Corporate Insolvency

THE DISAPPEARANCE OF LEGAL PERSONALITY

When a commercial company acquires legal personality the personality does not persist for life i.e., it is not permanent, it will some day end. The disappearance of legal personality is the consequence of dissolution of the company, which entails the dissolution and distribution of its patrimony among shareholders (partners).

Causes of Disappearance

The causes of disappearance are of two types, the one is applicable to all commercial companies; the other relates to individual partners and is restricted to those companies in which the personality of the participant is fundamental.

General Causes

There are four general causes:

  • A commercial company established for a certain period of time dissolves at the end of that period in the absence of a resolution extending its life.
  • A decision taken by the shareholders (partners) to dissolve the company before the time agreed upon.
  • Loss of the object or impossibility of performance
  • If the object has been attained
Peculiar causes

The causes peculiar to individuals do not apply to all commercial companies, they relate exclusively to partnerships. Accordingly the death, incapacity or insolvency of a partner will lead to the dissolution

However in practice, partnership agreements usually contain a provision (clause) making it possible for the partnership to continue doing business not withstanding any of the above causes that may lead to its dissolution.

A partnership cannot be dissolved by the unilateral will of a partner except if he acts in good faith. The last cause for dissolution, which is applicable to all types of commercial companies, is the dissolution for just cause. Here dissolution may be requested by an individual shareholder or partner. The just cause is left to the appreciation of the court. Some of the factors, which may be considered as just cause, include failure by a partner to respect his obligations, permanent disability of a partner, antagonism that makes it impossible for the partners to work together etc

Note that the regular transformation of a limited company  from one form into another shall not entail the creation of a new legal entity. The same shall apply to an extension of the existence of a company or any other amendment of its Articles of Association (partnership Agreement) with formalities of publication both at the time of constitution (formation) to any amendment of its Articles of Association (partnership Agreement) 

Dissolution of a Company

The dissolution of a company is the termination of its legal existence. Among the causes of dissolution of companies we may allude to the factors which are general and which apply to all types of commercial companies and those which that are unique to certain forms of commercial companies.

Causes Common to dissolution of all types of Companies The factors that may occasion the dissolution of a company are:

  • The expiry of the period for which it was formed;
  • The realisation of the object or where the realisation of the object has become impossible;
  • On the decision of the shareholders under the conditions provided for amending the Articles of Association:
  • Upon a decision of the court at the request of a shareholder for a misunderstanding between shareholders hampering the normal functioning of the company:
  • Where all the shares are united in the hands of a single shareholder / when all the shares are held by one person; Bankruptcy;

Expiry of the term (Exfluxion of time):  If the articles of association provided for definite life (term) the company automatically terminates at the end of the designated time.  However, the life of a company constituted for a fixed period may be extended by a decision of the shareholders in conformity with the condition provided for amending the Articles of Association.  In the event where it is deemed necessary to prolong the life of the company, the managers (directors) are required to submit the question of prolongation to the shareholders at least six months before the expiry date.

Where a company is established for an indefinite period, then, a shareholder may if acting in good faith signifies his intention to withdraw from the company by giving the company six months’ notice.  Should that come to pass the other shareholders are required to reimburse the dissenting shareholder the equivalent of his assets having regard to the situation of the company as at the time of withdrawal provided that he does not elect to dissolve the company Note that where a company is established for an indefinite period the company is a company at will. Such a company may be dissolved at any time by any shareholder. All that is necessary is for a shareholder to notify the other shareholders.

Realisation of the object or where realization of the object becomes impossible. 

A company that is formed for a certain objective such as to acquire a certain plot of ground and then to develop and sell residential lots dissolves when that objective is reached. Similarly where a company is formed for a certain objective and the realization of the object becomes impossible the company may be dissolved. Impossibility of achieving the objects may be the result of exhaustion of minerals, withdrawal of administrative concession nationalization etc.

On the decision of the shareholders.  

Since a company is created as a result of the decision of the shareholders the shareholders can at any time decide to terminate the life of the company in accordance with the conditions provided for amending the Articles of Association

Upon a decision of the court. 

A company may also be dissolved upon a decision of the court at the request of a shareholder for a serious misunderstanding between the shareholders, which leads to a malfunctioning of the company.

Where all the shares are united in the hands of a single shareholder.

When all the shares are held by one person this person can alone decide to dissolve the company.  The person could be not only an individual but another company.

The bankruptcy of accompany is another factor that conduces to the dissolution of accompany.

A company is said to be bankruptcy if it is unable to pay its debts as they are, or become due.  Both bankruptcy and judicial administration are procedures controlled by the court.

LIQUIDATION OF COMPANIES

Liquidation of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. Upon liquidation of a company, a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

There are two types of liquidation: compulsory liquidation under an order of court and voluntary liquidation under a resolution of the company.

A company shall be under liquidation as soon as it is dissolved for any reason except by merger. The words “in liquidation” shall be added to the name of the company including letters, invoices and various publication of the said company.

The legal personality of the company shall continue to exist for liquidation purposes until the liquidation procedure is completed.

