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Sri Lankan Law Forum » Debt & Bankruptcy Law Forum » How to terminate an existence of a company

How to terminate an existence of a company

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1 How to terminate an existence of a company on Mon Oct 30, 2017 1:15 pm

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(a) Cancellation of registration – in cases where the grant of registration itself was unlawful:

(b) Removal of name – of a defunct company by the Registrar in terms of section 373 of the Companies Act No: 17 of 1982 (the ‘Act’):

(c) Order of Court – consequent to compromise or arrangement under section 261 of the Act:

(d) Winding up

Winding up may be either:
(i) compulsory, or (ii) under supervision of Court, or (iii) voluntary.

A voluntary winding up may be either,
(a) a members’ voluntary winding up if the company is solvent, or
(b) a creditors’ winding up if the company is insolvent.

Compulsory Winding Up

In terms of section 254 of the Act a petition may be presented for winding up in the relevant District Court. Section 255 of the Act lists the circumstances in which a company may be wound up by Court, viz.,

(i) the company has by special resolution resolved that the company be wound up,
(ii) default is made in delivering the statutory report to the Registrar or in holding the statutory meeting,
(iii) the company does not commence its business within a year from its incorporation or suspends its business for one year,
(iv) the number of members is reduced to, in the case of a private company below two, or in the case of a public company below seven,
(v) the company is unable to pay its debts – section 256 sets out the circumstances in which a company will be deemed to be unable to pay its debts,
(vi) the Court is of opinion that it is just and equitable that the company should be wound up – if the main object of the company has either been completely achieved or is impossible to achieve or is fraudulent or if the company is only a ‘bubble’ company or if there is a deadlock of such a nature that no remedy is obtainable etc.

Section 256(a) provides that a company shall be deemed to be unable to pay its debts where a creditor to whom the company is indebted in a sum exceeding Rs.500.00 then due, has demanded from the company the payment for same and the company has for three weeks neglected to make payment or to secure or compound for it to the reasonable satisfaction of the creditor.

Section 257 of the Act provides that an application for winding up to Court shall be by petition. The procedure is still governed by the Companies Winding up Rules 1939, made under the Companies Ordinance of 1938 which though repealed by the Act, has saved the application of the Rules by section 450.

Section 257(c) provides that ” the Court shall not give an hearing to a winding up Petition presented by a creditor………………..until such security for cost has been given as the Court thinks reasonable………….”

Voluntary winding up

A voluntary winding up is deemed to commence at the time of passing of the resolution for a voluntary winding up. Vide Section 310.

A company may be voluntarily wound up when
(i) If the articles provide for the dissolving of the company after a specified period or on occurrence of a specified event, and such period has lapsed or such event has occurred and the company has resolved in general meeting to wind up the company,
(ii) If the company resolves by a special resolution that the company be wound up voluntarily,
(iii) If the company cannot pay its debts and resolves by extra ordinary resolution that the company be wound up.(section 308)

Notice of winding up resolution must be given in the Gazette within 14 days of passing of the resolution (Section 309).

Voluntary winding up may be in the form of:
(i) members voluntary winding up and
(ii) a creditors voluntary winding up.

Members voluntary winding up
A voluntary winding up becomes a members voluntary winding up when a declaration of solvency is made, and a creditors voluntary winding up when such a declaration is not made. (Section 313(3))

What is a declaration of solvency?
A declaration of solvency is where a declaration is made by the directors or a majority of them at a meeting, affirming to the fact that the directors having made a full inquiry into the affairs of the company are of the opinion that the company will be able to pay its debts in full within a period of 12 months from the commencement of the winding up. (Section 3131

How can one ascertain whether it is a members voluntary winding up or a creditors voluntary winding up?

