AMALGAMATION OF COMPANIES

 

Amalgamation of Companies.

Osborn’s Concise Law Dictionary 12th Edition at page 28 defines Amalgamation as the merger of two or more companies or their undertaking. In essence, two or more companies may Amalgamate and continue as one company which may be the one of the amalgamating companies or may be a new company.

Section 237 of the Companies Act No. 1 of 2012 (herein referred to as “the Act”) provides for amalgamation. It states that two or more companies may amalgamate and continue as one company which may be one of the amalgamating companies or may be a new company. The amalgamating companies amalgamate to form the amalgamated company.

A company has power under section 10(1)(g) of the companies act to alter its memorandum of association to enable it to amalgamate with any other corporate company as emphasized in the case of Bread Limited Vs Uganda Company Ltd & Industrial Machinery ltd [1975] HCG 214

For a company to be authorized to amalgamate, there must be an amalgamation proposal and proposed incorporation documents pursuant to section 238 of the Act.

The procedure for amalgamation of companies under the Act is as follows;

1.    Amalgamation proposal.

1.1.       Section 239(1) of the Act states that the amalgamation proposal must set out the terms of amalgamation and in particular;

(a)  the manner in which shares of each amalgamating company are to be converted into shares of the amalgamated company; 

(b)  if any shares of an amalgamating company are not to be converted into shares of the amalgamated company, the consideration what the holders of those shares are to receive instead of shares of the amalgamated company;

(c)  any payment to be made to any shareholder or director of an amalgamating company, other than a payment of the kind described in paragraph (b);

(d)  and details of any arrangements necessary to perfect the amalgamation and to provide for the subsequent management and operation of the amalgamating company. 

1.2.       Section 239(2) of the Act states that an amalgamation proposal may specify the date on which the amalgamation is intended to become effective. Where shares of one of the amalgamating companies are held by or on behalf of another of the amalgamating companies, the amalgamation proposal must provide for the cancellation of those shares when the amalgamation becomes effective without any payment in respect of those shares and no provision may be made in the proposal for the conversion of those shares into shares of the amalgamated company. This is pursuant to section 239(3) of the Act.

2.    Incorporation documents of the amalgamated company. 

2.1.       Section 240(1) of the Act provides that the incorporation document for authorization under section 238 must be in the prescribed form and must in particular state—

(a)  the name of the amalgamated company; 

(b)  the share structure of the amalgamated company, specifying—

(i)             the number of shares of the amalgamated company; and

(ii)          the rights, privileges, limitations and conditions attached to each such share or class of share and its transferability, if different from fundamental rights attached to shares; 

(c)  the full names, postal and residential addresses of each director of the amalgamated company; 

(d)  in the case of a public company or a private company with a secretary, the full name, postal and residential address of the secretary of the amalgamated company;

(e)  the registered office of the amalgamated company;

(f)   the place where the amalgamated company’s records are to be kept if not the registered office; and

(g)  the amalgamated company’s accounting reference date. 

2.2.       Section 240(2) of the Act states that the incorporation document may also contain— 

(a)  any restriction on the amalgamated company’s capacity and powers;

(b)  and any provision permitted by this Act or otherwise relating to the internal management of the amalgamated company.

2.3.       Section 240(3) of the Act states that if the proposed amalgamated company is to be the same as one of the amalgamating companies, the incorporation document for authorization may comprise the incorporation document of that amalgamating company and proposed notice of change of the incorporation document.

3.    Manner of authorizing amalgamation.

3.1.       Section 241(1) of the Act states that the directors both companies must resolve that the amalgamation is in the best interest of the shareholders of the company and the amalgamated company will be solvent immediately at the time the amalgamation becomes effective.

3.2.       Section 241(2) of the Act states that the directors have to vote in favor of the resolution to amalgamate as per section 241(2) of the companies Act.

3.3.       After passing the resolution to amalgamate, the directors must sign a certificate stating that amalgamation is in the best interest of the shareholders and the amalgamated company will be solvent as per section 241(2) of the companies Act.

