- An in depth analysis of the laws applicable on voluntary winding up
- A partial breakdown of other modes of winding up
Winding up is defined by the Black’s Law Dictionary, 9th Edition, to mean the process of settling accounts and liquidating assets in anticipation of partnership or corporation’s dissolution. In a winding up procedure, the assets of the company are used to settle the liabilities of the creditors and its members prior to dissolution of the company.
Dissolution refers to the act of bringing to an end the existence of a company. It is an event which immediately follows liquidation or winding up of a company.
1.1 Modes of Winding Up
There are two modes of winding of a company in Tanzania:
- Winding up by the Court (compulsory winding up).
- Voluntary Winding up
- By Members
- By Creditors
This article shall examine voluntary winding up mode only.
1.2 Applicable Law
The Companies Act, 2002 (Act No. 12 of 2002).
2.0 General conditions for Voluntary winding up (Sec. 333)
i. Expiration of the period fixed by the articles or occurrence of the event which the articles provide for expiration upon its occurrence followed by a resolution for voluntary winding up.
ii. Passing of a resolution that the company be wound up voluntarily.
iii. Passing of a special resolution to the effect that the company, by reason of its liabilities, cannot continue its business and that it is advisable to wind it up.
2.1 Notice of Resolution to Wind Up
A resolution to wind up the company has to be published in the Gazette and also in some newspaper circulating in Tanzania within 14 days from the date of its being passed by the Company
2.2 Declaration of Solvency
This refers to a declaration by the directors that they have made a full inquiry into the affairs of the company and they have formed an opinion that the company is able to pay its debts in full within the prescribed period not exceeding twelve months from the commencement of the winding up.
2.3 Validity of the Declaration of Solvency
A valid declaration of solvency must comply with the following:
a. It has to be made within 30 days immediately preceding the date of passing of the resolution to wind up the company and is delivered to the Registrar for registration before that date.
b. It has to contain a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration.
2.4 Commencement of Voluntary Winding Up
Time for voluntary winding up commences immediately after passing of the resolution for voluntary winding up by the company.
3.0 Members’ Voluntary Winding Up (Sec. 340-345)
This happens when the company is solvent and capable of paying its liabilities in full but resolves to voluntarily wind up its business. A declaration of solvency stating that the company is capable of paying its debts in full on being wound up is mandatory for members’ voluntary winding up.
i. Convene a Board meeting whose agenda is to pass a resolution for voluntary winding up and a declaration of solvency.The declaration of solvency has to be registered with the Registrar before convening a general meeting for voluntary winding up of the company.
ii. Convene a general meeting within 30 days after passing of the resolution to voluntarily wind up and declaration of solvency by the Board.
iii. Appoint a liquidator at the general meeting for voluntary winding up of the company.
iv. Publish the resolution for voluntary winding up in the Gazette or circulating newspaper within 14 days of its being passed.
v. The Liquidator calls upon creditors of the company for settlement of their claims against the company.
vi. The Liquidator issues a notice for a general meeting at least 30 days before specifying the time, place and purpose of the meeting. The notice has to be published in the Gazette and a circulating newspaper in Tanzania. The purpose of the meeting is for determination of an account of winding up report from the liquidator.
vii. The Liquidator submits to the members an account of the winding up, showing how the winding up has been conducted and disposal of the assets of the company. The liquidator gives explanation of an account of winding up in details to the members.
viii. The Liquidator, within 14 days after the general meeting, submits to the Registrar a copy of an account for winding up and minutes of the meeting which deliberated on the liquidator’s winding up report.
ix. The Registrar on receiving the account and returns from the liquidator on winding up; shall register them and on expiration of three months from registration of the same, the company shall be deemed to be dissolved.
4.0 Creditors’ Voluntary Winding Up (Sec 348 – 355)
This happens in a situation where the company is not solvent and no declaration of solvency is made and filed with the Registrar.
i. Publish a notice for creditors’ meeting in the Gazette or a circulating newspaper.
ii. Convene a creditors’ meeting for passing a resolution for voluntary winding up.
iii. The directors must draw up a full statement of the position of the company’s affairs together with a list of the creditors of the company and estimated amount of their claims to be laid before the meeting of the creditors and appoint one of the directors to preside over the meeting.
iv. The creditors and the company at their respective meetings may nominate a person to be a liquidator for the purposes of winding up the affairs and distributing the assets of the company, and if the creditors and the company nominate different persons, the person nominated by the creditors shall be the liquidator, and if no person is nominated by the creditors the person, if any, nominated by the company shall be the liquidator.
v. The creditors at the creditors’ meeting may, if they think fit, appoint more than five persons to be members of a committee of inspection, and if such committee is appointed, the company may (with the creditors’ approval) such number of persons as they think fit to act as members of the committee. However, the majority of the members shall be persons appointed by the creditors.
vi. In the event of the winding up continuing for more than one year, the liquidator must summon a general meeting of the company and a meeting of the creditors at the end of the first year from the commencement of the winding up, and of each succeeding year, or at the first convenient date within three months from the end of the year or such longer period as the Registrar may allow, and shall lay before the meetings an account of his acts and dealings of the conduct of the winding up during the preceding year.
vii. As soon as the affairs of the company are fully wound up, the liquidator must make an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon shall call a general meeting of the company and a meeting of the creditors for the purpose of laying the account before the meetings and giving any explanation thereof.
viii. Within 14 day after the date of the meetings, or, if the meetings are not held on the same date, after the date of the later meeting, the liquidator shall deliver to the Registrar a copy of the account, and shall make return to him of the holding of the meetings and of their dates.
ix. The Registrar on receiving the account and, in respect of each such meeting, the returns, must immediately register them, and on the expiration of three months from registration thereof the company shall be deemed to be dissolved.
5.0 Powers of the Court in cases of voluntary winding up
i. It may appoint liquidator where the appointed liquidator is not acting.
ii. It may remove the liquidator and appoint another liquidator on justifiable cause being shown.
iii. On an application of the Liquidator or contributory or creditor, it may determine any question arising in the winding up of a company and it may exercise, as respects the enforcing of calls, the staying of suits or other legal proceedings or any other matter, or any of the powers which the Court might exercise if the company were being wound up by the Court.
6.0 Effects of Voluntary Winding Up
a. Company ceases to carry on its business except so for as may be required for the beneficial winding up thereof.
b. Board of Director’s power ceases on appointment of a liquidator in case of members’ voluntary winding up.
The Corporate Department at Breakthrough Attorneys recommends companies in insolvent situations to opt for voluntary winding up instead of compulsory winding up by the Court. This is because Directors will be exonerated from liability for wrongful trading under Section 384 (1) of the Companies Act, 2002. This Section applies to Directors who continue doing business in an insolvent Company. It is advisable for Directors to opt for voluntary winding up other than continuing with the business of the Company which is likely to be insolvent.
Furthermore, voluntary winding up is a simple, cost effective and expeditious exercise compared to compulsory winding up which involves court intervention. Court process is often complex, expensive and time consuming. Breakthrough Attorneys, therefore commends companies to opt for voluntary winding up for avoidance of complexities of the Court process in compulsory liquidation.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.