Question Tag: Liquidation

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  • 15 Marks

CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

Bank of Ghana (BoG) recently announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company, has been affected by the increase in players in the Micro Finance Industry, which has seen a reduction of its loan portfolio and an increase in loan default rate. A statement of financial position recently prepared by Capital Link is provided:

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

  • Scheme 1 – Close Down Mission:
    Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
  • Scheme 2 – Rescue Mission:
    Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

  • Current borrowing rate is 14%.
  • The present value of GH¢1 receivable at the end of each year is:
Year 14% 20%
1 0.88 0.83
2 0.77 0.69
3 0.67 0.58
4 0.59 0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)

 

a) Numerical Evaluation of Recovery:

Scheme 1 – Close Down Mission:

b) Advantages of Each Scheme:

Scheme 1 – Close Down Mission:

  1. The cash flows from liquidation can be estimated with a high degree of certainty, especially with a firm offer for the leasehold property.
  2. The bank recovers a significant portion of its loan quickly and avoids future risk exposure to Capital Link’s performance.

Scheme 2 – Rescue Mission:

  1. The bank retains a customer and avoids negative publicity that may arise from shutting down a local business.
  2. The potential recovery from the debenture provides an opportunity for additional returns, particularly if Capital Link recovers successfully in the future.
  • 20 Marks

CR – Nov 2019 – L3 – Q4 – Corporate Reconstruction and Reorganisation

Evaluate the liquidation and reconstruction options for Mahadi Ltd and prepare the statement of financial position after reconstruction.

Mahadi Ltd has operated profitably in Ghana for several years but is now facing financial difficulties after recording losses in its operations recently.
The company’s statement of financial position as at 30 September 2019 is given below:

Mahadi Ltd Statement of Financial Position as at 30 September 2019 GH¢
Non-current Assets
Freehold property 68,000
Equipment 468,000
Total Non-current Assets 536,000
Current Assets
Inventories 120,000
Total Assets 656,000
Equity and Liabilities GH¢
Equity
Stated capital (400,000 ordinary shares issued at 25 pesewas per share) 100,000
Capital surplus 68,000
Retained earnings (40,000)
Total Equity 128,000
Non-current Liabilities
10% debenture stocks 48,000
Current Liabilities
Sundry payables 412,000
Bank overdraft (from Northern Rock Bank) 68,000
Total Liabilities 656,000

Additional Information:

  1. Mahadi Ltd operates several retail outlets for snack bars, most of which are rented out. The company’s largest supplier, Banda Ltd, holds all of the debenture stocks and is also a trade creditor for GH¢240,000 included in sundry payables. The sundry payables also include GH¢44,000 owed to the Ghana Revenue Authority (GRA).
  2. The bank overdraft is secured by a fixed charge over the freehold property, and the debenture stock is secured by a floating charge over the company’s assets.
  3. On October 1, 2019, Mahadi Ltd has scheduled a meeting of stakeholders to consider the following two proposals:
    • Proposal Alternative 1 (Liquidation): The management proposes immediate liquidation, which would result in the following amounts for realised assets:
      Realised Assets GH¢
      Freehold property 56,000
      Equipment 204,000
      Inventories 40,000
    • Proposal Alternative 2 (Reconstruction): Banda Ltd proposes to allow the company to continue operating as a going concern with the following actions:
      • Convert the debenture stock into 48,000 ordinary shares (issued at GH¢1.00 per share).
      • Convert trade debt owed to Banda Ltd into 110 ordinary shares (issued at GH¢1.00 each) for every GH¢200 owed, and the balance of the debt would be written off.
      • Existing shareholders would receive one ordinary share for every five held.
      • Banda Ltd would subscribe for an additional 140,000 ordinary shares at GH¢1.00 each for cash to improve liquidity.
      • The fair value of the freehold property and inventories approximates their carrying value.
      • The management of Banda Ltd expects that after reconstruction, Mahadi Ltd would earn a regular net profit of GH¢54,000 per annum.