3.4.       The directors of each of the amalgamating companies must send to each shareholder of that company not less than twenty working days before the amalgamation is to take effect –  

(a)  Copy of amalgamation proposal.

(b)  Copy of the proposed incorporation document.

(c)  Copies of signed certificates given by each set of directors setting out that;

(i)             The amalgamation is in the best interest of the shareholders of the company

(ii)          The amalgamated company will be solvent immediately after the amalgamation is effective, and a statement of any material interests of the directors.

(d)  Any further information necessary to enable reasonable shareholder understand the nature and implications for the company and its shareholders of the proposed amalgamation.

4.    Special resolution

4.1.       Section 241(4)(a) of the Act states that the amalgamation must be authorized – 

(a)  by the shareholders of each of the amalgamating companies by special resolution; and 

(b)  by authorization of any class of an amalgamating company where any provision in the amalgamation proposal contain an alteration to that company’s incorporation document. 

5.    Registration of amalgamation.

5.1.       Section 242(1) of the Act states that after authorization of amalgamation pursuant to section 241, the following documents must, within ten working days after the special resolution has been passed, be delivered duly completed, to the registrar the following documents in relation to the amalgamated company;

(a)  its incorporation document or if the amalgamated company is the same as the one of the amalgamating companies, notice of change of incorporation document; and

(b)  consents in the prescribed form signed by each of persons named as director or secretary in the incorporation document.

(c)  certificates required by section 243.

6.    Certificate of amalgamation.

6.1.       Section 243(1) of the Act states that the registrar must send to the company or person from whom the documents required under section 242 were received—

(a)   if the amalgamated company is the same as one of the amalgamating companies, a certificate of amalgamation in the prescribed form, together with an amended certificate of incorporation if necessary; or 

(b)   if the amalgamated company is a new company, a certificate of amalgamation in the prescribed form together with a certificate of incorporation in the prescribed form. 

6.2.       Section 243(3) prescribes that on the date shown in a certificate of amalgamation—

(a)  the amalgamation becomes effective;

(b)  the registrar must remove the amalgamating companies other than the amalgamated company from the register;

(c)  the amalgamated company succeeds to all the property, rights and privileges of each of the amalgamating companies;

(d)  the amalgamated company succeeds to all the liabilities of each of the amalgamating companies;

(e)  proceedings pending by or against any amalgamating company may be continued by or against the amalgamated company;

(f)   any conviction, ruling order or judgment in favour of or against an amalgamating company may be enforced by or against the amalgamated company; and

(g)  the shares and rights of the shareholders in the amalgamating companies are converted into the shares and rights provided for in the incorporation document of the amalgamated company.

 

BANK OF INDIA v NC BEVERAGES & URA (RIGHTS OF A SECURED CREDITOR)

 

BANK OF INDIA (U) LIMITED VERSUS NC BEVERAGES LIMITED & UGANDA REVENUE AUTHORITY HIGH COURT (COMMERCIAL DIVISION) CIVIL SUIT NO. 0009 OF 2021 (OS)

(Floating and fixed charge – commencement of liquidation – Rights of a secured creditor – Rights of unsecured creditors)

Before: Hon Justice Stephen Mubiru.

JUDGMENT

The Plaintiff advanced two credit facilities to the 1st defendant which were secured by a debenture and further charge respectively over the 1st defendant’s fixed and floating (present and future) assets. The charges were duly registered. Around 30th 20 September, 2021 the 1st defendant had defaulted on the loans with an outstanding consolidated debt of shs. 4,236,039,316/= inclusive of accumulated interest. Before the plaintiff could realise the security, the 2nd defendant seized and disposed of most of the assets mortgaged to the plaintiff in a bid to recover unpaid tax of shs. 457,360,192/= under a warrant of distress issued on 26th May, 2021. The plaintiff seeks the enforcement of its rights as mortgagee despite the 2nd defendant’s execution of the warrant of distress.

Issues:

1. Whether the plaintiff is entitled to foreclosure and sale of the mortgaged assets.

2. Whether the plaintiff is entitled to take possession of the charged assets.

3. Whether the defendants should pay the costs of the suit.

Resolution.

