WINDING UP

Winding up, also known as liquidation, is the process by which a company is dissolved and its
assets are used to pay off outstanding debts. It's a formal legal procedure that brings an end to a
company's existence.

In BTI 2014 LLC v Sequana SA and others [2022 UKSC 25] (“Sequana”), Court held that a
legal entity could be engaged in winding up where the company is “insolvent or bordering on
insolvency.”

A company is insolvent if it is unable to pay its debts, largely upon satisfying the
requirements under sections 2 and 92(1) (a) & (2) of the Insolvency Act Cap. 108;25
and regulations 85(1) & 2 and 86 of the Insolvency Regulations S.I No. 36 of
2013.

It is important to note that when a legal entity (a company, a partnership and other forms of legal
entities) are in a position of insolvency or nearing insolvency, one can petition for that entity to
be declared bankruptcy.
In Ambey Flour Mills Pvt. Ltd. vs Shri Vimal Chand Jain [1991] 70
COMPCAS561(DELHI), 40 (1990) DLT78, We may say at the outset that we are of the
considered view the no prima facie case whatsoever was made out by the respondent for the
admission of the petition for winding up the appellant-company as it was not at all shown by the
respondent that the appellant-company was unable to pay any debt owing form it as
contemplated by section 433(e) of the Act. It is settled law that the machinery of winding up is
not to be allowed to be utilized simply as a means for realizing debts DUE from a company. A
winding up petition is not the legitimate means of seeking to enforce payment of the debt which
is bona fide disputed by the company.

In Medipharm Publication (Nig) Ltd (1971) ULR 42, A petition was lodged asking court to
wind up the company. It was shown that the company was destitute. Having a normal capital of
British pound 100. Which had since been expended. It had no assets and could not meet its
routine
obligations. The winding up order was granted.

Insolvency is a financial state where a person or business is unable to meet their debt obligations
when they are due. Bankruptcy is a legal process or court order that can be initiated when an
individual or business is insolvent. Essentially, insolvency is the condition, while bankruptcy is a
potential solution or outcome.

In Re: Maria K Mutesi Bankruptcy Petition No 5 of 2011, it was held that “The filing of a
bankruptcy petition is an act of bankruptcy under section 2 (1) (f) of the Bankruptcy Act cap 67
Laws of Uganda. This section provides that the act of a court declaration of inability to pay his or
her debts or the presentation of a bankruptcy petition as in this case constitutes an act of
bankruptcy.

TYPES OF WINDING UP.

1. Voluntary
2. Compulsory:

1. VOLUNTARY WINDING UP.

Voluntary winding up. Voluntary winding up can be initiated by a resolution of the members
(shareholders) if the company is solvent or by the creditors if it is insolvent.

Section 1 of the Companies Act, provides that "members voluntary winding up" has the
meaning assigned to it by the law that governs insolvency in Uganda.

Section 266 (1) of the Companies Act Cap 106, provides for Voluntary winding up of
company. It states that a company may by special resolution resolve to be wound up voluntarily.

Sect 266 (2) provides that “a voluntary winding up of a company shall be taken to commence
at the time of the passing of the resolution under subsection (1).”

In Neptune Assurance Co. Ltd Vs Union of India (1973) SCR 940, court held that the
expression voluntary winding up means a winding up by a special resolution of a company to
that effect.

N.B when a company passes a winding up resolution, the company must within 14 days after
passing that resolution, notify the public in the gazette or any other media of wide circulation,
and thereafter register the winding up resolution with the registrar of companies and send a copy
of the resolution to the official receiver within 7 days from the date of passing the resolution.
When the responsible officer or the liquidator fails to gazette or publish the notice of winding up
in the media of wide circulation within 14 days and registering the notice with the company
registry and giving a copy to the official receiver within 7 days, will be held liable for defaulting
the legal process.

Sec 267 of the Companies Act provides for a Notice of resolution for voluntary winding up.

Sec 267 (1) provides that “Where a company passes a resolution for voluntary winding up, it
shall, within fourteen days after passing the resolution, give notice of the resolution in the
Gazette or any other media of wide circulation as the registrar may determine by notice in the
Gazette in the official language.

Sec 267 (2), The resolution for voluntary winding up shall be registered with the Registrar and a
copy sent to the official receiver within seven days from the date of passing the resolution.3382
Cap. 106.) Companies Act. In Bland and another v Keegan EWCA Civ 934, the Court of
Appeal concluded that the register is prima facie evidence of the members and the validity of
resolutions passed by members unless rectified by the court.
Facts of the case.
the Court of Appeal addressed the conclusiveness of a company's register of members, even
when it's been fraudulently altered. The case involved a situation where a forged stock transfer
form led to a person being mistakenly removed from the register of members, and a shareholder
resolution was then passed by the person shown on the register. The court held that, despite the
fraud, the register of members is generally conclusive as to the identity of the company's
members, and the liquidators could rely on the register unless it was rectified by a court order.