“The test is not whether the company is solvent or not but whether the declaration of solvency has been made before the general meeting passing the resolution for winding up”.
Vide- Palmer on Company Law, 23rd edition, at page 1211

The outline procedure in a members voluntary winding up
(i) Statutory declaration of solvency is made and filed with the Registrar
(ii) Notices are issued by the Board of directors of an extraordinary general meeting to pass a winding up resolution
(iii) The meeting passes resolution to
(a) to wind up
(b) to appoint a liquidator
When such resolutions are passed the company ceases to carry on business except for purposes of winding up.
(iv) Such resolution is filed with the Registrar and also Gazetted within 14 days.
(v) Liquidator assumes control
(vi) As soon as the winding up is complete, the liquidator calls a final meeting of the company by one month’s notice in the gazette and submits his final accounts (showing the conduct of the winding up and disposal of property)

Creditors voluntary winding up
Where a company cannot make a ‘declaration of solvency’ it would be a ‘voluntary winding up by the creditors’.

In a voluntary winding up by the creditors, the directors must summon a meeting of the creditors to be held on the day or the day after the meeting of the members at which the winding up resolution is to be passed. The notices of the creditors meeting must be advertised in the Gazette and at least two newspapers circulating in the district. At the meeting of members, directors must preside, and a statement disclosing fully the company’s affairs, the list of creditors and their claims must be laid before the meeting. (Section 323)

Appointment of a liquidator
At the two meetings i.e. the members and creditors meetings, the members and the creditors may appoint their own liquidator. If the members and creditors appoint two different persons, the creditors nominee will be the liquidator. (Section 324)

Committee of Inspection
At the creditors meeting, the creditors may appoint a committee of inspection of not more then 5 persons. The members may also appoint 5 persons at their meeting. The creditors are entitled to object to such appointments, in which case such persons may not act on the committee unless sanctioned by court. The court has also the power to appoint others. (Section 325)

The outline procedure in a creditors voluntary winding up
(i) Notices are issued by the Board of directors simultaneously for
(a) an extraordinary general meeting of the company to pass a resolution for winding up the company
(b) a meeting of creditors to be held on the same day as the above meeting
(ii) Resolution to wind up is passed at the company
meeting. The meeting may nominate the liquidator and persons to be members of the Committee of inspection.
(iii) ‘Directors Statement of Affairs’ and the ‘list of creditors’ together with their respective claims are received at the creditors meeting. The liquidator and members of the Committee of inspection are nominated.
(iv) Liquidator is appointed and Committee of inspection appointed subject to court orders.

Irrespective of whether it be a voluntary winding up by members or a voluntary winding up by creditors the liquidator, a contributory or a creditor can apply to court to:
(a) determine any question arising in the winding up
(b) exercise on any matter the powers the court has under a compulsory winding up by court (Section 337)

Under Section 339 a company shall not bar the right of any creditor or contributory to have the company wound up by the court.

Winding up subject to supervision of Court
When a company has passed a resolution for voluntary wining up, the court may order that the voluntary winding up shall continue subject to such supervision of the court, and with such liberty for creditors, contributor’s or others to apply to the court and generally on such terms and conditions as the court think just (Section 340).

Generally supervision orders are rare and of little importance because in a voluntary winding up if creditors and contributor’s are dissatisfied they can
(a) Petition for a compulsory winding up (section 339) or
(b) by the powers granted by section 337 they can apply to court to determine questions and exercise powers which the court could exercise in a compulsory winding up. The main advantage of the supervision order is that no proceeding can be commenced or continued against the company without leave of court. The court has under section 259 the power to stay proceedings against the company and under section 264 actions are stayed
when the supervision order is made.

Effect of a Supervision Order
The liquidator is allowed to wind up the company as in a voluntary winding up, subject only to any restrictions imposed by the court.

Generally the liquidator can exercise all the powers of the liquidator in a members voluntary winding up, but in those cases in which he requires sanction of an extraordinary resolution of the company, he requires the sanction of the court Same would apply in the case of creditors voluntary winding up, where the sanction of court is required where the liquidator requires the sanction of the meeting of the creditors or Committee of inspection.