When a decision ordering the liquidation of the company has been taken the powers of the board of directors, managing directors or the managers shall end (be suspended) and the liquidator will assume their functions. The managing directors or managers are required as at the date of dissolution to establish a balance sheet, profits and loss account and a report, which shall be submitted to the auditors (if any) for verification and to the shareholders for approval.

The liquidator(s) are, in default of their designation by the articles of association appointed by the annual meeting. Note that one or more liquidators shall be appointed:

  • Unanimously by the partners in case of a general partnership;
  • Unanimously by the active partners and by the majority in capital in case of a limited partnership and limited partnership by shares;
  • By the majority capital of shareholders in case of private limited company
  • Under the quorum and majority conditions provided for a special meeting in case of a public limited company .

 

As seen before, every company shall be considered to be a commercial company.

It is therefore of paramount importance to discuss some matters relating to commercial activities, persons who carry out such activities (traders), and any other relevant matter that might fall within commercial sphere.

 WINDING UP BY THE COURTS

Upon a decision of the court

A company may also be dissolved upon a decision of the court at the request of a shareholder for a serious misunderstanding between the shareholders, which leads to a malfunctioning of the company.

 VOLUNTARY WINDING UP

On the decision of the shareholders

Since a company is created as a result of the decision of the shareholders the shareholders can at any time decide to terminate the life of the company in accordance with the conditions provided for amending the Articles of Association (i.e. in principle the unanimous decision of the partners (partnership) and the special majority for companies (SARL and SA).

 LIQUIDATORS: APPOINTMENT AND DUTIES

Note that a liquidator may be chosen from among the shareholders or third parties.  In addition, the liquidator may be a corporate body.

However, where the shareholders are unable to appoint a liquidator within three month of the dissolution of the company he may be designated by a court decision at the request of any interested party. In default, the managers or directors of the company at the time or moment of dissolution shall, in relation to the third parties, assume any obligation and liabilities of the liquidators.

Note that in case of nullity e.g. where the Articles of Association does not take the form of a notarial act it is only the court that is competent to appoint liquidators.

The liquidators are clothed with the widest powers possible to realize the act of liquidation as well as to represent the company i.e., legal proceedings (liquidation proceedings).  However, the liquidator cannot without the consent of the shareholders (under condition for amending the articles of association) or authorization of the court, as the case may be, sell real estate, borrow give secured debts, transfer the assets of the company by private contract), assign or transfer the assets of the company to another company or stay the execution of a judgment.

Note that the effect of liquidation is to create concurrent rights between creditors of the company. As such, no cancellation of sale of movable property can be allowed against the interest of creditors.

The liquidator is empowered to pay creditors.  Where the sums allotted to creditors have not been paid out, they shall be deposited in an account opened at the National Bank of Rwanda.

After paying off the creditors the balance available will then be shared among shareholders and any property that cannot be shared conveniently shall be handed over to the shareholders jointly.

In the course of performing his duties the liquidator is required to use the care and skill required of a paid agent. The liquidator is liable to the company as well as third parties for the actionable wrong resulting from any errors made by him in the exercise of his duties.

Each year the liquidator is required to submit to the general meeting a financial statement, profit and losses account as well as a written report in which he shall give an account of the liquidation exercise during the year together with reasons hampering the closure of liquidation.  Nonetheless, the general meeting of shareholders or the court may at any time request the liquidator to submit a written report containing the state of the liquidation exercise and the reason hindering the closure of liquidation.

 RELEASE OF LIQUIDATORS

At the close of liquidation it is mandatory for the liquidator to establish a written report on the liquidation exercise, which shall be submitted to the general meeting, failing this, to the auditors.

The shareholders shall take a decision on the final accounts, the discharge of the liquidator and auditors in respect of the performance of their duties.  The discharge will be valid if and only if the report and profit and loss account do not contain errors or omissions.

The foregoing notwithstanding the court may at the request of any interested party pronounce the termination of liquidation once the liquidation exercise has been concluded.  This, it will do after hearing the liquidator.

Notwithstanding the end of liquidation the court may order the reopening of liquidation at the request of any interested party:

  • If the decision pronouncing the end of liquidation was actuated by a fraud on his rights;
  • if the liquidators have not shared all that accrued to the company in liquidation To make known his status of shareholder or creditor.

Should liquidation be reopened the former liquidators will be reinstated, if need be, they may be replaced.          

PRESCRIPTION OR LIMITATION OF TIME

Prescription relates to the extinction of rights by lapse of time i.e. the time within which if an action is not instituted in court, the plaintiff’s right of action is lost.

All actions against the company shall lapse after 10years from the date the right of action accrued. However, the following acts shall be barred after 5years:

  • all actions against the promoters of a company starting from the date of publication of the memorandum of association;
  • all actions against shareholders starting from the date of publication of their retirement or dissolution of the company;
  • All actions against the organs of the company for acts committed in the exercise of their functions starting from the date of such acts or if it was concealed by fraud from the date of discovery;
  • All actions against a company in liquidation from the date of publication of the closure of liquidation;
  • all actions for the restitution of dividends unjustly paid from the date of distribution;
  • all actions for the payment of dividends or for the reimbursement of part thereof, from the date it became due.
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