1. The plaintiff’s claimed right of foreclosure.

A secured party may apply to court for an order to foreclose the right of a debtor to redeem the collateral. Foreclosure is the legal process that allows lenders to recover the balance owed on a defaulted loan by taking ownership of and selling the mortgaged property as collateral. The equity of redemption is a right given to the mortgagor over the mortgaged property, which includes the right to redeem the property on full repayment of the secured debt (see section 54 of The Security Interest in Movable Property Act, 2019). The mortgagor may redeem the mortgaged property on paying the full amount, including costs found due to the plaintiff. A final order of foreclosure usually puts an end to the equity of redemption and is valid against all defendants. Once obtained, the plaintiff obtains title to the property free and clear of the interests of the defendants and may therefore proceed to take possession or transfer the property to a purchaser.

Suits for foreclosure appeal to mortgagees where the value of the property at the time is not sufficient to repay the mortgage debt.

The plaintiff is the holder of a chattels mortgage and debenture charge dated 26th March, 2019, which incorporated a fixed charge over the 1st defendant’s fixed assets and a floating charge over other assets. According to clause 3.1 (a) – (x) thereof the fixed charge registered on 28 20 th March, 2019 covered the 1st defendant’s “estates and other interests in freehold, leasehold and other immoveable property. Clause 3.1 (b) of the same debenture deed comprises a first floating charge registered on 28th March, 2019 over all the 1st defendant’s “undertaking, revenues, property right and assets (including without limitation, stock in trade) whatsoever and whosesoever situated, both present and future as are not for the time being or form time to time, subject to an effective fixed charge in favour of the bank under sub-clause 3.1 (a) or the provisions of any deed or other instruments executed pursuant thereto.”

Fixed and floating charges.

The key feature of a floating charge is that, until it crystallises, the chargor is entitled to deal with the charged assets in the normal course of business without any further consent from the chargee (see Robson v. Smith [1895] Ch D 118 and National Westminster Bank Plc v. Spectrum Plus Ltd [2005] 2 All ER 1000). The central feature which distinguishes a floating charge from a fixed charge lies in the chargor’s ability to control and manage the charged assets freely and without the chargee’s consent. The essence of a floating charge is that it is a charge, not on any particular asset, but on a fluctuating body of assets which remain under the control of the chargor (see Agnew and Kevin James Bearsley v. The Commissioner of Inland Revenue, and Official Assignee for the Estate In Bankruptcy of Bruce William Birtwhistle and Mark Leslie Birtwhistle [2001] 2 AC 710; [2001] Lloyd’s Rep Bank 251, [2001] 3 WLR 454). It “is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp” (see Illingworth v. Houldsworth [1904] AC 355 at 357).

Clause 3.4 (c) and (d) of the debenture deed provides that the floating charge created by sub-clause 3.1 (a) was to automatically and without notice be converted into a fixed charge in respect of the charged assets subject to the floating charge, if and when the company ceases to carry on business or to be a going concern, or upon the occurrence of a potential event of default and / or an event of default. Upon crystallisation of a floating charge, the floating charge attaches to all existing assets that are within the scope of the charge and becomes fixed.

The main consequence of crystallisation is that the chargor's authority to dispose of or to deal with those assets without the consent of the chargee comes to an end. It is accepted that crystallisation will occur automatically upon the winding up (or other business cessation event) or the appointment of a receiver of the chargor (see In Re Portbase Clothing Ltd; Mould v. Taylor [1993] Ch 388). When a floating charge crystallises, it becomes a fixed charge attaching to all the assets of the company which fall within its terms. Thereafter the assets subject to the floating charge form a separate fund in which the debenture holder has a proprietary interest. For the purposes of paying off the secured debt, it is his fund. The company has only an equity of redemption (see Buchler and another (as joint liquidators of Leyland DAF Limited) v. Talbot and another (as joint administrative receivers of Leyland DAF Limited) and Stichting Ofasec and others, [2004] 2 WLR 582; [2004] AC 298).

