Topic: Legal implications relating to companies in difficulty or in crisis

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  • 20 Marks

BCL – Nov 2015 – L1 – Q6 – Legal Implications Relating to Companies in Difficulty or in Crisis

Define company membership and outline the commercial duties of a liquidator appointed by company members.

a) Who is a member of a company? (5 marks)
b) What are the commercial duties of a liquidator appointed by the members of a company? (15 marks)
(Total=20 marks)

a) Who is a member of a company?
A member of a company is any person who has subscribed to the regulations of the company and has his name entered into the register of the company.
Any shareholder of the company who owns at least one share in the company.
(5 Marks)

b) Commercial duties of a liquidator appointed by the members of a company:
i) Duty to vest in the liquidator by notice in the Gazette that all properties of the company shall vest in him.
ii) Duty to sell the assets so that the monies so realized could be used for distribution to creditors.
iii) Duty to verify debts by meeting with creditors to proof their claim.
iv) Duty to amend or alter claim or rectify admitted values or amounts.
v) Determine the priority of debt so the most priority debts are settled first.
vi) Duty to consult creditors and members to discuss relevant matters.
(3 Marks each for any five points)

  • 20 Marks

BCL – Nov 2015 – L1 – Q4 – Legal Implications Relating to Companies in Difficulty or in Crisis

Discuss the circumstances under which the courts may lift or pierce the veil of incorporation of a limited liability company.

What are the reasons for which the courts are prepared to lift or pierce the ‘veil of incorporation’ of a limited liability company? (20 marks)

With the ‘Veil of Incorporation’, the company is separate from its members, such that, although the corporate veil principle is regarded as fundamental to company law, there are instances where it has been lifted or ignored in favor of the economic realities of the situation.

This occurs where the Courts are prepared to take judicial notice of the identities of the owners, directors, or controllers with a view of fixing them with some legal liability. The reasons the Court gives for lifting the veil may be several but notable among them are:
i) Agency principle
ii) Fraud principle
iii) Capital flight
iv) Public policy
v) Facade principle/Evasion of contractual obligation
vi) Statutory provisions

Examples of statutory provisions are:
a) Failure to publish annual returns
b) Operating with less than two directors
c) No membership (a company without any member)
d) Failure to display the company’s name

(20 Marks)

  • 6 Marks

BCL – Nov 2023 – L1 – Q5c – Legal Implications Relating to Companies in Difficulty or in Crisis

Discuss the eligibility and restrictions related to the appointment of a receiver, particularly in cases of conflict of interest.

c) Manu is the Finance Director of Womengold Ltd, an insolvent company whose creditors have applied to the court to appoint a receiver. Manu wants to be appointed as a receiver since he is very much versed with the details of the company and feels better placed to deal with the creditors than any other person. Alternatively, he proposes that his consultancy company, Adom Consult, should be appointed as a receiver.

Required: i) Explain whether or not Manu or Adom Consult can be appointed as a receiver. (6 marks)

ii) State FOUR (4) reasons that prohibit a person from being appointed as a receiver. (4 marks)

Answer: i) Manu, as a director or former director, along with all other directors, cannot be appointed receiver for the company. The same applies to an auditor of the company. Their previous detailed knowledge of the company is immaterial here, and they must hand over the books, documents, etc., to any court-appointed receiver.

Manu’s consultancy company, Adom Consult, or any corporate body is also barred from being appointed as a receiver. (6 marks)

i) Manu, as a director or former director, along with all other directors, cannot be appointed receiver for the company. The same applies to an auditor of the company. Their previous detailed knowledge of the company is immaterial here, and they must hand over the books, documents, etc., to any court-appointed receiver.

Manu’s consultancy company, Adom Consult, or any corporate body is also barred from being appointed as a receiver. (6 marks)

ii) Reasons that prohibit a person from being appointed as a receiver:

  • A minor—anyone below 21 years, according to Act 992.
  • A person declared insane by a court.
  • An undischarged bankrupt unless with leave of the court.
  • A body corporate other than the office of the Registrar.                                                          (Any 4 points @ 1 mark each = 4 marks)
  • 4 Marks

BCL – Nov 2019 – L1 – Q3b – Legal implications relating to companies in difficulty or in crisis

Impact of liquidator appointment on the Board of Directors during private liquidation.

