Objectives
At the end of this lecture you will be able to:
§ Describe winding up of companies
§ Explain types of winding up
§ Explain stages in winding up proceedings by court
§ Discuss the effects of winding up order
§ Describe the order of distribution of property
§ Prepare statement of affairs and deficiency account
Content
§ Meaning of liquidation
§ Types of winding up (liquidation)
§ Stages in winding up proceedings by court
§ Effects of winding up order
§ Companies' distribution of property
§ Preparation of statement of affairs and deficiency account
What is Liquidation?
Liquidation
means the termination of the firm as a going concern. It involves selling the
assets of the firm for a salvage value. The proceeds, net of transaction cost
are distributed to creditors in order of established priority. The process of
liquidation is also referred to as ‘winding up of the company’. in this chapter
the words liquidation and winding up will be used interchangeably to mean
termination of the company as a going concern.
There are two types of liquidation
(i)
Voluntary liquidation
(ii)
Involuntary
liquidation/compulsory winding up
Voluntary
liquidation is when the corporation itself decides to file a petition for
bankruptcy
Involuntary
liquidation or compulsory winding up is when an order from the court has made
that the company should be wound up. The high court of Tanzania has power to
wind up any company registered in Tanzania. The court may order the winding up
of a company on any of the following grounds:
(a) The
company by special resolution resolves to be wound up by court
(b) The
company defaults holding statutory meetings
(c) The
number of shareholders falls below the number prescribed as the minimum by
company law
(d) The
company is unable to pay its debts
(e) The
company fails to commence business within a year of its incorporation suspends
its business for a whole year
(f) For
any other reason the court considers it just and equitable that the company
should be wound up. The court apparently has a description in determining what
constitutes just and equitable ground for winding up
The stages in winding up proceedings
- A
petition is filled in the court. A corporation may file a voluntary
petition, or involuntary petitions may be filed against the corporation
- A
bankruptcy trustee is elected by the creditors to take over the assets of
the debtor corporation. The trustee will attempt to liquidate the assets
- When
the asset are liquidated, after payments of the cost of administration,
proceeds are distributed among creditors
- If
any assets remain, after expenses and payments to creditors, they are
distributed to the shareholders
The stages in winding up proceedings by Court
- Petition:
the petition for a winding up order may be presented by:
(a) The
company
(b) The
creditor- including any contingent creditor or prospective creditor provided
they have given any reasonable security
(c) A
contributory- provided his shares have been previously allotted to him on the
death of the previous holder or has been registered in his name for at least
six months within the eighteenth months preceding the commencement of winding
up
- Commencement
of winding up
The
winding up is deemed to commence at the time of presenting the petition for
winding up order. Where the petition for winding up order was preceded by the
efforts at voluntary winding up, the winding up is deemed to have commenced on
the date of passing the resolution for such voluntary winding up
Effects of commencement of winding
up
After the date of commencement of
winding up the following are the results
(a) Any
disposition of property by the company becomes null and void
(b) Any
transfer of shares or alteration in status of members is void
(c) Any
attachments, distress or execution put onto force against the company is void
- Protection
of property since commencement of winding up
For
the purpose of protecting the company’s property, the court may find it
necessary, on the application of a creditor, contributory on the company itself
to appoint an official receiver or some other fit person as the provisional
liquidator. This is slightly different from bankruptcy of sole traders or of a
partnership where the entire property is transferred in the hand of an
appointed official receiver.
The
official liquidator is simply acting as a custodian and is not empowered to
proceed with realization. All services of a manager is ceases upon appointment
of a liquidator
- Winding
up order
The
winding up order has the following effect
(a) It
orders the company to be wound up. This order is in favour of creditors and
shareholders together without caring who filled the petition. This is because
the company was legally a separate entity.
(b) The
official receiver is appointed to be the provisional liquidator, if had not
been appointed. His major duty will be to take possession and control of the
property of the company, unlike an adjudication order in bankruptcy of
individuals, which vests the property on the trustee. The winding up of the
company does not vets property of the company to the liquidator
(c) All
servants of the company including directors are discharged. All powers of
directors cease
(d) The
court may restrain further proceedings against the company
- Submission
of statement of affairs
This
statement will have to be prepared in in the prescribe form, and should be
filled within 14 days of the winding order. The statement should show the
position of the company affairs as on the days of the winding up order
- The
official receiver makes a preliminary report to the court regarding
(a) The
amount of capital issued subscribed and paid up
(b) Estimated
amount of assets and liabilities
(c) The
causes of failure of the company
(d) Whether
in his opinion further enquiries is desirable on the matter relating to
formation, promotion and failure of the company
- The
official receiver sermons separate meetings of the creditors and
contributors of the company for the purpose of determining whether or not
an application is to be made to appoint a liquidator to replace an
official receiver
- The
order from court follows that the company should be dissolved. The order
shall be communicated within 14 days
Company’s distributions of Property
Once
the corporation has determined to be bankrupt, liquidation takes place. The
following is the order in the distribution of claims upon liquidation:
- Administration
expenses associated with liquidating the bankruptcy assets
- Unsecured
claims arising after the filling of an involuntary bankruptcy petition
- Wages,
salaries and commission
- Contribution
to employee benefits plans arising within 180 days before the filling date
- Consumer
claims
- Tax
claims
- Secured
and unsecured creditors
- Preference
shareholders’ claims
- Ordinary
shareholders’ claims
Preparation of statement of Affairs and Deficiency
Accounts
The
law recognises a company as a person separate and the distinct even from those
who own it. Accordingly, the law relating to winding-to-winding up requires the
company unable to pay the debts to identify not only its deficiency as regards
outsiders, but also its deficiency as regards its shareholders
Illustration
1
On
the day of winding up order was made on Mbucha Ltd. Its summerised balance
sheet appeared as follows:
Illustrative
Example 1
On
the day the winding up order was made on Mwabuki Ltd. Its summarised statement
of financial position appeared as follows:
Tshs”000” Tshs”000”
Ordinary
share capital 100,000
Asset 200,000
Profit
& Loss Account 40,000
Current
liabilities 60,000
200,000 200,000
Ø Accepting
the position that the company is an entity separate from its owners, we have to
concede that this company ows tshs. 100,000,000 just as much as it owes Tshs.