Winding up Rules 1939
Rule 3 – every application to Court other than the Petition shall be made by way of Motion
Rule 5 – Service of notices summons …….through the Fiscal
Rule 6- Every Petition to wind up shall be in accordance to Form 1 and 2
Rule 7 – Every Petition shall be advertised 7 days before the hearing in the Gazette and at least one English newspaper.
The advertisement shall state the date the Petition was presented and the name and address of the Petitioner or his proctor and shall contain a note stating that any person who intends to appear on the hearing of the Petition, either to oppose or support must send notice of intention to the petitioner or his proctor within the time and manner prescribed in Rule 13.
If Petitioner contravenes Sub Section (1) The Petition shall be removed from the roll of court.
(Rule 13 – Every such person shall sent his notice of intention to the Petitioner or his proctor ………. at least a day previous to the date of hearing of the Petition. The notice shall be in Form 9. A person who has failed to comply with this rule shall not. without special leave of Court, be allowed to appear on the hearing of the Petition.
Rule 9- Every Petition for winding up by court …..shall be verified by an affidavit…….. ..and shall be sworn after and filed within 4 days after the Petition is presented and such affidavit shall be sufficient prima facie evidence of the statement of the Petition.
Provisional Liquidator
Rule 11 – After the presentation of a Petition, upon an application of creditor, ……..court if it thinks fit may appoint a liquidator.
Hearing of Petition and Orders made thereon (Rule 12-16)
Rule 12- Petitioner shall on the day appointed by Court attend before it and satisfy that
(a) the Petition has been duty advertised
(b) affidavit verifying the statements have been duly filed (Rule 9)
(c) affidavits of service if any has been filed. (Rule 13)
Rule 13 – Every such person shall send his notice of intention to the Petitioner or his proctor ………. at least a day previous to the date of hearing of the Petition. The notice shall be in Form 9. A person who has failed to comply with this rule shall not. without special leave of Court, be allowed to appear on the hearing of the Petition.
Rule 14 – Prior to hearing of the Petition the Petitioner shall hand over to court a prepared list of all those who have given notice of their intention.
Rule 15 – Affidavits in opposition to a petition that a company may be wound up shall be filed within 7 days of the date on which affidavit verifying the petition is filed, and such affidavit in opposition shall be given to the petitioner on the day on which the affidavit is filed. (The company sought to be wound up files this affidavit)
Affidavit in Reply shall be filed within 3 days of the date on which notice of such affidavit is received by the Petitioner.
Order to wind up a company (Rule 17 to 20)
Rule 17 – Notice that winding up Order has been pronounced to be given to the official receiver.
Rule 19 – An Order to wind up a company or for the appointment of a Provincial Liquidator shall contain at the foot thereof a notice stating that it will be the duty…..de director”) to make out or
concur in making out the Company’s Statement of Affairs as the Official Receiver may require.
Rule 20 – When an order that a company be wound up. or for the appointment of a Provincial Liquidator has been made 3 copies of the order shall be sent to the Official receiver. (one copy will be served on the company’s registered office, one shall be published in the gazette by a Director, and one shall be sent to the English news paper as the Official Receiver may direct”).
Rule 21 – 22 – Special Manager
Rule 23 – 28 – Statement of Affairs
Rule 23 – A person who under the Ordinance is required to submit a Statement of Affairs shall furnish to the Official Receiver such Statement
Rule 29 – Appointment of Liquidator in a winding up by the Court
Rule 29 – As soon as possible after the first meeting of the creditors and contributor’s, the Official Receiver shall report the result to Court.
Rule 29(5) If a Liquidator is appointed a copy of such Order shall be given by the Official Receiver to the Director who shall cause the notice of such appointment be gazetted.
Rule 30 and 31- Security by Liquidator or Special Manager
Rule 32 -36- Public Examination
Rule 37 – 38 – Proceedings by or against director
Rule 39 – Witnesses and Depositions
Rule 40- Disclaimer
Rule 40 Any application for leave to disclaim any part of the property of the company…………….shall be by summary procedure under Chapter XXIV of the CPC . Such application should be supported by an affidavit showing who are the parties interested and what they are interested in.
Until the disclaimer has been filed by the Liquidator the disclaimer shall be inoperative.
Where any person claims to be interested in any part of the property the Liquidator wishes to disclaim he shall at the request of the Liquidator furnish a statement of interest.
Rule 41 – Vesting of disclaimed property
