ASHABA-AHEBWA MARKMORRISON

markmorison90@gmail.com|amarka90@rocketmail.com
LL.B(Hons) Dip KSL Cert International Humanitarian law-Switz
WINDING UP A COMPANY IN UGANDA
SHARES
In a company with a share capital it is obvious that the company must issue some
shares and the initial presumption of the law is that all the shares so issued confer
equal rights and impose equal liabilities. Normally a shareholders right in a
company will fall under 3 heads.
1.
Payment of dividends;
2.
Refund of Capital on winding up;
3.
Attendance and voting at companys general meetings.
Unless there is indication to the contract all the shares will confer the same rights
under those heads. In practice companies issue shares which confer on the holders
some preference over the others in respect of either payment of dividends or capital
or both. This is the method by which classes of shares are created i.e. by giving
some of the shareholders preference over others.
In practice therefore most companies with classes of shares will have ordinary
shares and preference shares. The preference shares being those that enjoy some
preference with reference to voting rights, refund of capital or payment of
dividends.
There are certain rules that courts use to interpret or construe on shares.
(a)
Basically all shares rank equally and therefore if some shares are to have
any priority over the others, there must be provision to this effect in the regulations
under which these shares were issued. Refer to the case of Birch V. Cropper
(1889) 14 AC 525 here the company was in voluntary winding up. The company
discharged all its liabilities and some money remained for distribution to the
members. The Articles being silent on the issue, the question was on what
principle should the surplus be distributed among the preference and ordinary
shareholders? The ordinary shareholders argued that they were entitled to all the

surplus. Alternatively the division ought to be made according to the capital

subscribed and not the amount paid on the shares. It was held that once the capital
has been returned to the shareholders, they thereafter become equal and therefore
the distribution of the surplus assets should be made equally between the ordinary
and preference shareholders.
(b)
However if the shares are expressly divided into separate classes thereby
rebutting the presumed equality, it is a question of construction in each case what
the rights of each class are. Hence if nothing is expressly said about the rights of
one class in respect of either dividends, return of capital or attendance and voting
at meetings, then that class has the same rights in that respect as the other
shareholders. The fact that a preference is given in respect of any of these matters
does not imply that any right to preference in some other respect is given e.g. a
preference as to dividends will not apply a preference as to capital i.e. the shares
enjoy only such preference as may be expressly conferred upon them.
(c)
If however, any rights in respect of any of these matters are expressly
stated, the statement is presumed to be exhaustive so far as that matter is
concerned. For instance the preference dividend is presumed to be nonparticipating in regard to other dividends. Refer to Re Isle of Thanet Electricity
Supply Co. (1950) Ch. 1951 where Justice Wynn Parry stated the effect of the
authorities as now in force is to establish two principles. First that in construing an
article which deals with the rights to share all profits, that is dividend rights and
rights to shares in the companys property in liquidation, the same principle is
applicable and secondly that principle is that where the articles sets out the rights
attached to a class of shares to participate in profits while the company is a going
concern or to share in the property of a company in liquidation, prima facie the
rights so set out are in each case exhaustive.
(d)
Where a preferential dividend is provided for it is presumed to be
cumulative for instance if no preferential dividend is declared the arrears of
dividend are carried forward and must be paid before any dividend is paid on the
other shares. But these presumption may be rebutted by words tending to show
that the shares are not intended to be cumulative or words indicating that the
preferential dividend is only to be paid out of the profits of each year i.e. if the
company sustains any financial loss during any year, there will be no dividend for
that year. Even then preferential dividends are payable only if and when declared.
Therefore arrears of cumulative dividends are not payable on winding up unless

the dividend has been declared.

indication to the contrary.

