Chapter 7: End of Corporate Legal Personality: Judicial Management and Winding Up

Chapter 7: End of corporate legal personality: Judicial management and winding–up

7.1. Learning Objectives

At the end of this Chapter, learners should be able to:

Explain the process of judicial management
Discuss the legal effects of judicial management
Identify the forms of winding up a company applicable in Zimbabwe
Explain the process of company winding up

7.2. Introduction

This Chapter discuss two critical aspects relating to the issue of ending of a company’s legal personality in the form of judicial management and winding-up or liquidation. Focus will be on the legal aspects applicable to these issues.

7.3. Judicial management

Upon incorporation, a company becomes a separate legal entity capable of independent existence from the promoter and then the owners (shareholders) as well as its management (directors).
The legal personality is only but artificial for even if the law equates a company to a natural person(section 9 of the Companies Act [Chapter 24:03]), this is only in the eyes of the law.
A company have but limited legal personality in that it cannot operates like a natural human being and it still requires human agents to act on its behalf.
These agents are thus expected to act in the best interest of the company in order to ensure that the entity achieves its stated and any related objects.
The company’s management must properly manage it for the benefit of its owners and any other stakeholder
Mismanagement on the part of those entrusted with the company’s management adversely affects its shareholders as well as its stakeholders.
The law thus provides for a mechanism aimed at ensuring the proper management of a company’s affairs.
These mechanisms are contained in a process referred to judicial management.
Judicial management is a legal process where a company facing operational challenges will have its management divested of its management powers and in its place a court appoints a judicial manager whose mandate will be to turn around the fortunes of the company so that it returns to profitability.

Rationale

To identify the source of management shortcomings and then with the judicial manager at the helm, implement management strategies that is designed to address the identified shortcomings and turn around the company’s fortunes.
The company that is placed under judicial management must show signs that if properly managed, it will return to profitability. This requires a showing that the causes of the problems been faced must be poor or improper management (or mismanagement).
A company is placed under judicial management by a court order following an application by any person who would be entitled to apply for winding up of the company, that is, the company itself, a creditor (including a prospective creditor) or contributories or the Minister
The object of the judicial management order is to avoid the drastic and unwanted automatic winding-up of a company as a result of poor performance that can be cured through proper management.

The legal process

Section 300(a)(ii) provides that an applicantneed to establisha reasonable probability that the company will return to profitability if not wound up but have change of management.
The said application must be made in terms of section 299(1)(a).
In the event that the application is not opposed, the court will not simply grant it. The court must still determine whether or not the applicant has managed to establish that there is a reasonable probability that placing the company under judicial management will return it to profitability (Ex parte Mayhew 1959 (1) R& N 133).
upon application and if satisfied that a reasonable probability exist that if the company is placed under judicial management it will return to profitability, the court will first grant a provisional order for judicial management.
This order is made even if the original application is not for judicial management but rather for winding up. An application for winding-up can thus results in the court granting an order for provisional judicial management if it appears that the grounds relied upon for winding up may be removed and the company can become successful again.
Courts have the powers to grant an appropriate remedy after considering the available evidence.
The court has the discretion to decide on whether to issue a provisional judicial management order (Clarke v Protein Foods (Pvt) Ltd 1970 (2) RLR 278).
However, the discretion has to be carefully exercised. For instance, the court cannot place a company under judicial management only if this will benefit a few shareholders at the expense of creditors (Tobacco Auctions Ltd v Hamilton (Pvt) Ltd 1966 RLR 190).
Similarly, if the application is for winding up, the court can exercise its discretion and order that the company be placed under judicial management if it appears that the position of the creditors will be improved by judicial management and worsened by winding up (Ex parte Porter 1960 R&N 269).
The legal process for judicial management can be put in motion either by a direct application for a judicial management order or by an indirect application for winding up resulting in an order for judicial management.
Section 299(a) provides for a direct application for a provisional judicial management order.
This application can be made by any person who would be entitled to apply for winding up of the company, that is, the company itself, a creditor (including a prospective creditor) or contributories or the Minister.
Section 299(b) provides for an indirect application where the question of judicial management can be raised during a hearing of a winding up application by the court.
The question can be raised by an opponent of the winding up application who will feel that its interests or those of others will be better served if the court grants a provisional judicial management order rather than that for winding up.
During the winding up proceedings, the applicant can also decide to abandon its original application and opts for judicial management having considered the available facts.
The company as well as major shareholders can also raise the question of judicial management during winding up proceedings (South African Timber Co v Your Builders (Pvt) Ltd 1958 R&N 297).
Any interested party can also raise the question.
The provisional judicial management order must have a return date (section 301) where the court will either confirm the order into a final judicial management order or will order that the company be wound up.
In terms of section 301, the court is empowered to order that any proceedings (legal) against the company be stayed during the course of the judicial management.
This stay affects pending as well as future proceedings.

