If you are a creditor of a company which is insolvent, you may petition to wind the company up to realise your debts.
Winding up of a company is a process where the company ceases to exist and its assets are seized and realised. Any remaining monies will be used to pay off the creditors of the company, the expenses and costs of the winding up, and any balance thereafter will be dispensed among the shareholders of the company. The following modes set out your options as a creditor to wound up a company:
- Creditor’s Voluntary Winding Up; or
- Compulsory Winding Up order by the Court.
Voluntary Winding Up
A company may commence a voluntary winding up if majority of its directors believe that the company is unable to meet its liabilities to continue to operate its business. The company can initiate a meeting with its creditors to consider a voluntary winding up of the company. If a favourable resolution is passed, you as a creditor, have the right to wind up the company, to appoint a liquidator, and to have control over the process of winding up. However, if the directors of the company remain uncooperative, you can apply to the Court to wind up the company.
Compulsory Winding Up by the Court
Such an order is commenced by a person who has Locus Standi to do so, which would include the company itself or you as a creditor of the company. Section 254(1) of the Companies Act contains an exhaustive list of grounds on which an application for winding up may be presented. Some of the grounds on which a winding up application may be presented include:
- The company has by special resolution resolved that it be wound up by the Court;
- A default is made by the company in lodging the statutory report or in holding the statutory meeting;
- The company does not commence business within a year from its incorporation or suspends its business for a whole year;
- The company being unable to pay its debts; or
- The directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatever which appears to be unfair or unjust to other members.
The most commonly used ground is where the company is unable to pay its debts (i.e. that the company is insolvent). A company is deemed to be insolvent if:
- The company is unable to pay its debts if there has been a failure to meet the statutory demand for payment for 3 weeks with respect to an amount exceeding $10,000; or
- The execution or other process issued on a judgment, decree or order of Court in favour of a creditor of a company is returned unsatisfied in whole or in part.
Ultimately, the Court shall have the discretion to make the winding up order.
Consequences of Winding Up
When a Winding Up order is made, the business of the company ceases. No action or proceeding shall be commenced against the company except with leave of Court. Further, any disposition of the company’s property made after the commencement of the winding up shall, unless the Court otherwise orders, be void. The liquidator will convert the company’s assets into cash, and pay you and/or any other creditors in order of priority. Take note that the order of priority of the creditors is largely based on whether you are a secured or unsecured creditor.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact me at firstname.lastname@example.org.