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Distribution Of Company Assets In Liquidation
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Distribution Of Company Assets In Liquidation

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  • 1. “DISTRIBUTION OF COMPANY ASSETS IN LIQUIDATION”. BY CHIMEZIE VICTOR C. IHEKWEAZU JULY 31, 2010 BEING A PAPER PRESENTED AT THE SECOND PREPARATORY TRAINING FOR BRIPAN MEMBERS TITLED :
  • 2. “STRIKING A BALANCE BETWEEN MERE PAYMENT DEFAULT AND INSOLVENCY GUIDING COINSIDERATION” JULY 31, 2010 1. CONTENTS. 1. INTRODUCTION 2. WHAT ASSETS ARE AVAILABLE FOR DISTRIBUTION 3. HOW DO YOU SWELL THE POOL OF ASSETS
  • 3. 4. PROOF OF DEBTS 5. RANKING OF CLAIMS IN LIQUIDATION 6. PARI PASSU PRINCIPLE 7. EXCEPTIONS TO THE PARI PASSU PRINCIPLE 8. CONCLUSION
  • 4. 2. INTRODUCTION Liquidation is the process of winding up of a Limited Liability Company or other incorporated Association. In the case of a Limited Liability Company, the liquidation or winding up may be voluntary, by the Court or under the supervision of the Court. The applicable provisions are provided under the Companies and Allied Matters Act. See part XV of the Act. A Liquidator is a person appointed to wind up the Business affairs of a Company in liquidation. He may be appointed by the Court, the Creditors, or the Company as the case may be and with relation to the nature and stage of the winding up of a Company. He retains the duty to gather the assets of the Company and manage same with a view to realizing the best value of the assets to pay the Company’s debts and for distribution among the Company’s creditors, and the surplus to shareholders subject to other statutory obligations. These obligations include among others, payment of recognized Taxes, charges, cost and fees under the Law and managing the Affairs of the Company with due statutory compliance until final dissolution of the Company under the Companies and Allied Matter Act. See Part XV of the Act. According to the Osborn’s Concise Law Dictionary 8 th Edition – by Leslie Rutherford and Sheila Bone, (Sweet & Maxwell) 1993. A Liquidator is “an individual appointed to carry out the winding up of a company. The duties of a liquidator are to get
  • 5. in and realize the property of the Company to pay its debts, and to distribute the surplus (if any) among the members”. The powers and the manner in which the Liquidator is to exercise its duties are as stated under the Companies and Allied Matters Act and the Companies Winding up Rules. 3. WHAT ASSETS ARE AVAILABLE FOR DISTRIBUTION The assets of the Company in Liquidation may be present or future. These assets include properties, choses-in-action to which the Company is or appears to be entitled. These can be ascertained from Statement of affairs of the Company and other available records of the Company. Other assets may also be located at the Company premises and locations where the Company carries on business or businesses. In Liquidation the following assets are available for distribution :
  • 6. a. All assets that are realized by the Liquidator (after discharge of due debts of the Company as may be sufficient to meet them.) b. All such assets that may be further realized from the management of the business of the Company as elected by the Liquidators. c. All assets that may be recovered in the course of winding up through discoveries made from the companies records or other information. See generally Sections: 420, 423, 424, 425 and sections 494(5) of CAMA. (Example- ADC experience as regards discoveries and claims.)
  • 7. 4. HOW DO YOU SWELL THE POOL OF ASSETS 1. Claims through any Legal Process against debts owed to the Company. See Section 425(1) (a) 2. Placing a demand on contributories on any money due from them or their estate to the Company. See Section 441 of CAMA and Rule 62. 3. Making calls on any part of unpaid Share Capital. This may be enforced by order of Court. Rule 73 Winding up Rules. See also Section 442 of CAMA. 4. Exercising the Power to summon persons suspected to be in possession of Company Assets. See Section 449 of CAMA 5. Carrying on the business of the Company as may be necessary for its beneficial Winding up. See Section 425 of CAMA. 6. By making compromises or arrangements with Creditors. See Section 425 of CAMA.