Thix presumption could be rebutted by any

WINDING UP
Section 212 of the Companies Act provides that a company may be wound up as
follows
1.
Voluntarily;
2.
Order of the Court;
3.
By supervision of the Court.
The circumstances under which the company may be voluntarily wound up are
outlined in Section 217 of the Companies Act. Here a company may be wound up
a.
When the period fixed for its duration by the articles expires or the event
occurs on the occurrence of which the articles provide that the company is to be
dissolved and thus a company passes a resolution in general meeting that it should
be wound up voluntarily;
b.
If it resolves by special resolution that it should be wound up voluntarily;
c.
If the company resolves by special resolution that it cannot by reason of its
liabilities continue its business and that it be advisable that it be wound up.
Basically the second circumstance is the most important because in practice at least
the first circumstance does not arise and in the 3rd circumstance the creditors
themselves will resolve that the company be wound up.
In any winding up those in need of protection are the creditors and the minority
shareholders. Where it is proposed to wind up a company voluntarily Section 276
of the Companies Act requires the directors to make a declaration to the effect that
they have made a full inquiry in to the affairs of the company and having so done
have found the company will be able to pay its debts in full within such period not
exceeding one year after the commencement of the winding up as may be specified
in the declaration. Such declaration suffices as a guarantee for the repayment of
the creditors. If the directors are unable to make the declaration, then the creditors
will take charge or the winding up proceedings in which case they may appoint a
liquidator.

WINDING UP BY THE COURT

Winding up after an order to that effect by the court is the most common method of
winding up companies.
Section 218 of the Companies Act gives the High Court jurisdiction to wind up any
company registered in Kenya. The circumstances under which a company may be
wound up by a court order are spelt out in Section 219 of the Companies Act.
These cover situations in which
1.
the company has by special resolution resolved that it be wound up by
court;
2.
Where default is made by the company in delivering to the registrar the
statutory report or on holding the statutory meeting;
3.
When the company does not commence business within one year of
incorporation or suspends its business for more than one year;
4.
Where the number of members is reduced in the case of a private company
below 2 or in the case of a public company below 7;
5.
Where the company is unable to pay its debts;
6.
Where the court is of the opinion that it is just and equitable to wind up the
company;
7.
In the case of a company registered outside Kenya and carrying on business,
the court will order the company to be wound up if winding up proceedings have
been instituted against the company in the country where it is incorporated or in
any other country where it has established business.
Under Section 221 of the Companies Act an Application for winding up by an
order of the court may be presented either by a creditor or a contributory. However
a contributory cannot make the application unless his name has appeared on the
register of members at least 6 months before the date of the application and in any
event he can only petition where the number of members has fallen below the
statutory minimum.
In practice the creditors will petition for a compulsory winding up where the
company is unable to pay its debts. The companys inability to pay its debts under
Section 220 is deemed in the following circumstances

1.
If a creditor to whom the company is indebted in a sum exceeding 1000
shillings demands payment from the company and 3 weeks elapse before the
company has paid that sum or secured it to the reasonable satisfaction of a creditor;
2.
If execution issued on a judgment against the company is returned
unsatisfied;
3.

If it is proved by any other method that a company is unable to pay its debts.

Before a creditor can petition it must be shown as a preliminary issue that he is in

fact a creditor or a company creditor. This is a condition precedent to petitioning
and the insolvency of the company is a condition precedent to a winding up order.
PETITION BY A CONTRIBUTOR
Section 221 of the Companies Act speaks not of members but of contributories.
Section 214 defines the term contributory as follows every person liable to
contribute to the assets of the company in the event of its being wound up. The
persons falling under this category are defined in section 213 of the Companies Act
and include both present and past members. A past member however, is not liable
to contribute if he ceased to be a member one year or more before the
commencement of the winding up and he is not liable to contribute for any debt or
liability contracted after he ceased to be a member. Even then he is not liable to
contribute unless it appears to the court that the existing members are unable to
satisfy the contributions required.
The most important limitation on liability of contributories is found in Section 213
(1) (d) of the Companies Act. Under that clause no contribution shall be required
from any member exceeding the amount unpaid on their shares in respect of which
he is liable as a present or past member.
The petitioning contributor must establish that on winding up there will be prima
facie a surplus for distribution among the members i.e. he must establish a tangible
interest. If therefore the companys affairs have been so managed that there would
be no assets available for distribution among the members then a shareholder has
no locus standi and will not be allowed to petition for winding up.

