Winding Up and Administration of Companies

A company does not die. It stays on the register until the law ends its life, and the law ends it by winding up (also called liquidation). Winding up turns the company’s assets into cash, pays its debts in a fixed order, shares anything left among the members, and then dissolves the company. A company in difficulty may instead be placed in administration, which tries to rescue it.

Examiners ask who may petition for winding up almost every year, and they ask for the consequences, the grounds and the order of payment.

This topic covers the three modes of winding up, the grounds for a court winding up, who may petition, voluntary winding up (members’ and creditors’), winding up under the supervision of the court, the order of priority of payments, the consequences for shareholders, and administration. The tests of insolvency, receivership and charges are in the next topic.

The modes of winding up

Winding up is the legal way of terminating the life of a company, or dissolving the association. Section 564 of CAMA says it may be:

1. by the Federal High Court (compulsory winding up);
2. voluntarily by the company; or
3. subject to the supervision of the court.

A past multiple-choice question asks which of four forms is not a mode of winding up. Creditors’ winding up, members’ winding up and winding up subject to supervision of the court are all real, and “winding up at the complaint of the liquidator” is not.

Winding up by the Federal High Court

The Federal High Court with jurisdiction over the area where the company’s registered office is may be asked to wind up the company, under the court’s companies winding-up rules.

Grounds (section 571)

Who may petition (section 573(1))

1. the company or a director, following a special resolution;
2. a creditor, including a contingent or prospective creditor;
3. a contributory, in the case of a company limited by guarantee;
4. a trustee in bankruptcy to, or a personal representative of, a creditor or contributory;
5. the Corporate Affairs Commission under section 366, if, having considered an inspector’s report, it appears expedient in the public interest that the company be wound up;
6. a receiver, if authorised by the instrument of appointment; or
7. all or any of these parties, jointly or separately.

This list is tested constantly. May 2019 (TELETEE Plc), May 2023 (four persons, public company) and November 2023 (four categories) all asked it. The examiners’ May 2019 list also included the Official Receiver, who is the Deputy Registrar of the Federal High Court so designated by the Chief Judge, and a receiver authorised by the debenture deed. The May 2023 list included an equity shareholder when membership has fallen below two.

Use the section 573 list as the base and add these if the question has a place for more.

Voluntary winding up

When a company may wind up voluntarily (section 620)

1. When the period fixed for its duration by the articles expires, or the event occurs on which the articles say it is to be dissolved. The company passes an ordinary resolution to wind up voluntarily; or
2. when the company resolves by special resolution to wind up voluntarily.

Members’ voluntary winding up

This occurs where the company has made a declaration of solvency and delivered it to the CAC. Under section 625, the directors, or a majority of them, must make a statutory declaration at least five weeks before the winding-up resolution is passed.

It states that they have made full inquiry into the company’s affairs and that the company will be able to pay its debts in full within the period stated in the declaration, which must be not later than 12 months. A general meeting is then called to pass the resolution.

Creditors’ voluntary winding up

This occurs where no declaration of solvency has been made and filed with the CAC (section 625(4)). The creditors have a real say, since the company is probably unable to pay its debts. Separate meetings of creditors and of members are held to resolve to wind up, and then an Extraordinary General Meeting is called to pass the resolution under section 457 (see also sections 635 to 641).

The two compared

Winding up subject to the supervision of the court

Where a company is being wound up voluntarily following a special resolution, the court may, on petition, order that the voluntary winding up continue under its supervision (section 649). The order allows creditors, contributories or others to apply to the court, on the terms the court thinks fit.

A petition for winding up subject to the supervision of the court is treated as a petition for compulsory winding up over which the court has supervisory jurisdiction (section 650).

Priority of payments in a winding up

The syllabus sets out the order as follows.

1. Secured creditors take priority over all other claims, including preferential payments, other debts and the expenses of the winding up, so far as their security extends.
2. The expenses of the winding up.
3. Preferential debts: local rates, charges and assessed taxes; deductions made from employees’ pay; contributions under the Pension Reform Act; and contributions and obligations under the Employees’ Compensation Act. They rank equally among themselves, are paid in full unless the assets are insufficient, in which case they abate in equal proportions.
4. If the assets for general creditors are insufficient, the preferential debts have priority over the claims of holders of debentures under a floating charge and are paid out of the property subject to that charge.
5. General (unsecured) creditors.
6. Equity (ordinary) shareholders rank last as residual claimants (section 657).