Workings:

  • Shareholding in the Reconstructed Company:
Shareholders No. of Shares GH¢
Banda Ltd:
– Conversion of debentures 48,000 48,000
– Conversion of trade debt 132,000 132,000
– New shares subscription 140,000 140,000
Existing shareholders (1-for-5 exchange) 80,000 80,000
Total 400,000 400,000
  • 10 Marks

BCL – Apr 2022 – L1 – Q5b – Company directors and other officers

Analyze the validity of promoters' defense in a pre-incorporation contract case and discuss the lawfulness of for-profit companies limited by guarantee.

b) The promoters of Adzeku Company, made a contract on its behalf with Ansah Oko before the company came into existence. The company once formed, purported to ratify the contract, but then went into liquidation, and the promoters themselves were sued on the contract. The promoters argued that they had been contracted as agents, and that the liability on the contract had passed to the company by ratification.

Required:

i) From the facts of the scenario above, explain if the defence set-up by the promoters is valid. Advise the promoters. (8 marks)

ii) State briefly, if it is lawful for a company limited by guarantee to be incorporated with the object of carrying on business for the purpose of making profits. (2 marks)

i) The question has to do with pre-incorporation contract or other transaction. Any contract or other transaction purported to be entered into prior to its formation, or by any person on behalf of the company before its formation may be ratified by the company after its foundation, whereupon the company shall assume rights and liabilities under the contract or transaction as if it had been in existence at the date of such contract or transaction, and had been a party to it. (2 marks) Before the ratification, the promoter(s) or other persons purporting to act on behalf of the company remains personally liable in the absence of any express agreement to the contract and is entitled to any benefit accruing under the contract or transaction. (1 mark) It may be added that the reason for the promoter’s inability to be regarded as an agent in respect of the pre-incorporation contracts or transaction derives from general legal principle that a person cannot derive the powers and authority of an agent from non-existent principal. (1 mark) In the circumstance of this, the promoters of Adzeku Company contracted with one Ansah Oko prior to the formation of the company. From the facts, the company upon coming into existence ratified the contract the Adzaku Company entered into with Ansah Oko, but immediately went into liquidation. (1 mark) It must be stated that the ratification of the transaction with Ansah Oko took place after the formation of Adzenku Company. It is clear that the promoters after contracting with Oko Ansah had the contract ratified by the company when it finally came into existence, and can, therefore, not be personally liable. The ratification of the contract after the formation exonerated the promoters of any personal liability upon the liquidation of the Adzaku Company Ltd. (3 marks)

ii) A Company limited by guarantee is a non-profit making legal entity. A company limited by guarantee shall not be incorporated with the object of carrying on business for the purpose of making profit other than making profit for the furtherance of its objects. Section 10 of the Companies Act makes it unlawful for a company limited by guarantee to be incorporated with the object of carrying on business for the purpose of making profits. Where a company limited by guarantee engages in or carries a business for the purpose of making profit, Section 10 (2) of the Companies Act provides as follows: (a) “all officers and members of the Company who are aware of the fact that the company is so carrying on a business shall be jointly and severally liable for the payment and discharge of all the debts and liability incurred by the company as a result of carrying on such business. (b) every such officer and members shall be liable to a fine …..” It is, therefore, unlawful for a company limited by guarantee to be incorporated with the object of carrying on business for the purpose of making profits. (2 marks)

  • 10 Marks

BCL – May 2017 – L1 – Q5a – Types of capital and the financing of companies

List and explain the duties of a liquidator under private or solvent

a) The liquidator under private or solvent liquidation performs certain duties. State THREE of these duties. (10 marks)

 

  • The liquidator must keep proper records and books of account for all transactions in respect of the winding up. Should the liquidator carry on the business of the company, they should keep a distinct account of the trading.
  • Should winding up proceed beyond 12 months, the liquidator should shortly thereafter, and no later than 3 months following unless the Registrar extends this period, summon a general meeting of the company and lay before the meeting an account of the liquidator’s acts and dealings and of any trading the business may have conducted while winding up was pending.
  • Within 28 days after the said general meeting, the liquidator shall send a copy of the accounts to the company Registrar for registration.
  • As soon as the affairs of the company are fully wound up, the liquidator shall prepare and send to every member of the company the final audited accounts of the winding up showing how the winding up was conducted, the results of trading, and how the property of the company was disposed of.
  • After dispatching these final audited accounts, the liquidator shall convene a general meeting of the company to lay before the meeting their accounts and offer any explanations.
  • Within 28 days of that general meeting, the liquidator shall send to the Registrar copies of the accounts and a statement of the holding of the meeting and the meeting date for registration.
  • The liquidator must settle the accounts of the company.
  • The liquidator will invite the creditors and debtors to present their statements to him.
  • The liquidator will rank the debts and pay creditors.
  • The liquidator will serve notice to creditors and debtors.
  • The liquidator stands in fiduciary relations with the liquidated company.
  • Realise the assets of the company.
  • The liquidator is required to preserve the books and papers of the company and of the liquidator for 5 years from the company’s dissolution.

