS A COMPANY BE DEEMED AS UNABLE TO PAY DEBTS?
When the winding up procedure is to be initiated by a creditor, the first step is to issue the statutory demand to the debtor company. The statutory demand requiring the company to pay its debts must be signed by the creditor (in the case of a corporate creditor, the demand must be signed by a director or any other principal officer).
By the provision of Section 409 (a) of CAMA, the debtor company has three weeks within which to pay or respond to the demand to the satisfaction of the creditor. If at the expiration of the statutory period the company fails or neglects to pay, a winding up petition can then be issued against the company for its inability to pay its debt.
STEPS IN WINDING UP FOR DEBT RECOVERY
Section 415 of CAMA provides for the commencement of winding up proceedings to the effect that when a resolution has been passed by a company for voluntary winding up, before the winding up petition is brought to court, the winding up will be deemed to have commenced at the time of the passing of the said resolution. However, in every other case, the winding up of a company is deemed to commence at the time the petition for winding up is presented.
COMMENCEMENT OF WINDING UP
The Companies Winding-up Rules 2001 provides the steps for winding up and the rules to be complied with when winding up a company. Rule 16 states that the petition must be presented at the court’s registry.
Rule 17 – The petition must be served on the company (except if it is presented by the company itself) and an affidavit of service must be prepared and filed.
Rule 18 – A verifying affidavit must be done by the petitioner. It will constitute prima facie evidence of the statements in the petition.
Rule 19 – Application for Advertisement: After the presentation of the petition to Court, the petitioner would apply to a Court to grant an order for the advertisement of the petition.
STEPS IN WINDING UP PROCEEDINGS
The advertisement cannot be done except with the backing of a court order. It is essential that it is done 15 clear days before the hearing of the petition. It is also important to note that it can be done as many times as the court directs.
Contents of the advertisement must state the date on which the petition was presented, the name and address of the petitioner and his solicitor and the fact that any person who is interested in the petition either to oppose it or support it, must send notice of his intention to the petitioner or his solicitor. A petition not advertised within the set time will be struck out unless the court orders otherwise upon being given sufficient reason.
Rule 23 – Any person who is interested in the petition must indicate by a notice which must be sent to the petitioner or his solicitor not later than 5 days before the hearing.
Rule 20 – After the advertisement, but before the hearing of the petition, every creditor that pays the prescribed fee for the petition will be entitled to a copy of same within two days after requesting for it.
Rule 21 – APPOINTMENT OF PROVISIONAL LIQUIDATOR:
After the advertisement of a petition, on the application of a creditor and upon the proof of sufficient ground to appoint a provisional liquidator (this is done by affidavit), the Court may make the appointment. Persons who cannot be appointed as liquidators include infants, persons of unsound mind, a body corporate, an undischarged bankrupt, a director of the company being wound up, a person convicted of an offence involving fraud, dishonesty, official corruption, or moral turpitude. Section 509 & 254 (b) of CAMA
The powers of a liquidator include the right to bring or defend any action or other legal proceedings in the name and on behalf of the company; carry on the business of the company so far as may be necessary for its beneficial winding up; appoint a legal practitioner or any other relevant professionals to assist him in the performance of his duties; pay any classes of creditors Section 425 CAMA.
Section 423 In a winding up by the Court, the liquidator shall take into his custody, under his control, all the property and chooses in action to which the company is or appears to be entitled to.
Rule 22 – HEARING:
On the date of hearing, the petitioner must satisfy the court that he has advertised the petition, and he has duly complied with the prescribed affidavits verifying the statements in the advertisement. On the day of the hearing, a list of the person(s) interested to be parties in the petition must have been compiled and filed by the petitioner.
Rule 26 – The court has the power to substitute the petitioner with any creditor that would have the locus standi to bring the petition in the first place.
