What winding up means
Winding up is the orderly end of a company's life.
A liquidator takes control from the directors, gathers in the assets, turns them into money, works out who is owed what, pays them in the order the law requires, and distributes whatever remains to the shareholders. When that is finished the company is dissolved and stops existing.
The order of payment is the part that decides everything. Secured creditors look to their security first. Then come preferential claims, which include employee wages within limits and certain taxes. Then unsecured creditors, who share whatever is left, usually receiving a fraction of what they are owed. Shareholders come last, and in an insolvent winding up they receive nothing.
Winding up and liquidation are used interchangeably in practice. Dissolution is the final step at the end of it.
How it is used
CAMA 2020 provides three routes, and which one applies depends on who is driving it and whether the company can pay its debts.
Members voluntary winding up is for a solvent company. The directors swear a declaration of solvency stating that the company can pay its debts in full within a stated period, the shareholders resolve to wind up, and a liquidator is appointed. This is the route for a company that has simply finished what it was set up to do.
Creditors voluntary winding up is for an insolvent company where the shareholders resolve to wind up but no declaration of solvency can be made. Creditors have the decisive say in appointing the liquidator.
Winding up by the court happens on a petition, most often by a creditor who has served a statutory demand that went unpaid. It can also be ordered on other grounds, including that it is just and equitable to do so, which is sometimes used when shareholders in a small company reach complete deadlock.
Key features
- Three routes: members voluntary, creditors voluntary, and by the court
- A liquidator replaces the directors and takes control of the assets
- Assets are distributed in a statutory order of priority
- Employees and certain taxes rank as preferential claims
- Shareholders are paid last, and usually receive nothing where the company is insolvent
- Dissolution follows the completion of the winding up
How this works in Nigeria
CAMA 2020 added alternatives that did not previously exist, and they are often better than closing a business that could survive.
Administration allows an administrator to run the company with a view to rescuing it as a going concern. A company voluntary arrangement lets a company propose a compromise to its creditors, binding them if the required majority agrees. Both are aimed at rescue rather than burial, and both are underused in Nigeria simply because they are not well known.
CAMA 2020 also brought insolvency practitioners under a regulatory framework, so liquidators and administrators must be qualified and licensed.
For a small dormant company, formal winding up is often disproportionate. Striking off through the CAC is the cheaper route where the company has no assets, no liabilities and no activity, though it does not give creditors the protection a liquidation does.
Winding up vs striking off vs administration
Three ways a Nigerian company stops trading, with very different consequences.
Striking off removes a dormant company from the CAC register. It is the cheap route for a company with nothing in it and nothing owing. It is administrative rather than judicial, and it offers creditors none of the protections of a liquidation.
Winding up is the formal process. A liquidator realises the assets and distributes them in the statutory order. It is the right route where there are assets to distribute or creditors to deal with properly.
Administration is a rescue procedure. An administrator takes over with the aim of saving the company or getting a better result for creditors than an immediate liquidation would. It buys time and imposes a moratorium on claims.
Directors of a struggling company should look at administration before winding up. Once a liquidator is appointed the business is generally being sold, not saved.
Limits and risks
Winding up is slow and it consumes value. The liquidator's fees and the costs of the process come out of the assets before creditors see anything, so a small estate can be largely absorbed by the cost of distributing it.
Unsecured creditors rarely recover much. By the time secured and preferential claims are met, there is often little left.
Directors are not automatically off the hook either. A liquidator investigates the conduct of the directors, and where they carried on business fraudulently or in defined improper circumstances they can be made personally liable.
And it is public. A winding up petition against a company is visible, and it can trigger the collapse of supplier credit and customer confidence long before the court decides anything.
Worth knowing
A statutory demand that goes unanswered is how most creditor petitions begin. If your company receives one, respond within the period rather than ignoring it, because failure to pay or dispute it lets the creditor tell the court the company cannot pay its debts.
Questions people ask
What is winding up a company?
It is the process of closing a company down: a liquidator realises its assets, pays creditors in the statutory order of priority, distributes anything left to shareholders, and the company is then dissolved.
What are the ways to wind up a company in Nigeria?
Three under CAMA 2020: members voluntary winding up for a solvent company, creditors voluntary winding up where no declaration of solvency can be made, and winding up by order of the court, usually on a creditor's petition.
Who gets paid first in a liquidation?
Secured creditors look to their security first. Then preferential claims, including employee wages within limits and certain taxes. Then unsecured creditors share what is left. Shareholders come last and often receive nothing.
What is the difference between winding up and striking off?
Striking off is an administrative removal of a dormant company from the CAC register, suitable where there are no assets and no liabilities. Winding up is a formal process with a liquidator, used where there are assets to realise or creditors to deal with.
Can a company be saved instead of wound up?
Yes. CAMA 2020 introduced administration and company voluntary arrangements, both aimed at rescuing a company or getting creditors a better outcome than immediate liquidation. Directors should consider them before petitioning to wind up.
Can directors be personally liable in a winding up?
They can. The liquidator investigates their conduct, and directors who carried on business fraudulently or in other defined improper circumstances can be ordered to contribute personally to the company's assets.