(Any 3 points for 10 marks)

  • 10 Marks

BCL – May 2020 – L2 – Q3a – Company Meetings and Resolutions

Explain what constitutes the ordinary business of an AGM and the procedure for private liquidation.

On 26th February 2018, Gold Link Limited, a public limited liability company trading on the Ghana Stock Exchange sent a notice to its shareholders inviting them to an Annual General Meeting (AGM) on 2nd March 2019. The notice simply states that the ‘purpose is to transact the ordinary business’. Namoale is a shareholder of Gold Link Limited and is very disturbed about the vagueness of the notice. He is also not satisfied with the performance of the company and is seeking to requisition for a special resolution to liquidate the company.

Required:

i) Explain to Namoale, what constitutes ‘the ordinary business of an annual general meeting’ and state TWO (2) other information, Namoale must see in the notice for an AGM.
(5 marks)

ii) Advise Namoale on the procedure for private liquidation.
(5 marks)

i) Ordinary Business of an Annual General Meeting (AGM):

  • According to Section 153 of the Companies Act, 1963 (Act 179), the notice of a general meeting must contain sufficient details to enable persons entitled to attend to decide whether to attend and to prepare their minds on how to vote.
  • The phrase ‘to transact the ordinary business’ of an AGM typically refers to the following items:
    • Declaration of dividends.
    • Election of directors in place of those retiring.
    • Consideration of the accounts and reports of auditors and directors.
    • Fixing the remuneration of auditors.
    • Removal and election of auditors and directors in accordance with sections 135 and 185 respectively.
  • Additional information that must be included in the notice for an AGM:
    • Date, time, and place of the meeting.
    • Statement that a member has the right to appoint a proxy to attend on their behalf.

(5 marks)

ii) Procedure for Private Liquidation:

  • Affidavit of Solvency: Directors must make an affidavit of solvency, confirming that they have thoroughly inquired into the company’s affairs and believe it can pay its debts within 12 months from the start of the liquidation.
  • Resolution for Winding Up: A special resolution must be passed by at least 75% of the company’s shareholders to approve the liquidation. The resolution should also include the appointment of a liquidator.
  • Liquidator’s Consent: The person named as the liquidator must have previously consented in writing to the appointment.
  • Registrar Notification: Within fourteen days of passing the resolution, the company must send a copy of the resolution to the Registrar, who will publish it in the Companies Bulletin.
  • Transfer of Powers: Upon appointment, the powers of the board of directors vest in the liquidator, and the authority of directors ceases except for any necessary actions permitted by the liquidator.

(5 marks)

  • 2 Marks

BCL – Mar 2024 – L1 – Q5e – Legal Implications Relating to Companies in Difficulty or in Crisis

Explain the concept of a Declaration of Insolvency in the context of company law.

What is a Declaration of Insolvency? (2 marks)

Insolvency is a state of financial distress in which a person or company is unable to pay their debts. Insolvency occurs when liabilities exceed the value of the company, or when a debtor cannot pay the debts they owe.

A Declaration of Insolvency suggests a company in receivership. The appointment of a receiver-manager implies a shift in control from the existing directors to the receiver-manager. The directors are required to present a written report of the state of affairs of the company to the receiver-manager. This statement must be filed by the directors with the receiver-manager within 14 days or such longer period that the receiver-manager may allow in writing, verified by an affidavit.

(2 marks)

  • 5 Marks

BCL – Mar 2024 – L1 – Q5c – Legal Implications Relating to Companies in Difficulty or in Crisis

List and explain grounds for winding up a company under the Bodies Corporate (Official Liquidations) Act, 1963, Act 180.

