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Is Deadlock Between the Directors and/or Shareholders a Sufficient Ground for Making of a Liquidation Order?

CM Advocates > Corporate Law  > Is Deadlock Between the Directors and/or Shareholders a Sufficient Ground for Making of a Liquidation Order?

Is Deadlock Between the Directors and/or Shareholders a Sufficient Ground for Making of a Liquidation Order?

Section 424 of the Insolvency Act, 2015 (hereinafter “the Act”) provides for the circumstances under which a company can be dissolved by Court which includes; when it is just and equitable to do so. The provisions pertaining to liquidation on the just and equitable ground are increasingly being tested before the Courts, case in point, being on the premise that that there is a deadlock or stalemate between the directors and/or contributories (shareholders) of the Company on who/how to conduct management and operations of the Company thus necessitating issuance of a liquidation order. As per the provisions of Section 425 of the Act, an application for liquidation of the company can be filed by among other parties, the company, its directors or contributories (shareholders).

Accordingly, directors and/or shareholders have in some instances moved Courts for a Liquidation Order on the ground of it is ‘just and equitable’ necessitating a pronouncement by Courts on whether the said ground is sufficient for grant of a Liquidation Order.

The ground of ‘just and equitable’ does not entail a particular definition or threshold, as such, in analyzing the said ground as a basis of issuing a Liquidation Order, Courts have held that the same is at the discretion of Court. In Re Garnets Mining Co Ltd [1978] eKLR the Court held as follows:

“So a summary of the way to approach the issue of whether or not to wind up a company under the just and equitable rule is this. It is a matter for the discretion of the court. The discretion is a very wide one. It will be a matter of fact whether the company should be wound up or not under this rule. Each case will depend on its own circumstances: There must be a sound induction of all the facts to justify the exercise of the discretion. There is no general rule for this. The discretion is a judicial one, so it must be judicially exercised.”

In addition, Section 427 (3) of the Act provides that if the application is made by members of the company as contributories on the ground that it is just and equitable that the company should be liquidated, the Court shall make a liquidation order, but only if it is of the opinion that the applicants are entitled to relief either by liquidating the company or by some other means; and that, in the absence of any other remedy, it would be just and equitable that the company should be liquidated.

Section 427(4) further states that the Court will not consider a liquidation order on this ground if it is of the opinion that some other remedy is available to the applicants and that the contributories are acting unreasonably in seeking to have the company liquidated instead of pursuing that other remedy.

The foregoing provision of the Act was affirmed in the case of Abdirashid Mude Ulow Vs Hassan Omar Kassai [2020] eKLR wherein the Learned Judge in dismissing a Petition for liquidation of a company on this ground held as follows:

“There is no evidence that from then to date the Company is unable to carry out its business and is no longer a going concern, there is no evidence presented that the Company cannot pay its debts. The evidence presented is that there is a deadlock and/or stalemate by the Directors of the Company’s dispute on who/how to conduct management and operations of the Company. The Respondent admittedly ousted the Petitioner from the Company. This is a directors/shareholders dispute and not any handicap to the Company’s conduct of business to necessitate its dissolution. The Company is a separate legal entity carrying out its business. The court does not find the Directors feud a just and equitable basis to dissolve the Company. There are also other remedies available to settle the Petitioners and Respondents tussle in management and operations of the company.”

A further review of the Courts’ hesitance to issue liquidation orders in such instances is the Courts’ view of liquidation of a company as a draconian step which amounts to ‘corporate execution’. Case in point In re Ukwala Supermarket Limited [2019] eKLR the Court held that the Insolvency Act confers wide judicial discretion on liquidation Petitions of companies. In addition, that it is trite law that if the Court sees a Petition to liquidate a Company which is not brought in good faith it would apply its legal mind to dismiss it with costs. The Court further cited Matic General Contractors Limited Vs. The Kenya Power and Lighting Company Limited (2001) Llr 4837 (CAK) wherein it was held as follows; “………. But if a man will present a Petition to wind up when he has distinct notice that the debt is disputed, and the circumstances show that it is bonafide disputed, and also when he knows that the Company is solvent, if he will have recourse to this vexatious mode of proceeding, I can entertain no doubt that the duty of the Court, under those circumstances, would be, not to suspend the Petition, but absolutely dismiss it, with costs. And my opinion is, that this Court ought not, and I think will not at all events, I will not until I am controlled by higher authority permit the procedure under the winding up Acts to be made the vehicle of oppression.

In conclusion, it is clear that the directors and/or shareholders can approach a Court seeking a Liquidation Order on the ground that there is either a stalemate or deadlock between the said parties. However, the applicants should address their minds to other available remedies available to them for purposes of resolving the dispute since Courts will in most instances (as expounded in this article) decline to grant a Liquidation Order.

In case of any queries or if in need of any clarification, do not hesitate to contact the undersigned or route your queries through and +254716209673.

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