State what happens to the Board of Directors of a company limited by shares on the appointment of a Liquidator in respect of private liquidation. (4 marks)

Impact on the Board of Directors:

  • Dissolution of the Board: The Board of Directors is dissolved forthwith upon the appointment of a liquidator.
  • Transfer of Functions: The functions of the Board cease and are transferred to the liquidator. The liquidator does not run the company as a going concern but instead manages the process of gathering assets, paying debts, and distributing any surplus in accordance with the law.

(2 marks for each point = 4 marks)

  • 6 Marks

BCL – Nov 2019 – L1 – Q3a – Legal implications relating to companies in difficulty or in crisis

Explanation of liquidation, winding-up, and dissolution as used in company law.

a) Briefly explain TWO (2) of the following as used in company law:

i) Liquidation (2 marks)
ii) Winding-up (2 marks)
iii) Dissolution (2 marks)

i) Liquidation:
Liquidation includes both winding-up and dissolution. Liquidation is either private/voluntary or official/compulsory. In private/voluntary liquidation, which relates to solvent companies, the law applicable is the Companies Act, 1963 (Act 179). In respect of official/compulsory liquidation involving insolvent companies, the Bodies Corporate (Official Liquidation Act, 1963 ACT 180) applies. Whether private or official, a liquidator plays an important role in the process of liquidation. (2 marks)

ii) Winding-up:
Winding-up refers to the steps taken to have an operating corporate entity cease to be a corporate body. Winding-up includes the appointment of an officer (liquidator) who gathers assets, pays any debts, and distributes any surplus in accordance with the law. (2 marks)

iii) Dissolution:
Dissolution is the formal pronouncement by the Registrar of Companies that the corporate entity no longer exists and has been struck off the register of companies, with the public being notified by publication in the Gazette. (2 marks)

(Any 2 points to be answered @ 3 marks each =

6 marks)

  • 6 Marks

BCL – Mar 2023 – L1 – Q5b – Legal Implications Relating to Companies in Difficulty or Crisis

Explain the powers of receivers or managers in a voluntary liquidation process.

b) A person is not eligible to be appointed or to act as a receiver or manager unless that person has, in the opinion of the Registrar, the requisite expertise, skills, and experience to manage and administer a company in receivership.

Required:
Explain THREE (3) powers of receivers or managers in a voluntary liquidation process.
(6 marks)

Powers of receivers or managers in a voluntary liquidation process:

  • A person appointed as a receiver of a property of a company shall, subject to the rights of any prior incumbrances:
    • Take possession of and protect the property.
    • Receive the rents and profits.
    • Discharge the outgoings in respect of the property.
    • Realize the security of those on whose behalf that person is appointed, but unless also appointed as a manager, that person shall not carry on a business or an undertaking.
  • From the date of the appointment of a receiver or manager, the powers of the directors or liquidators in the voluntary liquidation of a member to deal with the property or undertaking over which the receiver or manager is appointed shall cease until the receiver or manager is discharged.
  • Where, on the appointment of a receiver or manager, the company is being wound up under the Bodies Corporate (Official Liquidations) Act, 1963 (Act 180), or the property concerned is in the hands of any other officer of the Court, the liquidator or officer is not bound to relinquish control of the property to the receiver or manager except under an order of the Court.

(3 points @ 2 marks each = 6 marks)

  • 10 Marks

BCL – July 2023 – L1 – Q5c – Legal Implications Relating to Companies in Difficulty or in Crisis

Explain the consequences of winding-up a company by private liquidation.

Three brothers Aba, Bawa, and Caroline registered a company (ABC Ltd) to supply cocoa products. The most influential member of the Board, Caroline, died five years into the life of the business. The surviving two directors decided to pass a special resolution by private liquidation to wind-up the business.