Consequences of winding up for shareholders

November 2015 asked for two (4 marks). The examiners’ answer lists four:

• a new statutory liability as contributories arises, as the shareholders’ initial liabilities are terminated on winding up;
• a transfer of shares or alteration in the status of a shareholder after the winding up is void;
• their investment in the shares is lost, and they get only the residue after the liabilities are settled; and
• they can no longer exercise rights such as appointing directors or voting on resolutions, because they can no longer direct the management.

Administration of companies

Administration is a rescue procedure. It is different from winding up, which ends the company.

How an administrator is appointed (section 443)

The administrator’s functions (section 444(1))

The administrator may do all things necessary for the management of the affairs, business and property of the company, and performs his functions with the objective of:

1. rescuing the company, or the whole or part of its undertaking, as a going concern;
2. achieving a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration; or
3. realising property so as to make a distribution to one or more secured or preferential creditors.

Effect of administration

An administration order dismisses a pending petition for winding up. If the administrator is appointed on the application of a liquidator, the winding-up process is suspended while the company is in administration.

Working through the rules

Is it members’ or creditors’ voluntary?

The order of payment in figures

A company is wound up. Its assets realise ₦100m, of which ₦30m comes from a factory that is subject to a fixed charge for ₦30m. The winding-up expenses are ₦10m, preferential debts ₦25m, a floating charge debenture holder is owed ₦20m, and general creditors are owed ₦60m.

The general creditors receive 25 kobo in the naira (₦15m out of ₦60m), and the shareholders nothing. If the preferential debts were ₦40m but the assets for them only ₦20m, they would abate in equal proportions.

The petition periods

A public company’s statutory meeting was due on 1 June and has not been held. A shareholder may petition on that ground only after 14 days from the last day on which it ought to have been held, that is, from 15 June.

Winding up and administration compared

Worked problems

Problem 1: who may petition

1. The rule. Section 573(1) lists the persons.
2. The list. The company, or a director, following a special resolution; a creditor, including a contingent or prospective creditor; a trustee in bankruptcy; a personal representative of a creditor or contributory; the CAC, with a public interest report; and a receiver authorised by the instrument. The examiners also accepted the Official Receiver.
3. The ground. Inability to pay debts is a ground under section 571(d).

Problem 2: the solvent company that wants to close

1. The route. A members’ voluntary winding up, because the company is solvent.
2. The steps. The directors make a statutory declaration, at least five weeks before the resolution, that they have inquired into the company’s affairs and the company can pay its debts in full within a stated period of not more than 12 months. They file it with the CAC. A general meeting then passes a special resolution to wind up voluntarily (section 620).

Problem 3: unpaid employees and a floating charge

1. The rule. If the assets for general creditors are insufficient, preferential debts have priority over the claims of holders of debentures under a floating charge, and are paid out of the property subject to the charge.
2. The result. The preferential debts of ₦15m are paid first, after the winding-up expenses, leaving ₦25m for the floating charge holder, who is short by ₦15m.
3. Advice. The debenture holder ranks after the preferential creditors. If it had a fixed charge instead, it would have been paid first.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Giving two modes of winding up instead of three. The third is winding up subject to the supervision of the court.
• Saying any member can petition. A contributory can do so for a guarantee company, and a shareholder has the specific grounds above.
• Forgetting that the CAC can petition, and only after an inspector’s report and in the public interest.
• Mixing the 5-week declaration with the 12-month period.
• Saying that creditors rank after shareholders. Shareholders rank last.
• Putting preferential creditors ahead of a fixed charge holder. A secured creditor is paid first from his security.
• Confusing administration with winding up. Administration aims to rescue.

Quick revision

• Three modes (s.564): court, voluntary, supervised. Six grounds (s.571). Petitioners (s.573).
• Voluntary: ordinary resolution (duration expires) or special resolution (s.620). Members’: declaration of solvency 5 weeks before, 12 months. Creditors’: no declaration.
• Priority: secured, expenses, preferential (equally), floating charge, general creditors, shareholders last (s.657).
• Administrator: court order (s.449), floating charge holder or company or directors (s.459). Objectives (s.444(1)). An administration order dismisses a winding-up petition.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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