Sec 267 (3), Where default is made in complying with this section, the company and every
officer of the company who is in default shall be liable to a default fine and for the purposes of
this subsection the liquidator of the company shall be taken to be an officer of the company.

In African Textile Mill Ltd in Liquidation v Co-operative Bank Ltd in Liquidation HCT-
00-CC-CI-20 OF 2005, a secured creditor like CBL is entitled to enforce its mortgage rights,
even during liquidation. The court also stated that the provisions for staying actions against
companies in compulsory winding up do not apply to voluntary winding up, though the court has
discretion to stay proceedings.

In the Matter of the Financial Institutions Act and in the Matter of an application For
Leave for Voluntary Winding up by Imperial Investments Finance Ltd, Hct-00-Cc-Ma-
0013-2007, Court stated that, it is entirely novel to require a company in voluntary liquidation to
seek leave of court to voluntarily wind up its business. The Act does not specify what
considerations this court should take into account before it can grant leave for a financial
institution to voluntarily wind up its affairs. It has been left to the court to determine what the
intention of the legislature.

Facts of the case

The evidence contained in the affidavits deponed by Mr. Dan Lutwama in support of the
application show that on 21stFebruary 2007, the applicant’s directors made a statutory declaration
of solvency and registered it with the Registrar of Companies as required by section 281(1) and
(2) of the Companies Act. (See Annexture “D” to the Supplementary affidavit in support of the
application). The company passed a special resolution to wind up voluntarily at an Extraordinary
General meeting held on 21stFebruary 2007 and appointed Mr. Lubwama as liquidator (see
Annexture “E” to the same affidavit).

Notice of resolution to wind up voluntarily was given in the Gazette, Vol. C No. 12 of 9thMarch
2007 (annexture “F”). However, what appeared in the Monitor Newspaper of January 24, 2007,
(Annextures “A” and “B”) is not a notice of voluntary winding up.

The two Notices in the Daily Monitor notified the depositors of the Applicant that the Applicant
Company “intends to pass a resolution to voluntarily wind up its activities”; and the Creditors of
the Applicant that “a meeting of all the creditors…will take place at the Company premises” on
Wednesday 21stFeb 2007, and listed ‘Notice winding up of the Company’ as the 3rditem on the
agenda. In addition to this, the Notices were advertised on 24thJanuary 2007, long before the
Resolution for Voluntary winding up was passed by the Applicant Company on 21stFebruary
2007.

Court held that “This Notice does not therefore satisfy the provisions of Section 277(1) of the
Companies Act which require that the Company shall give Notice of the Winding up resolution
within 14 days after the passing of the resolution.

What are the consequences of none-compliance with Section 267 of the Companies Act?

Held that, it is important, especially in matters of this nature that the applicants do comply with
the law, as laid down in an Act of Parliament. It may be contended that no one will be prejudiced
if this infraction is overlooked. I suppose we would never know if anyone has suffered prejudice
precisely because of overlooking this infraction. This is so especially given that these
proceedings are essentially ex parte. I would therefore decline at this stage to grant leave sought
but would provide the applicant with an opportunity to comply with the requirements of the law.

The applicant is given 30 days from the date of this ruling to advertise notice of a voluntary
winding up resolution that was passed by the company in a daily local newspaper, and thereafter
the applicant may file further papers indicating compliance thereof and move this court to issue
the leave sought.

Sect 268 of the companies Act Cap 106 provides that once a company is voluntarily wound
up, there are the following effects or consequences.

1. Cease to carry on business, except when required by the beneficial winding up of the
company (creditors and potentially shareholders.)
2. The company loses its powers and corporate status.

Sect 268 Effect of voluntary winding up on business and status of company

Sec 268 (1) A company shall, from the commencement of voluntary winding up, cease to carry
on business, except so far as may be required for the beneficial winding up of the company.

Sec 268 (2) Subject to subsection (1), the corporate status and powers of the company shall,
notwithstanding anything to the contrary in its articles, continue until it is dissolved.

DECLARATION OF SOLVENCY

Sec 269. Statutory declaration of solvency in case of proposal for voluntary winding up

Sect 269 (1) Where it is proposed to wind up a company voluntarily, the directors of the
company or, in the case of a company having more than two directors, the majority of the
directors, may, at a meeting of the directors make a declaration in the prescribed form to the
effect that they have made a full inquiry into the affairs of the company and that, having done so,
they have formed the opinion that the company will be able to pay its debts in full within a
period not exceeding twelve months from the commencement of the liquidation as may be
specified in the declaration.