Another possible limitation is that stated under Section 22(2) of the Act. Here the
court has a discretion not to grant the winding up order where it is of the opinion
that an alternative remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of pursuing that
other remedy.
WINDING UP ON JUST AND EQUITABLE GROUNDS
It is now established that the just and equitable clause in Section 219 of the Act
confers upon the court an independent ground of jurisdiction to make an order for
the compulsory winding up of the company. The courts have exercised their
powers under this clause in the following circumstances:
1.
In order to bring to an end a cause of conduct by the majority of the
members which constitutes operation on the minority;
2.
The courts have also exercised this power where the substratum of the
company has disappeared;
3.
The courts have applied the partnership analogy to the small private
companies particularly those of a kind which makes an analogy with partnerships
appropriate.
In case of domestic private companies, there is normally an understanding between
the members that if not all of them, then the majority of them will participate in the
management of the companys affairs. Such members impose mutual trust and
confidence in one another just as in the case of partnerships.
Also usual in such companies is the restriction of the transfer of a members shares
without the consent of all the other members.
If any of these principles were violated in a partnership, the courts will readily
order the partnership to be dissolved. In the case of a small private company, the
courts have also held that such companies are run on the same principles as
partnerships and therefore if the company was run on such principles it is just and
equitable to wind it up where a partnership would have been dissolved in similar
circumstances.
RE YENIDGE TOBACCO CO. LTD [1916] 2 Ch. 426

Here W and R who traded separately as Tobacco and Cigarette manufacturers

agreed to amalgamate their business. In order to do so, they formed a private
company in which they were the only shareholders and the only directors. Under
the Articles both W and R had equal voting powers. Differences arose between
them resulting in a complete deadlock in the management of the company. The
issue was whether it was just and equitable to wind up the company. Lord Justice
Warrington stated as follows
It is true that these two people are carrying on business by means of
the machinery of the limited company but in substance they are partners. The
litigation in substance is an action for dissolution of the partnership and we should
be unduly bound by matters of form if we treated the relations between them as
other than that of partners or the litigation as other than an action brought by one
for the dissolution of the partnership against the other.
The Model Retreading Co. [1962] E.A. 57
Here the petitioner who was a shareholder in a small private company petitioned
for winding up mainly on the ground that this was just and equitable. The
Affidavits sworn by the petitioner and his co-shareholders disclosed that there had
been bitter and unresolved quarrelling between the parties going to the root of the
companies business but none of these stated that the companys affairs had reached
a deadlock. It was however conceded by all the parties that as a result of the
quarrelling the petitioner had been prevented from participating in the management
of the companys affairs.
The issue was it just and equitable to wind up the company? Sir Ralph Winndham
C.J. said as follows:
in these circumstances the principle which must be applied is that laid
down in re-Yenidge Tobacco namely that in the case of a small private company
which is in fact more in the nature of a partnership a winding up on the just and
equitable clause will be ordered in such circumstances as those in which an order
for dissolution of the partnership would be made. In that case the shareholders
were two and they had quarrelled irretrievably. In the present case, if this were a
partnership an order for its dissolution ought to be made at the instance of one of
the quarrelling partners. The material point is not which party is in the right but
the very existence of the quarrel which has made it impossible for the company to

be ran in the manner in which it was designed to be ran or for the parties disputes
to be resolved in any other way than by winding up.
Mitha Mohamed V. Mitha Ibrahim [1967] EA 575
4.
Finally the just and equitable clause will also be applied where there is
justifiable loss of confidence in the manner in which the companys affairs are
being conducted Continuous Cause of Conduct
CONSEQUENCES OF A WINDING UP ORDER
Once a company goes into liquidation, all that remains to be done is to collect the
companys assets, pay its debts and distribute the balance to the members.
Under Section 224 of the Companies Act, in a winding up by the Court, any
dealing with the companys property after the commencement of the winding up is
void except with the permission of the court.
The purpose is to freeze the corporate business in order to ensure that the
companys assets are not wasted. Once the company has gone into liquidation, the
directors become functus officio.
Thereafter a liquidator is appointed whose duty is to collect the assets, pay the
debts and distribute the surplus if any. In so doing, he must always have regard to
the interests of the creditors.
The powers of the liquidator are set out in Section 241 of the companies Act.