  • 8. 5. PROOF OF DEBTS All unsecured creditors and secured creditors (that have surrendered their rights) are entitled to prove their claims for debts. NOTICE TO CREDITORS TO PROVE DEBT. The Liquidator shall fix the date for proof of debts by Creditors and he shall do so by advertisement in any convenient Newspaper. See Rule 89. In addition the Liquidator may also notify all the creditors in writing through any means of communication which will be received by the Creditor. (E.g. By post or other electronic medium). MODE OF PROOF OF DEBT
  • 9. By verifying Affidavit deposed to before any Commissioner of Oaths. The Affidavit must state the debt and necessary particulars and must be submitted to the Liquidator within the specified time. The Deponents to the Affidavit must be the creditor or a person who has authority to make the deposition at his instance and he must state so. CONTENTS OF THE AFFIDAVIT: It must contain all necessary facts showing the debt including Statements of Accounts, Receipts, Vouchers etc. PROCESS OF PROOF OF DEBT (a). Examination of the verifying Affidavit by the Liquidator and upon reasonable satisfaction of the Liquidator in the verification exercise. See Rule 90 of the Rules. (b) Issuance of certificate of indebtedness – to be marked “without prejudice” of the proved debt. (c) Notice of Rejection – to be issued against unsubstantiated claims for debt. Where a Notice of rejection is issued and served on a creditor, he is entitled under the Winding up Rules to challenge same in Court within thirty (30) days of service. The Court may vary or reverse same. See Rule 91. 6.
  • 10. RANKING OF CLAIMS IN LIQUIDATION (ISSUE OF PRIORITY) The manner of applying the assets of the Company in Liquidation is as prescribed under the Companies and Allied Matters Act and the Companies Winding up Rules. CLASS A Costs, Expenses, Fees 1. Cost of Winding Up 2. Debts of the Company 3. Remuneration of Special Manager 4. Cost of any Person properly employed by the Liquidator 5. Remuneration of the Liquidator 6. The out-of-Pocket expenses incurred by the Committee of Inspection CLASS B SECTION 494 PREFERENTIAL PAYMENTS. a. Local rates and charges from the Company, all pay as you earn tax deductions and taxes due from the Company as prescribed under Section 494 (1) (a) and (6) of CAMA. b. Deductions under the National Provident Fund Act. c. All wages of any workman or Labourer whether payable for time or piece of work for service rendered to the Company. d. All accrued holiday remuneration payable to any staff.
  • 11. e. All amounts due in respect of workmen’s compensation under the workmen’s compensation Act 1987 – unless where the Company is being wound up voluntarily for purposes of reconstruction or amalgamation. The above debts are to be paid even where the funds are insufficient. In which case it will be pro-rated among preferential debtors. 7. CLASS C DISTRIBUTION AMONGST OTHER CREDITORS. 1. Secured Creditors – are to be paid first unless where they surrender their security. Secured Creditors include holders of Debentures under any Floating charge as may be created by the company. 2. Unsecured Creditors. These Creditors are ranked equally. FORM OF PAYMENT TO UNSECURED CREDITORS
  • 12. Payment is made in form of Dividends and subject to be shared equally based on available assets. DISTRIBUTION AMONGST CONTRIBUTORIES Upon full payment to Creditors- Any surplus may be distributed among contributories. Section 446. 8. PARI-PASSU PRINCIPLES
  • 13. The pari-passu principle stipulates equal treatment of the same class of creditors and in relation to insolvency matters. It is a principle recognized in insolvency law and which applies to insolvency proceedings. (e.g, winding up). According to Riz Mokal in the Article “Global Initiative on Insolvency and Creditor/Debtor Regimes” “Pari-passu Principle provides that the Creditors of a Company ranked at par with each other under the general law should similarly be treated on par with each other in Insolvency Proceedings”. The Pari-passu principle in winding up discloses equal distribution of available assets among all classes of Debtors and unsecured creditors without any preference, depending on the payment due and available funds realized from sell of the assets. EXCEPTION TO THE PARI-PASSU PRINCIPLE 1. Section 425 (1) (d)- The liquidator may with the sanction of a resolution of the company, in members voluntary winding up or with the sanction of the committee of Inspection or meeting of creditors pay any class of creditors in full. 2. Section 425 (1) (e)- The liquidator can make any compromise or arrangement with creditors regarding their claims. 3. Section 197 and Section 208 (secured creditors)
  • 14. Beneficiaries of charges property registered and as prescribed under Section 197 of the Act. 9. CONCLUSION Management of assets in Liquidation is critical to the success of the Insolvency Proceedings and Process. It is therefore of great need to ensure due compliance with statutory provisions to ensure appropriate discharge of the requisite obligations. While it is possible that assets of a Company in Liquidation may not be adequate to satisfy all claims against the Company in liquidation, proper approach, compliance with the relevant laws and standard practice will guarantee satisfaction among all persons entitled to benefit and as may be affected by the process. CHIMEZIE VICTOR C. IHEKWEAZU
  • 15. 31 ST JULY 2010.