In short, the requirements for placing a company under judicial management are:

(i)Showing that there is a reasonable probability that if the company s placed under judicial management it will be able to pay its debts and become a successful concern again (section 305(1).

(ii)The only remedy to solve the company’s problems is internal, that is change in management.

(iii)It is just and equitable to place a company under judicial management. No stakeholder will be prejudiced by the order.

The Judicial manager

As soon as an order for provisional judicial management is granted, the Master of The High Court takes custody of all the company’s property. The company is said to have been divested of its property.
The Master will then appoint a provisional judicial manager.
Who can be a judicial manager? An accountant or any person who is qualified and experienced in corporate business management can be appointed as a judicial manager.
Section 302 disqualifies from the position of a judicial manager a company auditor or any person who is so disqualified under the Act from being a liquidator (see section 272).
The Master fixes the remuneration of the judicial manager (section 308).
The judicial manager upon appointment assumes management functions of the company.
Applies his/her judgment calls to manage the company BUT requires court’s leave (permission) before selling or disposing of any of the company’s assets.
However, if selling or disposal is done in the ordinary course of the company’s business, does not require the court’s permission.
The judicial manager can borrow or offer security for company’s debts if the court so permits (Trevor v Trevor Construction (1957)(Pvt)Ltd 1958(4); Ex parte Hughes 1959(1)R&N 56).
The court seldom grants the powers to borrow or offer security for company’s debts to the judicial manager just before the return date. This is meant to prevent the reality that the exercise will be futile for it will not serve any meaningful purpose if on the return date the court orders winding up ( Ex parte Morgan 1958 R&N 757).
The judicial manager has a duty to be impartial in conducting his functions particularly where there are disputes in the company. He must remain neutral and not take sides.
Must report to the Master and provide full details in his/her report in order for the court to make an informed decision on whether or not there are any prospect of recovery for the company.
The Master upon receipt of the report will convene a provisional meeting and consider the provisional report.
The provisional meeting also (i) determines whether a final judicial management order is a viable option and proves the same to the creditors and (ii) determine on the status of liabilities incurred during the provisional judicial management process that is whether they can be ranked above or preferred over the existing claims?
The provisional judicial manger remains in office until the return date unless is removed or dies. At the return date he/she will either be removed, or replaced for incompetency by a final judicial manger.

Effects of judicial management

The management of a company is transferred from the ordinary manager to a judicial manger
The final judicial management order transfers the company management from the provisional judicial manager to the final judicial manager
The court have the powers to vary terms of the judicial management order at any time
The duties and powers of the judicial manager are as what the courts determines
Company’s auditor remains in office during the process (section 312).
In the event that the company is unable to meet its debt obligations, the judicial manager have a duty to apply to the court in terms of the Insolvency Act to set aside some of the transactions as voidable (impeachable).
Although judicial management can be relied upon to enforce proper company management, it must be pointed out that its effectiveness in reporting company’s profitability is questionable. There are only but a handful of companies that have been revived in Zimbabwe after having being placed under judicial management. This includes Cains Foods Ltd, National Blanket and David Whitehead. In the majority of cases, the final route for companies placed under judicial management is winding up and dissolution. Judicial management can thus in practice, be deemed as a mere expensive exercise that tries to delay the inevitable.

7.4. Winding up

This is a process whereby a company’s legal personality is brought to an end
Winding up may take any of the following two forms: (i) winding up by the court and (ii) voluntary winding up instituted by the company.
Section 206 of the Companies Act sets out the grounds upon which a company can be wound up.
There are seven (7) grounds in the Act that can be relied upon to wind up company.
It must be pointed out the court is not obliged to issue an order for winding up a company BUT can do so using its discretion.
The court has to take into account wishes of creditors and shareholders (Pillay v Liquidators The Union and Rhodesian Wholesalers Ltd 1927 SR 136).

Grounds for winding up a company

By special resolution, a company can resolve that it be wound up.
Default in lodging a statutory report or in holding a statutory meeting.
Failure to commence business within a year of incorporation or suspension of a business for a year.
Company ceases to have any members.
If a company loses 75% of issued up share capital or such shares become useless for business of the company.
Company unable to pay its debts. A company is deemed to be unable to pay its debts if (a) it fails to pay for 3 weeks after formal demand a debt that is due to the creditor approaching court which debt must exceed the statutory prescribed amount ( see Stambolie v Nyamutamba Transport (Pvt) Ltd 1985 (2) ZLR 320),

(b) An empty judgement (nulla bona) following an order by the court to execute against the company,

(c) Company cannot meet its present, contingent and prospective liabilities (actual insolvency) (Mazongororo Sales (Pvt) Ltd 1987 (1) ZLR 81 (S).

vii. If in the court’s opinion, winding up the company is just and equitable. What constitutes just and equitable to justify winding up is a matter of fact and must not be similar to any of the stated grounds.

