It is always the desire of every company to remain a going concern. However, at some point, it behoves the company to exit the scene of existence by dissolving its business via a process called ‘Winding-Up’. This process becomes imperative when the business of the company is no longer generating profit; competition is wearing down a business, the owner has lost interest in operating the business, or arising from the business’ inability to pay its debts.
Winding-Up in Nigeria is primarily governed by the Companies and Allied Matters Act (CAMA), 2020 Company Proceeding Rules, Companies Regulations 2021, and Company Winding-Up Rules as well as other subsidiary legislations, where necessary. This article will respond to pop-up questions in the minds of company owners on salient issues before, during, and after winding up procedures in Nigeria.
HOW DO WE START?
We want to wind up our company, how do we start?
This depends on whether the company or its creditors areis kickstarting the proceedings. Section 564 of CAMA stipulates that a c company may be wound up by Order of Court; Voluntarily, or by Supervision of Court.
By Order of Court: The Jurisdiction to wind up (by Order of Court) lies with the Federal High Court where the head office of the Company is situated. Winding-up by Order of Court arises pursuant to a petition for winding-up presented for any of the following reasons: where the Company by a special resolution has resolved that the Company be wound up by the Court, inability of the Company to pay its debts, failure to hold statutory meetings or deliver statutory reports to the Corporate Affairs Commission (CAC), where the condition precedent for the operation of the Company has been concluded, or the Court believes it is just and equitable that the Company be wound up section 571 CAMA. According to sections 573 CAMA, creditors, official receivers, contributory, trustees in bankruptcy, personal representatives, or the CAC (on approval of the Attorney General of the Federation), are eligible to petition the Court for winding-up of relevant companies.
Relying on section 578 (1) and (2) CAMA, this mode of winding-up is deemed to commence at the time the winding-up petition is presented to the Court and not necessarily when the winding-up order is made, except in respect of a Company which has previously passed a resolution for voluntary winding-up.
Voluntary Winding-Up : A voluntaryVoluntary winding-up is a self-imposed liquidation process approved by the shareholders to terminate the life of a company. It can be activated by the members or the creditors of the company.:
Members of a solvent company by a special resolution may decide to end the business and realise the assets of the business, in order to distribute the proceeds amongst members. Section 625 CAMA provides that, the directors may within five (5) weeks of passing the resolution for winding up submit to the CAC for registration, a statutory declaration of solvency (which must be delivered to CAC for registration within 15 days after passing the resolution), stating that the business is solvent and can repay its creditors within twelve (12) months from the commencement of the winding-up.
The directors of an insolvent company may voluntarily decide to liquidate its assets in order to pay its debts. It usually arises when the liabilities of a company exceed its assets and it is unable to pay its creditors, thus it cannot carry on its business. Here the Company’s creditors nominate a person to be a liquidator on behalf of the company.
Winding-up by Supervision of the Court:
This is when a company passes a resolution to voluntarily wind up itself and petitions the court to supervise the winding-up, or petitions for the continuance of a voluntary winding-up subject to the supervision of the Court..
What is the role of the liquidator in a winding-up process?
A liquidator is appointed by either the shareholders or creditors of a company through an application to the court. He is appointed to run the affairs of a company being wound up by ensuring all the company’s debts are settled (if any) and surplus proceeds are distributed accordingly. A liquidator assumes the right to act as an agent of the company to deal with the assets and liabilities in receivership. The liquidator can also bring or defend, an action on behalf of the company yet the company does not lose its legal personality or title to its goods.
In addition, section 588 CAMA provides that “a Liquidator is responsible to bring or defend any legal proceeding in the name and on behalf of a Company; appoint a legal practitioner or any relevant professional to assists in the performance of its duties; run the business in so far as its benefits the winding-up; and meet up with creditors and potential/ future claims owners again the Company for compromise or arrangements that may render the Company liable amongst many others.”
What is the legal status of a company being wound up?
A company being wound up maintains its legal personality and only loses its personality when fully wound up. Thus, initiating a winding-up process or appointing a liquidator does not in itself result in the death of the company until such a company is dissolved up to the very last stage. It is only at that point that such a company loses its legal personality.
It is worthy of note that whilst a company is undergoing winding up having appointed a liquidator, it can sue but can only be sued against with leave of court.
How long does the liquidation process take? This is not specific stricto sensu, it is usually dependent on the timeline within which the liquidator uses to realize assets and agree with members’ and creditors’ claims.
What effect do liquidation procedures have on existing contracts?
Upon the appointment of a liquidator, all existing contracts will not automatically terminate, except otherwise expressly provided. Thus, termination of contract provisions, deemed trust, retention of title, set-off, deemed assignment/transfer, and other pre-agreed clauses will certainly remain valid irrespective of liquidation. A liquidator may however apply to the court to disclaim demanding or unprofitable contracts of the company. Nonetheless, upon the completion of the winding-up process, all its contracts are terminated, mostly without prejudice to the liabilities incurred before termination.
What is the extent of the director’s powers in a liquidation process?
When a liquidator is appointed, all powers of the directors will cease, except the continuance is sanctioned at the general meeting or by the liquidator.
What is the difference between liquidation and receivership?
Receivership is the appointment of a receiver by a secured creditor, usually a bank, to manage a company in the interest of the secured creditor. Whereas, liquidation is a process where the affairs of a company are wound up, and a liquidator is appointed to manage and sell off the assets of the company to pay off the creditors if any and then the shareholders with whatever is left after the sale of assets, and after then, the company is being dissolved.
What are the challenges faced during liquidation?
One of the most pressing challenges faced in the liquidation process is laying off employees; selling the assets of a company where potential buyers will want to pay less than the market value of the property, and potential exposure of creditors to losses because of the push to sell the company’s assets in the earliest possible time.
Do we have options besides winding up?
A company facing financial difficulty does not necessarily need to resort to winding up, as other alternatives to winding up include; mergers & takeovers, striking off for being defunct, and restructuring a company. However, in making this decision, consideration is taken as regards the interest of third parties, market conditions, and economic outlook.
What are the tax implications before and after winding up?
Under the Finance Act, where a company intends to wind up, it will be required to notify FIRS of its intention to deregister its registration (for Tax purposes) with the Federal Inland Revenue Service (FIRS) within 90 days from such cessation of business. This is known as Winding Up by CAC and Cessation of Business by FIRS.
After winding up, the company will be required to deregister with the (FIRS) and to do this, they are to file final cessation returns 6 months after the cessation date as stipulated under Section 29 (4) of the Companies Income Tax Act (CITA). The final tax year is from the beginning of the last accounting period to the date of cessation.
Conclusion
It cannot be overemphasized that the process of winding up a Company has effects and consequences on the structure of the Company when considered from the three-pronged approach ‘before, during and after’ winding up procedure of such a company. Once the process is started, the company ceases to carry on business until it is finally dissolved and would most likely be struck off from the register by the Commission where it becomes defunct.
This article is part of WTS Blackwoodstone Insights series
Ifeoma Madu is a Managing Associate and team lead of the Corporate Commercial/Legal Litigation group at WTS Blackwoodstone. Chidiebere Mbah is an Associate in the firm’s Corporate Commercial/ Legal Litigation group
WTS Blackwoodstone, is an international business law firm, that delivers innovative solutions across diverse client needs, specializing in core practice areas such as International Tax, Tax Advisory & Compliance, Corporate and Commercial law, and Transactional Services for companies operating in Nigeria. As the Nigerian partners of WTS Global, operating in over 100 countries, WTS Blackwoodstone aligns with a global tax practice that offers a comprehensive range of tax services.
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