Rule 41- Any application for an order for the vesting of any disclaimed property……..shall be supported by affidavit filed on the application for leave to disclaim such property.
Rule 42 – Arrangement with creditors and contributor’s in a winding up by the Court.
Rule 43 – 44 – Collection and distribution of assets in a winding up by court Rule 43 – collection of assets and discharge of companies liabilities shall be discharged by the liquidator.
The Liquidator shall be in the same position as he were a Receiver of the property appointed by Court under section 671 of the CPC.
Rule 45- 50 – List of contributor’s in a winding up by the court
Rule 45 – the Liquidator shall dispense with the settlement of the list of contributor’s.
Rule 51-55-Calls
The power and duties of the court in relation to making calls upon contributor’s may be exercised by the Liquidator. Rule 56 to 67 – Proof
Rule 56 – In a winding up by court every creditor shall prove his debt.
Rule 57- the debt may be proved by affidavit sent to Official Receiver or Liquidator.
Rule 60-Affidavit shall state whether the creditor is secured or not.
Rule 68 to 79- Admission and Rejection of Proof and Preferential Claims and Appeal to the Court. Rule 68 – Liquidator may from time to time fix certain day which shall not be less than 14 days of the notice, on or before which the creditors of the company are to prove their debts… and the title they may have to priority under the Ordinance.
Rule 69- Liquidator shall examine every proof of debt……..admit or reject such claim. If rejected the reasons shall be stated to the creditor.
Rule 70- If a creditor or contributory is dissatisfied with the decision of the liquidator in respect of the proof, the court may, on the application of the creditor or contributory reverse or vary the decision.
Rule 76 – Procedure where creditor appeals.
Rule 78 – Time for dealing with proof by liquidator.
Rule 80 – 81 – Dividends in a winding up by the Court.
Rule 82 to 87 – General Meetings of Creditors and Contributor’s in relation to a winding up by court.
Rule 88 to 106 – General Meeting of Creditors and Contributor’s in relation to winding up by the Court and of Creditors in relation to a creditors voluntary winding up.
Rule 107 to 115 – Proxies in relation to a winding up by the Court and to meeting of creditors in a creditors’ voluntary winding up.
Rule 116 to 117 – Attendance and appearance of parties
Rule 118 to 128 – Liquidator and Committee of Inspection
Rule 129 to 130 – Payments into and out of banks
Rule 131 to 132 – Books
Rule 133 – Investment of Funds
Rule 134 to 141 – Accounts and Audits in a winding up by court.
Rule 142 to 150 – Taxation of Costs
Rule 151 to 152 – Costs and expenses payable out of the assets of the company.
Rule 153 to 155 – Statements by Liquidator to the Registrar of Companies.
Rule 156 to 161 – Unclaimed funds and undistributed assets in the hands of a liquidator.
Rule 162 to 163 – Release of Liquidator in a winding up by the Court.
Rule 164 to 169 – Official Receiver
Rule 170 – 171 – Gazetting in a winding up by the court.
Rule 172 -175 – Miscellaneous
Rule 172 – In all proceedings in or before court……..where no other provision is made by the Ordinance or rules, the practice and procedure shall unless the court otherwise in any special case directs, be in accordance….., with the existing practice and procedure of the court in Civil proceedings.

Dissolution of the Company
In a compulsory winding up by court, when the affairs of the company have been completely wound up, the court shall on an application of the Liquidator make order the company be dissolved from the date of such order and the company shall be dissolved accordingly. Section 304.

A copy of the order is forwarded to the Registrar of Companies who will make a minute of the dissolution of the company in his books.

In a members voluntary winding up, as soon as the affairs of a company are fully wound up, the Liquidator must present an account of the winding up to the members at a general meeting of the company and send a return to the meeting and account to the Registrar of Companies. On the expiration of three months from the registration of the return the company is deemed to be dissolved. Section 320.
In a creditors voluntary winding up, the Liquidator must summon a general meeting of the company and a meeting of the creditors and lay before them an account of his acts and dealing and must file the account and return with the Registrar of companies and on the expiration of three months from the date of registration of the return, the company shall be deemed to be dissolved. Section 330.

In a voluntary winding up under supervision of court, the Liquidator is allowed to wind up as in a voluntary winding up subject to any restrictions imposed by court. The sanction of the company is replaced by the sanction of court. A supervision order is for all purposes deemed to be an order for winding up by the court. Section 344.

Thus the corporate life comes to an end.

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