Eg. (a) if a company’s main objects becomes impossible to achieve ( see Re Market Hall Bioscope Syndicate Ltd 1912 SR 183),

(b) Management issues in small private companies (Ebrahimi v Westbourne Galleries Ltd (1972) 2 ALL ER 429(HL) (Deadlock or mutual loss of confidence in the management of a company),

(c) Company is commercially insolvent (this is where a company cannot meet its liabilities without liquidating its assets) and winding up is the only means by which creditors can obtain payment (RAG (Pvt) Ltd v Huizenga 986 (2) ZLR 203(S)).

Winding up must be resorted to as a last resort.
It is not just and equitable to wound up a company if there are other remedies available to the complaining party and the latter is simply being unreasonable in resorting to winding up ahead of those remedies.

Forms of winding up

Winding up by the court

An application for winding up by the court may be made by the company, a creditor (including prospective creditor), Master during judicial management proceedings or Minister following inspector’s report.

(a)Procedure

Application must be made in terms of any prescribed legal rules eg rule 5 of Companies (Winding Up) Rules Statutory Instrument 841 of 1972.
Application must be served on the company if it is not the applicant.
The company need to be served within enough time for it to present its side of the story ( Ex parte Smith 1964 RLR 93).
Court upon application, can do any of the following, (i) grant a provisional winding up order, (ii) orders provisional judicial management or (ii) grant a final winding up order if granting such will not be prejudicial to any creditor.
The fact that a company does not have assets is not a basis for refusing final winding up order.
Winding up is a process that starts the moment an application is made (section 210(2)) and not when the order is made.
However, effect of winding up, such as stay of proceedings, only kicks in the moment the order is granted. This implies that during the application but before determination, a creditor can sue the company.

The Process of liquidation by the court

Creditors have to prove their claims
The liquidator then has to ascertain the company’s total liabilities from proven claims.
The liquidator must meet the claims by liquidating (reducing into cash) the company’s assets.
The selling of assets must be done with the authority of joint creditors’ meeting.
The liquidator must keep a proper account of transactions (section 278).
He must prepare shortfalls if any and if contributories had to contribute to the shortfalls, must prepare list thereof and calls for settlement (section 228).
If there is still shortfall, payment to be made in terms of order of preference as case in insolvency.
In the event of a surplus, distribution is to be made as follows; first to employees and their dependents, then to other statutory creditors and then to shareholders and lastly to any other creditors.
A winding up order can be cancelled if liquidator is able to arrive at a compromise with creditors.
A company can be reinstated and liquidator discharged.
A liquidator must produce a liquidation account that signals the dissolution of a company.

The liquidation account

The liquidator formulates a liquidation account and distribution plan within 6 months.
Must be laid before the Master.
Must be framed by complying with any prescribed formalities.
Account is advertised and available for inspection by any person interested in the winding up.
The purpose for availing the account is to enable any such interested person to lodge an objection with the Master.
Upon objection, Master may order account to be amended.
If dealt with any objection, Master confirms the account and once confirmed becomes final and can only be re-opened by court order.
If Master does confirm account, no subsequent objections can be entertained unless by court order.
An account confirmed by the Master will be advertised in the Government Gazette by the Liquidator.
The liquidator must then prepare a distribution plan.
The liquidator must then pay into relevant accounts as per the distribution plan.
He must thereafter deliver books and papers to the Master who will apply to the court for dissolution of the company.
Within 2 years, any person can apply for the dissolution order to be invalidated.
Should there be any property remaining after dissolution, such will vest in the state (section 321).
The Master may distribute any money or assets discovered after dissolution (section 236(4)).

Voluntary winding up

This process is initiated by the company following a special resolution.
It is a simpler and cheaper process thus best suits the company.
However, it is not suitable if there are contentious issues.
An application for voluntary winding up can be converted into into a winding up by the courts.

Procedure

A notice of the special resolution must be advertised and sent to the master and other officials (section 243).
winding up commences from the date the resolution to is passed and the company ceases business
This form can be a Member’s voluntary winding up or a Creditor’s voluntary winding up. A Member’s winding up is when if before special resolution, the director gives security for payment of the company’s debts and furnishes the master with the prescribed proof that the company has no liabilities. In any other case, it is creditor’s voluntary winding up.
In members’ voluntary winding up, the creditors have no interest. This means that the liquidator will b appointed, empowered, remunerated and if need be, replaced by the company in the general meeting.
A special resolution can authorise the liquidator to facilitate reorganisation by entering into arrangements with other companies (section 250).
In a creditors’ voluntary winding up, the special resolution must be followed by a creditors’ meeting organised by the company. In this meeting the company’s statement of affairs will be received and a liquidator nominated.
Creditors fix the liquidator’s powers.

Process