State FIVE (5) grounds that may lead to the winding up of a company pursuant to the provisions of Bodies Corporate (Official Liquidation Act, 1963, Act 180). (5 marks)

The following are grounds that may lead to the winding up of a company under the Bodies Corporate (Official Liquidations) Act, 1963, Act 180:

  • Failure to Commence Business: Within one year from the date of incorporation, the company fails to carry on all of its authorized business.
  • Suspension of Business: The company suspends any of its authorized business for a whole year.
  • Lack of Members: The company has no members.
  • Unlawful Business: The business or objects of the company are unlawful.
  • Illegal Operation: The company is being operated for an illegal purpose. When a company carries on illegal activities, it is sometimes said to be engaged in fraudulent trading. A company formed or operating to defraud others may be wound up.
  • Unauthorized Business: The business being carried on by the company is not authorized by its Regulations.
  • Inability to Pay Debts: The company is unable to pay its debts. However, if the debt is genuinely disputed, the company may not be wound up.
  • Just and Equitable Grounds: Finally, the court may issue a winding-up order if it is of the opinion that it is just and equitable that the company be wound up.

(Any 5 points @ 1 mark each = 5 marks)

  • 20 Marks

BCL – May 2019 – L1 – Q7 – Company Law

Discusses the process of liquidation, different modes of winding up, and the consequences of the winding up process.

a) Explain liquidation and state the different modes by which a company may be wound up.
(8 marks)

b) Describe FOUR (4) consequences of a winding up process.
(12 marks)

a) Explanation of Liquidation:

  • Liquidation may be defined as a legal process by which a company or other body corporate is dissolved. During this process, the activities of the organization are wound up, and its assets are either distributed or converted into cash or other considerations and shared among the members and other persons with legally justified claims against the company.

Modes of Winding Up:

  1. Official Liquidation: This occurs in accordance with the provisions of the Bodies Corporate (Official Liquidations) Act 1963 (Act 180).
  2. Private Liquidation: This occurs on the strength of a special resolution passed by the company.

(4 marks for explanation, 4 marks for modes = 8 marks)

b) Consequences of Winding Up:

  1. Cessation of Business Operations: The company is obliged to cease operations from the commencement of the winding-up process, except as may be required for the beneficial winding up of the company.
  2. Striking Off the Register: The company’s name is struck off the register by the Registrar and notified in the Gazette, which is the legal equivalent of the company’s burial.
  3. Continuation of Corporate State: Despite the winding-up process, the corporate state of the company, its legal personality, and corporate powers continue until the company is dissolved.
  4. Effect on Directors’ Powers: In a private liquidation, the appointment of a liquidator automatically leads to the cessation of all powers and authority of the board of directors, with these powers transferring to the liquidator. The liquidator is deemed to stand in a fiduciary relationship similar to that of a director.

(3 marks each for 4 points = 12 marks)

  • 6 Marks

BCL – Nov 2018 – L1 – Q7a – Legal Implications Relating to Companies in Difficulty or in Crisis

State the procedures to convert a private liquidation into an official liquidation.

State THREE (3) procedures to adopt in converting private liquidation to official liquidation. (6 marks)

  • On notice being given by the liquidator under private liquidation to the Registrar (of Companies) that the company may not be able to pay its debts and liabilities in full within the period stated in the declaration of insolvency, the Registrar may make a winding-up order converting the private liquidation into an official winding-up.
  • The allegation that the Company is unable to pay its debts in full within the stated period shall be accompanied by a statement in the prescribed form of the company’s assets and liabilities.
  • On the commencement of winding-up proceedings against a company, civil proceedings against the company shall be stayed, and a transfer of shares of the company is void.
    (Section 5 of the Bodies Corporate (Official Liquidations) Act, 1963 ACT 180)
    (3 points @ 2 marks each = 6 marks)
  • 8 Marks

BCL – Nov 2018 – L1 – Q3c – Company Law

Identify five situations in which a court can order a company to be wound up.

Identify FIVE (5) situations in which a company can be ordered by court to wind up. (8 marks)

  • Suspension of authorized business for a whole year.
  • The company has no members.
  • The business or objects of the company are unlawful.
  • The company is operating for an illegal purpose.
  • The company is unable to pay its debts.
  • If the court determines that it is just and equitable.
    (4 points @ 2 marks each = 8 marks)

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