Rule 27 & 30 – When an order for winding up has been made, or for a provisional liquidator, the Official Receiver is to be notified of such order by the Registrar not later than 5 days after the order was made. The registrar is to send the Official Receiver 3 sealed copies of the order. One copy of the order would be served on the company at its registered office or at its principal or last known principal place of business. If the order is for the company to be wound up by the court then a copy of the order shall be forwarded to CAC in compliance with Section 416 of CAMA
ORDERS THE COURT CAN MAKE IN A MATTER FOR WINDING UP
Section 411 – On hearing a winding up petition, the court may dismiss it, or adjourn it, or make an interim order or any order it thinks fit, but the court cannot refuse to make a winding up order on the ground that the assets of a company have been mortgaged to an amount equal or in excess of those assets or on the ground that a company has no assets. Where it appears to the Court that the petitioners are acting unreasonably because there are still some options available and have not been explored by them the court may make an order dismissing the petition.
EFFECT OF WINDING UP PROCEEDINGS
Section 413 – The company no longer has the power to dispose of its property.
Section 414 & 497 of CAMA – where accompany is being wound up by the Court, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of the winding up shall be void.
Section 417 – If a winding up order is made or a provisional liquidator is appointed, no action can be instituted against the company except with the leave of court.
Section 418 – An order for winding up operates in favour of all creditors and all the contributories of the company as if made on the joint petition of a creditor and of a contributory.
Section 500 – Where a creditor who issued execution against any asset of a company that is subsequently wound up, the creditor will not be entitled to retain such benefit unless he has completed the attachment or execution before the commencement of the winding up. The company may carry on business only for the limited purpose of completing the liquidation process. The powers of the company directors come to an end when a liquidator is appointed.
A liquidation order operates as a notice of dismissal to all of the company’s employees. However, if an employee is on a fixed-term contract and is required under this contract to be given a period of notice, then a liquidation order will breach this and the employee will be entitled to damages. When an application is made for a court-ordered liquidation, the court may stay or restrain any proceedings against the company as the court sees fit.
DIFFERENCE BETWEEN LIQUIDATOR AND RECEIVER
According to the Black’s Law Dictionary, a receiver is a person appointed by Court for the purpose of preserving the property of a debtor pending the action against him or applying the property in satisfaction of a creditor’s claim, whenever there is a danger that, in absence of such appointment, the property will be lost, removed or injured. According to the Black’s Law Dictionary, a liquidator is a person appointed to wind up a business’s affairs, especially by selling off its assets.
EFFECT OF WINDING UP
The wound up company is dissolved that is, it dies or ceases to exist. The company’s name is removed from the list of companies in the records of CAC.
There is a hierarchy that determines the order in which a company’s assets must be distributed in liquidation. This is strictly enforced by the Courts. All secured creditors have the first right to the assets of the wound up company and are usually paid out before there is a distribution. After this is paid out, any remaining debts are paid in the following order of priority: the costs, charges and expenses involved in the liquidation.
Sec. 484 of CAMA all wages and salaries payable to employees, including holiday pay – Sec. 494 CAMA unsecured creditors and any interest that is attached to any debt (but only if the debt became due before the liquidation process began).
Sec. 498 of CAMA any debt owed to shareholders of the company, such as dividends or profits.
It is advised to submit here that a creditor should try as much as possible to explore other means of debt recovery before resorting to winding up a corporate entity because winding up of a company indicated the death and final burial of such a company and we have to be careful before we bury a business that is in debt, by virtue of temporal economic set back. If we throw caution to the wind by making winding up our first point of call in debt recovery, there will be no actual economic progress in the country.
DEFINITION OF TERMS
Debt Recovery is the process of making individuals and businesses pay debts that are owed and due to be paid, which have not been paid or which are disputed.
Receiver – A disinterested person appointed by a Court, or by a corporation or other person, for the protection or collection of property that is subject of diverse claims. A Receiver according to Section 419 CAMA means the Deputy Chief Registrar or any officer designated by the Chief Judge.
Provisional Liquidator: He is appointed to safeguard the assets of the company and maintain the status quo pending the determination of the petition. He is responsible for the management of the company and its assets during the period of winding up.
Contributory – The members of a company on the commencement of winding up.
Creditor – A person who is being owed money and is entitled to recover such debt owed to him. According to Black’s Law Dictionary, winding up is the process of settling accounts and liquidating assets in anticipation of a corporation’s dissolution.
Winding up petition applies to corporate debtors (companies) rather than individual debtors. In other words, winding up petition cannot be issued against an individual.