5 Grounds for winding up of a company (guide + examples)

This post covers grounds for winding up of a company

Since the company comes into its existence by the operation of the law similarly it extinguishes by the operation of the law.

Here I will take you through

• what is the winding Up of a Company
• Types of winding up of a company
• Grounds for winding up of a company

Let’s get started

Meaning of Winding Up of a Company

Winding up refers to the legal process of bringing the company to an end. The major effect of winding up is the realization of the company assets for the payment of the company liabilities.

In winding up, accounts are settled (such as returning debts to creditors), corporate assets are liquidated, and any requirements for the corporation to close are taken care of.

Types of Winding Up of a Company

There are two types of winding up of a company i.e Compulsory winding up and voluntary winding up.

Compulsory Winding Up of a company

Compulsory winding up is the type of winding up of the company which involves the court’s intervention in the process of winding up.  Usually, the court force the company to come to an end by issuing the order for winding up where it deems fit to do so.

Compulsory Winding Up of a company is sometimes referred to as winding up of the company by the court’s order.

For example, in Tanzania, the court with jurisdiction for issuing a court order for winding up is the High court.

Voluntary winding up of a company

Voluntary winding up is the type of winding up of a company without the involvement of the court.

This kind of winding up of the company is initiated by the members of the company or creditors of the company when the circumstances render it necessary. However, the creditors usually, resort to winding up the company when the members of the company have failed to do that.

Grounds for winding up of a company

There are several grounds or reasons that may justify the claim by the court, creditor, or members of the company to wind up the company as follows.

When the company fails to pay its debts

When the company is not solvent enough to pay the principal sum plus the interest to its creditors is justifiable ground to wind up it.

This is normally done to rescue the funds that were injected into that particular company. Therefore to rescue the creditor’s funds, the assets are realized and the proceeds are used to pay debts that the company owed to creditors.

The fact that the assets are less than the liability is not sufficient so you have to go over the balance sheet of the company to justify that it fails to pay its debts.

Failure to commence business within one year after its incorporation

The company law demands that a company must commence business within one year since it was incorporated failure to do so attract compulsory winding up.

Further, where the company business has ceased for a period of one year, it is a good ground for its winding up.

See: the primary documents for incorporation of a company

Where the members of the company have fallen below the minimum required number

In Tanzania, It is the requirement of law that, a company must constitute a minimum number of two members. Thus failure to abide by this legal requirement is fatal and may subject the company to a winding-up process.

Where there is a Special resolution as to the winding up of the company

A special resolution is a resolution that is passed by a majority of not less than three-fourths of company members as, being entitled so to do.  Therefore when the members pass a special resolution that the company should be dissolved it must be held regardless of the status of the company.

Where the court is of the opinion that it is “just and equitable” to have the company wound up

Here the court is always called upon to decide whether or not to wind up a company. In these instances, the court is expected to make an account as to whether winding up the company is just and equitable.

The “just and equitable” principle derives its etymology from the principles of natural law and equity.

Therefore it is meant to protect the interests of all persons dealing with a company.

The principle is always invoked to ensure that neither party’s interests in a company are adversely affected as a result of issuing the court’s order for winding up.

Therefore it aims at reaching a just and fair decision as far as the winding-up process is concerned.

There are circumstances under which the company can come to the conclusion that the company is resolved by reason of “just and equitable”.

The following below are some of the instances that which the court can order the company to be wound up for just and equitable reasons;

1. Where the entire object of establishing the company was fraudulent activities
2. When the court is of the opinion that the company was incorporated for fraudulent purposes, the court may order the company to be wound up.
3. For instance when the company is established as a public company but actually, is a private company.
4. Here the court can order that a particular company be wound up because it committed fraud during its incorporation. And by so doing it is averting some legal obligations.
5. Where there is mismanagement of funds by the directors of the company
6. Whereupon the court’s assessment and investigation of the company’s funds, and come out with the view that there is mismanagement or embezzlement of the company’s funds; it can finally order the company to be wound up.

Conclusion

The above discussion reveals that the act of winding up a company is not just a mere wish and deliberate conduct by either member of the company or its creditors.

It involves various crucial and sensitive steps, for example, passing a special resolution for winding up a company, petitioning the court for the court’s order for winding up, were granted the appointment of the liquidators and receivers, the realization of the company’s assets, and payment of debts.

Therefore it is the kind of exercise that requires special diligence to succeed.

The main grounds that may justify the process of winding up include the situation where the company has failed to commence business within a period of one year after incorporation or where the company has suspended its business for a whole year, where there are fewer than two members of the company when the company has passed a Special Resolution to wind up a company by the order of the court when the court considers that it is “just and equitable” to wind up a company