Why petition to wind up a firm can’t see light of day

A High Court ruling upholding that the old Companies Act cannot be used to wind up a company has put on hold dissolution of firms until Parliament resolves the stalemate.

High Court Judge Eric Ogola ruled, in the wind-up petition of Blue Bird Aviation Ltd which was filed by a director, Mr Yussuf Abdi Adan, that companies could only be dissolved once the House passes procedures to do so under the Insolvency Act of 2015.

Justice Ogola said currently there are no procedural rules that give courts jurisdiction to hear and determine such disputes since regulations are yet to be enacted.

“A recommendation is hereby made to Parliament to enact the procedural rules and guidelines required under the Insolvency Act No. 18 of 2015 for liquidation of companies,” he said.

Individuals have been filing winding-up petitions including a recent suit against retail supermarket chain Uchumi based on Companies Act Cap 486.

Uchumi challenged the application of this law by its creditors given that the new Insolvency Act, which is in conflict with the old law, gives companies going through financial turmoil an opportunity to put their act together.

According to Uchumi, “the petition runs against the spirit of the Insolvency Act of 2015, whose net effect is to give struggling companies another chance so that they can be able to settle their debts as they continue to operate and not to terminate their lives abruptly”.

Lack of rules

Going by Justice Ogola’s ruling, owners and directors seeking to wind up a company where they have shares, currently have no recourse in law as there no rules and guidelines to facilitate the process.

The High Court said since the old law was repealed, all winding up applications must be filed under the new Companies Act even though lawyers have been arguing that the new Act excludes applications of winding up of companies incorporated under the old law.

Mr Justice Ogola in his ruling, said the pertinent issue to be determined is whether the instant application, as filed, was in conformity with the law and statute.

“Perhaps what this court ought to note is that as it stands now there are no procedural rules and guidelines with regard to the question of winding up, or as provided in the Insolvency Act No 18 of 2015, for the liquidation of companies,” the Judge said.

Legal Notice No 1 of 2016, effectively repealed the provisions under Parts VI-IX of the Companies Act, Cap 486 and particularly Section 342 of the Act. This means that at the moment, there are no procedures that the court could rely on in the event of a petition for liquidation, or a winding up petition.

Further, the winding up rules were repealed by virtue of Section 1023(4) of the Companies Act No 17 of 2015.

Mr Abdi’s petition to wind up Blue Bird Aviation Ltd was thus struck out despite its merits or demerits setting a precedent for similar cases.

“The petition herein is founded on faulty grounds, a quicksand, which renders it incapable of proceeding beyond the four applications by the respondents seeking to strike it out,” Justice Ogolla said.

Mr Abdi who has a 25 per cent shareholding in Blue Bird Aviation Ltd had said since incorporation of the firm, there haven’t been annual general meetings, that he has been excluded from the management of the firm, has no details or financial information and that he has never received any dividends as a shareholder. 

“The relationship between the petitioner and his co-directors has seriously strained, and for that reason, the company cannot be run in accordance with its Articles of Association.

The other directors have also refused to and continue to refuse to meet to discuss the pertinent issues regarding the company,” argued the lawyer for Mr Abdi.

He said his co-directors had breached their “fiduciary duty”, have misappropriated company funds, created a parallel financial system within the entity through which revenue from the firm’s business is stashed abroad and, have come up with a number of shell companies into which these monies are put.

Mr Abdi did not deny that the Companies Act No 17 of 2015, and the Insolvency Act No 18 of 2015, are the applicable laws but said since Blue Bird Aviation Ltd was incorporated before the enactment of the new Companies Act No 17 of 2015 and the Insolvency Act No 18 of 2015, the applicable law was the Companies Act that had been repealed.

He said the Insolvency Act No 18 of 2015 was operationalised on January 18, 2016, and that the same only caters for companies registered or incorporated under the 2015 Act.

“The Company being a creature of the repealed Companies Act, Cap 486 this petition is properly before this Court,” Mr Abdi submitted.

This line of argument was quickly countered by the other directors among them Mr Hussein Ahmed Farah, saying, the term “wind up” had now been replaced with “liquidation”.

Further, it was the co-directors’ contention that Section 3 of the latest Companies Act, holistically provided even for companies that had been registered and incorporated under the repealed Companies Act, Cap 486. In addition, that there was a vacuum in law since the Cabinet secretary had not yet made rules for the processes of insolvency.

Unsubstantiated allegations
They also contended that Section 736, which was subject to Section 734(2) was not in existence, and therefore, by the repealing of the Winding Up Rules through Section 1023(4) of the Companies Act No 17 of 2015, it effectively meant that a party that intended to move to the court on a winding-up procedure was deprived of procedural guidelines.

It was also the co-directors’ argument that Mr Abdi mischievously intended to litigate unsubstantiated allegations and further sought to have the company liquidated instead of pursuing other available alternative remedies.

The ruling will reverberate in the corporate corridors which are known to be litigious whenever boardroom wars break out.
It is now be upon Parliament to expedite the process of enacting the necessary legislation as currently it may be impractical to wind up companies even there are good grounds to do so.

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