In Nigeria, a company can be wound up voluntarily by resolution of its shareholders or compulsorily by an order of court. Voluntary winding up of a company involves the resolution of all its affairs and legal dissolution of the company as a corporate entity. This article addresses voluntary winding up in line with procedures, duties of key stakeholders, and the practical implications of the Companies and Allied Matters Act (CAMA) 2020.
Voluntary Winding Up
Voluntary winding up is when the shareholders of a company decide that it needs to be wound up. Contrary to compulsory winding up, which arises from court cases due to insolvency or violations of law, voluntary winding up arises from within usually because the company has achieved its purpose, it is no longer profitable, or the shareholders wish to withdraw.
CAMA 2020 provides for the legislative requirements of voluntary winding up of private and public companies. There are two main forms:
- Members’ Voluntary Winding Up applies where the company is solvent and has the ability to pay all its debts in full.
- Creditors’ Voluntary Winding Up applies where the company is insolvent or unable to pay its debts.
The distinction determines what procedure applies
A. Members’ Voluntary Winding Up (For Solvent Companies)
Step 1: Board Meeting and Declaration of Solvency
It is initiated with a board resolution to recommend the winding up.
The directors must lodge a Declaration of Solvency under Section 625(1) of CAMA 2020, declaring that the company will be able to pay its debts within 12 months.
Key points:
- The declaration must be made not less than five weeks prior to the passing of the resolution.
- It must be signed by all (or a majority of) the directors.
- Supporting financial statements are to be attached.
- A false declaration under CAMA is a criminal offence.
Step 2: Shareholders’ Meeting and Special Resolution
After the Declaration of Solvency, there is a meeting of the shareholders in a general meeting with the adoption of a special resolution for voluntary winding up.
- Notice to all the shareholders stating the purpose of the meeting must be issued.
- 75% of existing shareholders need to approve the decision.
- A liquidator is appointed to manage the winding-up.
Step 3: Appointment of a Liquidator
The liquidator is a professionally trained individual such as a lawyer or an accountant who takes charge of company affairs. Some of his duties are:
- Taking possession of and selling company assets.
- Payment of debts and liabilities.
- Distribution of balance assets among shareholders.
- Maintaining proper records and furnishing frequent reports to the Corporate Affairs Commission (CAC).
Part Sections 587–591 of CAMA 2020 prescribe the powers and functions of a liquidator.
Step 4: Notice to the Corporate Affairs Commission (CAC)
The company shall give notice to the CAC by filing:
- A copy of the special resolution.
- The Declaration of Solvency.
- Details of the liquidators.
The CAC notifies the company of the status change to reflect that it is voluntarily winding up.
B. Creditors’ Voluntary Winding Up (For Insolvent Companies)
When the company is insolvent, creditors’ voluntary winding up can be opted for.
Step 1: Meetings of the Company and Creditors
- The company passes a special resolution at a meeting for winding up.
- A separate meeting of the creditors is held on the same day or the following day.
- The meeting of the creditors must be advertised in the Federal Gazette and two national newspapers.
Step 2: Appointment of a Liquidator
Under Section 636 of CAMA 2020, both the company and creditors may appoint a liquidator, but in case they appoint different persons, the creditors’ nominee takes precedence.
The liquidator’s duty is to:
- Inform all known creditors.
- Verify claims and determine priorities of payment.
Step 3: Statement of Affairs
Directors of the company must present a Statement of Affairs, providing assets, liabilities, and list of creditors, to be presented to the creditors’ meeting.
Creditors have greater control over the process since the company owes them money.
C. Liquidation Process
The following takes place once the liquidator assumes office:
1. Realization of Assets
The liquidator gathers and sells all of the company’s assets such asvcash, stock, receivables, and property to raise funds.
2. Settlement of Debts
Debts are paid in the following order:
1. Secured creditors.
2. Preferential debts (pensions, wages of employees, taxes).
3. Unsecured creditors.
4. Shareholders (in a members’ voluntary winding up).
3. Distribution of Surplus
Any excess is distributed to shareholders proportionally to their shareholdings. The liquidator closes a final account of receipts, payments, and distributions.
4. Final Meeting and Dissolution
A final shareholders’ or creditors’ meeting is convened.
The liquidator presents the final accounts and returns to the CAC.
The CAC sends notice of dissolution, effectively bringing the company to an end under the law.
Common Challenges
- Disagreement between shareholders on liquidation policy or asset distribution.
- Incomplete records may delay the process.
- Unrealistic assumptions of solvency may get directors into trouble.
- Concealed or contingent liabilities may prolong winding up.
Voluntary winding up by members or creditors is just one of the ways a company may be wound up in Nigeria. The others are court winding up or striking off by the CAC. CAMA 2020 also provides for restructuring for financially troubled companies.
Directors intending to wind up a company should seek the advice of a lawyer or insolvency practitioner to ensure compliance with the law in every way and personal safety.