Required:

Explain FIVE (5) consequences of winding-up ABC Ltd by private liquidation. (10 marks)

Consequences of private/voluntary liquidation include:

  • Investigations may be opened: The greatest disadvantage to the voluntary liquidation of an insolvent company is an investigation into conduct. Upon appointment, an insolvency practitioner must open an investigation into the conduct of directors. This aims to determine why the company fell into such financial distress, and whether directors had a hand to play in it. This investigation will require anything relevant to the company and the actions of its directors. If a director is found to have engaged in wrongful trading, harsh legal penalties can be applied, including being barred from acting for up to 15 years, barred from other management positions, and held personally liable for the debt.
  • Directors can be held personally liable for company debt: Following an investigation, if it is found that a director engaged in wrongful trading or closed the company quickly to evade debt, they may be held personally liable. Additionally, if a director has signed a personal guarantee, their creditor can enforce it to receive payment.
  • All assets will be liquidated: Once a company enters liquidation, the appointed insolvency practitioner must sell off all assets to raise funds. This includes even those assets the directors may want to keep. These funds will then be distributed among creditors, shareholders, and used to pay any other liabilities.
  • Staff will be made redundant: As the company is to be closed, all employees must be made redundant. They may be able to claim redundancy pay and other statutory benefits.
  • Retained profits are passed to the shareholders in a tax-efficient way: If a director were to simply dissolve their company, they would need to distribute the assets of the company among themselves in advance. Because this is done as a normal day-to-day transfer to the shareholder, it is taxed like any dividend would be. For those with high earnings, the tax paid on this distribution can be significant.

(5 points @ 2 marks each = 10 marks)

  • 10 Marks

BCL – Dec2022 – Q5b – Legal implications relating to companies in difficulty or in crisis

Discuss conditions that disqualify a person from being a liquidator and explain the powers that can be exercised by a liquidator.

Certain classes of persons are prohibited by the Companies Act, 2019 (Act 992) from acting as liquidators.

Required:
i) State FOUR (4) conditions that prohibit a person from being appointed as a liquidator. (4 marks)
ii) Explain FOUR (4) powers that can be exercised by a liquidator. (6 marks)

i) Conditions That Prohibit a Person from Being Appointed as a Liquidator:
The Companies Act, 2019 (Act 992) specifies the following conditions that disqualify a person from being appointed as a liquidator:

  1. Infancy:
    An individual who is an infant (under the age of 18) is not eligible to be appointed as a liquidator.
  2. Unsound Mind:
    A person found by a court of competent jurisdiction to be of unsound mind is disqualified from being a liquidator.
  3. Corporate Body:
    A body corporate (e.g., a company) cannot be appointed as a liquidator; only natural persons are eligible.
  4. Conviction for Fraud or Dishonesty:
    An individual convicted of an offense involving fraud or dishonesty, or an offense in connection with the promotion, formation, or management of a body corporate, is disqualified from serving as a liquidator. This disqualification applies unless ten years have passed since the end of the sentence.
    (4 marks)

ii) Powers That Can Be Exercised by a Liquidator:
The Companies Act, 2019 (Act 992) grants liquidators several powers, including:

  1. Power to Bring or Defend Legal Proceedings:
    The liquidator has the authority to bring or defend any legal proceedings on behalf of the company, whether civil or criminal, to preserve and recover the assets of the company.
  2. Power to Carry on Business:
    The liquidator may carry on the business of the company so far as necessary for the beneficial winding up of the company. This includes actions such as completing contracts already in place.
  3. Power to Sell Property:
    The liquidator is empowered to sell the property of the company, whether real or personal, by public auction or private contract, to realize the company’s assets.
  4. Power to Compromise Debts:
    The liquidator can make compromises or arrangements with creditors and persons claiming to be creditors or having claims against the company. This may involve settling claims or arranging for payment of the company’s debts on terms that are favorable to the winding-up process.
    (6 marks)

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