60,000,000 to outside creditors.
Ø Hence
the resource the company could call are represented by the profit and loss
account of its balance its balance of Tshs. 40,000,000. The outside liabilities
should of course be discharged before any amount could be paid to the owners.
Ø In
the event the assets of the company, on this date, are expected to realize only
at Tshs 35,000,000 on the basis that there will be expenses of winding up, this
amount will have to be shared among those to whom the company owes its current
liability.
Ø The
company will thus be Tshs. 25,000,000 deficient as far its outside liabilities
are concerned. But the total deficiency of company, talking account also of
what it owes its shareholders, is Tshs. 125,000,000.
Ø In
other words, if the company could find this extra Tshs. 125,000,000 it could
discharge all that it owes, and will, therefore, not be regarded as insolvent.
The deficiency is the amount by which the company fails to meet what it owes.
Ø The
rules relating to winding up require that the deficiency as regards outside creditors
(tshs, 25,000,000 in the illustration should be identified separately from the
total deficiency as regards the shareholders as well Tshs. 125,000,000 in the
illustration. To meet this requirement is becomes necessary to prepare the
statement of affairs of a company in two compartments as follows:-
Statement
of Affairs as At 1st January 2004
Current
Liabilities 60,000 Assets expected to
realise 35,000
Deficiency 25,000 Deficiency to outsiders 25,000
Share
capital 100,000 Deficiency-shareholders 125,000
Liabilities 60,000 Liabilities 60,000
125,000 125,000
Deficiency
A/C
Ø The
deficiency account will have to commence with the resource the company could
have its own (shall we say for convenience on 1st January 2004 and
explain how the total deficiency of Tshs. 125,000,000 arose. The deficiency
account will account will appear as follows:-
Deficiency
Account as at 1st January 2004
Tshs”000”
Tshs”000”
Company’s
resources on 40,000 anticipated
loss on realizing 165,000
Total
deficiency 125,000
165,000 165,000
Ø Thus
the anticipated loss on realizing the assets happens to be the sole factor that
aggravated the company’s position in this case, and precipitated the deficiency
revealed in the deficiency revealed in the statement of affairs.
Which
date exactly should the reporting of deficiency commence in the deficiency
account?
There
is, however, a serious defect in the deficiency account set out above. The
company winding up rules required that the deficiency account should commence
by commence by reporting what the net resources of the company was on a date at
least three years before the date on which the winding up order was made and
proceed to show the various factors that either improved the position or made
it worse since then, culminating in the reported total deficiency.
Ø The
deficiency account cannot therefore be as at a certain date. Instead it has to
be for a period ending on a certain date and that period has got to be a
minimum of three years, unless the company failed to last three years since it
was incorporated.
Ø But
this defect we will not be learning to remedy until we come to a series of
illustrative examples that follows:
(a) The
resources a company could call its own could, therefore identified as the
difference between the values of all its assets and the mount it owes it owes
both to outsiders and its own shareholders.
Illustrative
Example 2
One
day the winding up order was made on Mabuki ltd its summarised balance sheet
appeared as follows:-
Balance
Sheet as at 1st January 2004
Tshs”000” Tshs”000”
Ordinary
share capital 100,000 Assets 200,000
Share
premium account 30,000 preliminary
expenses 12,000
Profit
prior to incorporation 24,000 Profit
and loss account 2,000
Current
liabilities 60,000
214,000
214,000
The
assets of this company are only expected to realize to Tshs. 35,000,000 as in
illustrative Example 1 one, the statement of affairs will be exactly as in that
illustration. The resources of the company itself on the day of the winding up
order are made up as follow:-
Tshs”000”
Shares
premium account 30,000
Profit
prior to incorporation 24,000
Less:
Preliminary expensive brought forward (12000)
Profit
and loss account debit balance 40,000
Deficiency
Account as at January 2004
Tshs “000” Tshs”000”
Shares
premium account 30,000 anticipated loss on
realizing the assets 165,000
Profit
prior to incorporation Less 24,000
Preliminary
expenses 12000
Profit
and loss account 2,000 (14,000)
40,000
125,000
Total
deficiency 165,000 165,000