A company is wound up in terms of Part XXVI of the Companies Act.
There are two methods of winding up a company. The first is by the court (‘compulsory liquidation’) and the second is voluntary.
The primary purpose in both is the same for there to be a fair and orderly procedure to handle the affairs of a company in liquidation. This is done by appointing an independent liquidator to secure and realise the assets of the company thereafter distributing the liquidated funds to the correct parties in accordance with insolvency law. The distribution is transparent and follows the production and confirmation of an account made publicly available. After payment, the company is legally dissolved.
In Botswana, the most common form for winding up a company is compulsory liquidation.
3.1. Voluntary Liquidation
Voluntary liquidation, as the name implies, involves the company voluntarily entering into liquidation and there is no involvement of the court. The Master of the High Court still has oversight over the process and the liquidator as well as the process of confirming the final accounts prepared by the liquidator at the end of the process following confirmation by the members and creditors at a meeting.
Voluntary liquidation occurs when the company’s shareholders decide to wind up the company by taking a special resolution. There are two methods of voluntary liquidation. There is a members’ voluntary liquidation (“MVL”) and a creditors’ voluntary liquidation (“CVL”).
It is important if a voluntary liquidation is being considered by the company that advice is sought about the process and the timing of taking the resolution as both need to be clearly understood before the winding up is initiated.
It is critical to note that the resolution to wind up a company voluntarily, once taken, cannot be rescinded (unlike a winding up by the court where the order can be discharged in certain circumstances). The liquidation commences on the date and time of the resolution. The powers of the directors cease and control of the company vests in the appointed liquidator.
A petition may be presented to court by the Master (or any other authorised person) to wind up a company that is being wound up voluntarily. The court will only grant the winding up order if it is satisfied that the voluntary winding up cannot be continued with due regard to the interests of the creditors or contributories.
3.1.1. Members’ Voluntary Liquidation
A members’ voluntary winding up is a liquidation where the company is solvent and the directors are in a position to swear the company has no liabilities (and provide a certificate from the auditors confirming same) or provide security to the satisfaction of the Master of the High Court that all debts will be settled within 12 months of liquidation. The furnishing of security or the sworn statement must be made before the passing of the resolution to wind up. The statement should include a statement of the company’s assets and liabilities as at the latest practicable date. A director making such a sworn statement without having reasonable grounds for doing so may be guilty of an offence. If security is neither provided nor dispensed with then the winding up following the passing of the special resolution is classified as a CVL even if the company intended it to be an MVL.
An important difference between an MVL and a CVL is that of solvency. An MVL can only be undertaken if the company is solvent. As the company is solvent and creditors will be paid in full they have no say in the way in which the liquidation proceeds. As a consequence, there is, ordinarily, no need for a meeting of creditors or for the creditors to prove a claim against the estate. Any creditors would be made aware of an MVL process through the publishing of statutory notices which the liquidator is required to do. A CVL is undertaken if the company is insolvent and the creditors are involved in the process.
In an MVL the shareholders, by ordinary resolution, appoint the liquidator and determine the remuneration. The liquidator will then proceed to realise the assets of the company and prepare an account in a similar fashion to that of a winding up by the court. However, this account is confirmed at a meeting of members. A liquidator in an MVL process, if a resolution was taken to that effect, may make a distribution in specie.
3.1.2. Creditors’ Voluntary Liquidation
A creditors’ voluntary winding up is a liquidation where the company is insolvent and the company resolves by special resolution to wind itself up.
In a CVL the appointment of the liquidator is ultimately controlled by the creditors as they are likely not to be paid in full (or within a period of 12 months) therefore they are directly affected by the liquidation. As a consequence, a meeting of creditors must be convened by the company. This is required to be on the day or the day after the meeting of the members at which the resolution is taken to wind up the company. Members, after taking the special resolution to wind up the company, appoint a liquidator. If there is a difference between the liquidator appointed by the members and the one appointed by the creditors at the meeting of creditors then the creditors’ appointment stands.
The conduct of a CVL is similar in many respects to the winding up by the court with the liquidator having many of the same powers and functions and the requirement for creditors to prove their claims at meetings of creditors. The creditors must prove a claim against the estate in a similar fashion as for a company wound up by the court but for a CVL it is the liquidator that proves the claim not the Master of the High Court. There is no prescribed form but the claim form must be accompanied by an affidavit.
The liquidator is also required to investigate and report on the reasons for the failure of the company (this is not required for an MVL). The liquidator has the same entitlement to investigate and challenge pre-liquidation transactions if made contrary to the provisions of the Companies Act and he/she would enhance the value of the estate in doing so. Secured creditors have the same legal rights in a CVL and a winding up by the court.
The main critical difference is that there is no automatic stay on legal proceedings in a CVL process like there is in a winding up by the court.
However, there are important benefits to winding up of an insolvent company by CVL rather than a winding up by the court. These include:
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- The winding up will usually be quicker than a compulsory one. This is particularly attractive for creditors because they should receive a distribution earlier than when court proceedings are involved (which may be preferred by the creditors and go some way to limiting the discontent of the creditors of the insolvency process).
- The winding-up can also be commenced without seeking legal advice (although it is normally the case that advice from an insolvency practitioner is sought) and the winding-up can commence relatively quickly, subject to notice provisions, as opposed to being subject to the court’s timetable.
- Given the liquidator is appointed on the day or the day after the special resolution for winding up the liquidator in a CVL he/she is in a position to seek sanction, as necessary from the creditors, and exercise his/her powers much more quickly. This is as opposed to compulsory liquidation where a final liquidator is only appointed at the first meeting of creditors which only occurs after the final order is granted (which in and of itself can be uncertain and a delay to the process). The timing of the first meeting of creditors is determined by the Master.
- CVL is often less costly, notably, there is no cost of the petition, so the dividend may be greater.