Members’ Voluntary Liquidation
|Author: Eleanor Ngalo|
|Dated: May 2, 2020|
It is no secret that the world is currently enduring a periodic chaos which continues to affect millions of lives globally and has brought so many things to a standstill. Officially declared a pandemic by the World Health Organisation (WHO) on 11th March 2020, the coronavirus or COVID-19, has not only claimed the lives of tens of thousands, but it has adversely affected the operationalization of businesses across the globe.
In the wake of the coronavirus, its aftermath is foreseeable that the torment local business owners are experiencing from the slump in global trade is likely to drive the decision to downsize operations or close shop altogether. Resultantly, many may have the following options open to them:
Afrilex Associates has compiled a step-by-step guide on how a company may conduct a members’ voluntary liquidation.
First and foremost, it is imperative to note that all company affairs in Tanzania are governed by the Companies Act (Cap 212) as amended from time to time. Winding-Up is covered under Part VIII of the Act and includes provision for court winding-up, creditors’ voluntary liquidation and members’ voluntary liquidation; this article will focus on the last.
There are few steps towards a voluntary liquidation (liquidation) but there are also some variables which inevitably will impact on the liquidation process. The steps and variables are described hereunder: –
Step 1: Board Resolution and Members’ Special Resolution
A Board Resolution must be passed, through which directors of the company resolve to liquidate the company due to the present economic challenges and difficulties in company upkeeping. Secondly, a second resolution, a members’ special resolution, shall be passed, detailing the members’ decision to liquidate the company. Both resolutions ought to indicate the date, time, and venue the resolution was passed. These resolutions or extracts shall be signed by the chairperson and secretary.
Step 2: Gazette Advertisement by Company
In compliance to Section 334 of the Act, the company seeking to liquidate must disclose this information to the general public within 14 days of passing the resolution, by advertisement in the Government Gazette and in some newspaper circulating in Tanzania.
This is usually done in order to welcome any complaints or concerns individuals or different entities may have with the winding-up decision. As a rationale, this breeds transparency and demonstrates that the decision was made in good faith.
Step 3: Declaration of Solvency
Pursuant to Section 338, the company carrying out a voluntary liquidation shall within 30 days of passing the resolution, fill in a statutory declaration statement through its directors, demonstrating that the company can pay its debts before it ceases business.
Step 4: Appointment of Liquidator
After 14 days on lapse of liquidation notice, the company shall appoint a liquidator as provided for under Section 340 of the Act.
The key roles of the liquidator shall include:
It is important to note that upon the appointment of the liquidator, the powers of the directors cease to apply.
Step 5: Gazette Advertisement by the Liquidator
If it is in the opinion of the liquidator that the company is unable to pay its debts in full, s/he will immediately inform the Registrar of Companies on this inability and then summon creditors by circulating a gazetted notice seven (7) days prior to meeting the creditors.
Alternatively, if the company can pay its debts, the liquidator shall produce another advertisement gazette, in a bid to welcome any claims the general public may have against the company. This exercise will help the liquidator become aware of the magnitude of debts owed by the company. After fourteen (14) days on the lapse of the notice, the liquidator shall call a general meeting and finalise the debtors and creditors for the company.
Step 6: Debt Payment and Tax Clearance
After setting apart his/her remuneration fees from the assets realised, the liquidator ought to discharge all remaining company debts. Section 367 of the Act indicates the list of priority claims to be paid off. All government creditors must be paid first. This includes taxes owed by the Tanzania Revenue Authority (TRA) and pension proceeds that are yet to be remitted. Furthermore, the company will need to consider the sector they are in and what organisations and authorities they are closely governed by or work with. For example, mining companies will need to be mindful of the royalties that may still be due.
The liquidator shall strive to pay all secured creditors of the company, although in practice, it is deemed improbable that the company, through its liquidator, will still have the monetary means to do so.
Following government creditor payments, the Tanzania Revenue Authority (TRA) must provide the company with a Tax Clearance certificate provided there are no outstanding tax liabilities for the company.
Where there are outstanding tax liabilities, a consensus is reached between the company and TRA where the liability shall be paid in installments until it is cleared off.
Step 7: Liquidator Final Meeting and Dissolution
Following issuance of Tax Clearance certificate, the liquidator shall call a general meeting of the company as provided for under Section 345 of the Act by gazetting a 30 days’ notice of a meeting for purposes of drawing up an account of how the winding up was conducted and how the property has been disposed of. This meeting shall include a briefing of the entire procedure while providing any explanations needed.
Step 8: Communication with the Company Registrar (BRELA)
Within fourteen (14) days of the liquidator proclaiming that the affairs of the company have been wound up, the liquidator shall deliver to the Company Registrar, a copy of the company’s account, and attach with that, the following items:
Following receipt of the above documents, the Company Registrar is, by law, responsible to immediately deregister them and dissolve the company within three (3) months.
The estimated timeline for the entire procedure is approximately 3-8 months.
Following this procedure, it has been advised as good practice to proceed paying all company creditors in pari passu, from whatever is left of the company assets, after liquidation costs and preferential debts are catered for, as indicated in law by section 357.
Should you require our services on any of the above, kindly contact us.
This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Afrilex Associates, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.