Sec 269 (2) A declaration made under subsection (1) shall have no effect for the purposes of this
Act unless-

(a) it is made within thirty days before the date of the passing of the resolution for winding up
the company and is delivered to the Registrar with a copy to the official receiver for registration
before that date; and

(b) it includes a statement of the company's assets and liabilities as at the latest practicable date
before the making of the declaration.

Sec 269 (3), A director of a company who makes a declaration under this section, without
reasonable grounds for the opinion that the company will be able to pay its debts in full within
the period specified in the declaration, commits an offence and is liable, on conviction, to a fine
not exceeding twenty-four currency points or to imprisonment for a term not exceeding one year,
or both.

Sec 269 (4) Where the company is wound up in accordance with a resolution passed within the
period of thirty days after the making of the declaration, but its debts are not paid or provided for
in full within the period stated in the declaration, it shall be presumed until the contrary is shown
that the director did not have reasonable grounds for his or her opinion.
See the case of Re: Maria K Mutesi Bankruptcy Petition No 5 of 2011

2. COMPULSORY WINDING UP.

Compulsory winding up is typically initiated by a court order, often in response to a company's

inability to pay its debts.

Section 2(1) & (2) of the Insolvency Act No. 14 of 2011 provides that: “(1) Subject to
subsection (2) and unless the contrary is proved, a debtor is presumed to be unable to pay the
debtor’s debts if-

a) the debtor has failed to comply with a statutory demand;

b) the execution issued against the debtor in respect of a judgment debt has been returned
unsatisfied in whole or in part; or

c) all or substantially all the property of the debtor is in possession or control of a receiver or
some other person enforcing a charge over
that property.

(2) On a petition to the court for the liquidation of a company or bankruptcy order, evidence of
failure to comply with a statutory demand by the creditor, shall not be admissible as evidence of
inability to pay debts unless the application is made within thirty working days after the last date
for compliance with the demand.”

Section 92 of the Act provides that: “(1) Subject to subsection (2), the court may appoint a
liquidator on the application of- a) the company;
(2) The court may make an order under subsection (1), if it is satisfied that the company is
unable to pay its debts within the meaning of Section 2.

Regulation 85 (2) of the Insolvency Regulations S.I No. 36 of 2013 provides that: “A petition
to liquidate a company may be presented to the court where the company-

a) has been served with a statutory demand and is unable to comply with the demand;

b) is unable to pay its debts;

c) has agreed to make a settlement with its creditors or entered into administration.”

In Cornhill Insurance vs Improvement Services [1986] 1 W.L.R 117, Harman J. relied on

the observation of Sir George Jessel M.R in re Globe New Patent Iron and Steel Co. (1875)
L.R. 20 Eq.337, 338, where he ruled that the company could be wound up whenever it was
proved to the satisfaction of the court that the company was unable to pay its debts. Upon the
facts there he had evidence that the company had not paid its debts and therefore was satisfied
that it was unable so to do. He ignored any question of statutory demand rightly in my respectful
view and said that that is merely another way of establishing the case.

In Premier Commodities (U) Ltd Vs. Kiir for Services & Construction Co. Limited HCCS
No. 0126 of 2019 at page 5, Justice Mubiru stated that “The Petitioner other than stating that she
failed to pay the taxes owed to URA, UNBS, the Landlord and salaries; she neither proves the
she failed to pay nor adduces any evidence in court to show these liabilities and failure to pay the
same. This Court cannot also ignore the necessity of a statutory demand to first be issued to the
Petitioner; and or any other evidence that the company had not
paid its debts; and therefore, be satisfied that it was unable to do so.

In the Matter of a Petition for Winding up Fravolt Technical Services Limited (In
Liquidation) by Shareholders, Company Cause No. 0003 Of 2023, Lady Justice Harriet Grace
Magala stated that “I am therefore of the view that the Parties cannot determined the liability
through a winding up petition. This calls for the need for both parties to adduce evidence
to fully determine the matter of controversy between them. Having established that a statutory
demand was never served upon the Petitioner, that the Petitioner has not adduced any evidence to
prove her inability to pay the debts and the same debts have not been proved by the Petitioner;
this Court is certain that the Petitioner has not satisfied the grounds to wind up the
company.

In Medipharm Publication (Nig) Ltd (1971) ULR 42, A petition was lodged asking court to
wind up the company. It was shown that the company was destitute. Having a normal capital of
British pound 100. Which had since been expended. It had no assets and could not meet its
routine obligations. The winding up order was granted.

CONSQUENCES OF WINDING UP A COMPANY, PARTNERSHIP AND OTHER

LEGAL ENTITIES.

1. Dissolution: Winding up essentially puts an end to the legal existence of the entity.

2. Asset Realization: The entity's assets are converted into cash.

3. Debt Settlement: The proceeds from asset sales are used to pay off creditors and other
debts.

4. Distribution of Surplus: Any remaining assets after debt settlement are distributed to the
shareholders or partners according to their entitlement.