In the instant case, the plaintiff’s floating charge crystalized on 21st April, 2021 upon the 1st defendant’s filing of a petition for winding up. According to clause 7.1 (c) of the debenture deed dated 26th March, 2019, a default would be deemed to have occurred upon the 1st defendant’s passing of a resolution or filing a petition for the winding up of the company. Therefore, not only did the filing of the petition for winding up crystallise the floating charge, but it also constituted an act of default on the part of the 1st defendant. It is trite that the mortgagee or charge may exercise his right of recourse against the security whenever he pleases after default (see Governments Stock and other Securities Investment Company v. Manila Railway Company [1897] A.C. 81).

Section 44 (1) of The Security Interest in Movable Property Act, 2019 provides that where a debtor defaults on the obligation to pay or where another event of default occurs, the security interest becomes enforceable. Upon default, the chargee or mortgagee has the option of taking possession of the assets of the charger or mortgagor that form the subject of that security, until the default which was the cause of the entry into possession has been rectified through the possession of the mortgagee, or until the mortgagee has exercised the power of sale (see section 47 (1) of The Security Interest in Movable Property, Act 2019). In a suit for foreclosure, following a final order of foreclosure, the mortgagor and subsequent encumbrancers are absolutely debarred and foreclosed of and from all right, title and equity of redemption of, in and to the mortgaged lands. This means that the mortgagors no longer have equity in the property which could support a claim to any right to request relief. An order of “foreclosure and sale” would thus be preferable for a defendant in situations where the value of the property exceeds the amount owing on the mortgage.

URA’s claim under warrant of distress.

Slightly over one month following the 1st defendant’s filing of a petition for winding up on 21st April, 2021, before the plaintiff had taken any step towards the realisation of the security, the 2nd defendant on 25th May, 2021, issued a warrant of distress authorising the attachment and sale of the 1st defendant’s “goods, chattels, or other distrainable things [of the 1st defendant] wherever the same may be found, for recovery of shs. 457,360,192/= in unpaid taxes. It is on that basis that the 1st defendant’s assets, already the subject of the plaintiff’s chattels mortgage and debenture charge, were attached.

The 2nd defendants seized the assets on 26th May, 2021 and advertised them for sale that was scheduled to take place on 15th June, 2021. That attachment prompted the plaintiff on or about 7th June, 2021 to file an application for an interim injunction order restraining the 2nd defendant from auctioning, selling, transferring or alienating the 1st defendant’s assets until the determination of the main application for an interlocutory injunction order. The interim injunction order was granted on 14th June, 2021 lasting until 14th July, 2021. The sale eventually took place on 20th November, 2021.

When liquidation commences.

According to section 93 of The Insolvency Act, No. 14 of 2011, where, before the presentation of a petition for the liquidation of a company by the court, a resolution is passed by the company for voluntary liquidation, the liquidation of the company is deemed to commence when the resolution is passed. In all other cases, it is taken to commence at the time of presentation of the petition for liquidation. The purposes of a liquidation are;

(a)    to ensure a just distribution of the company's assets among creditors and contributories and

(b)    to terminate the company's existence by its eventual dissolution.

The winding up of a company is a form of collective execution by all its creditors against all its available assets. The resolution or order for winding up divests the company of the beneficial interest in its assets. They become a fund which the company thereafter holds in trust to discharge its liabilities (see Ayerst (Inspector of Taxes) v. C & K (Construction) Ltd [1976] AC 167). It is a special kind of trust because neither the creditors nor anyone else have a proprietary beneficial interest in the fund. The creditors have only a right to have the assets administered by the liquidator in accordance with the provisions of The Insolvency Act, 2011 (see In re Calgary 10 and Edmonton Land Co Ltd (In liquidation) [1975] 1 WLR 355 at 359). But the trust applies only to the company's property. It does not affect the proprietary interests of others.

Secured creditors.

According to section 2 The Insolvency Act, No. 14 of 2011, “secured creditor” means a creditor who holds in respect of a debt or obligation a charge over property. Section 11 (2) (a) and (3) of the Act provide that a secured creditor may realise any asset subject to a charge, where he or she is entitled to do so, and after realising an asset subject to a charge may claim as an unsecured creditor for any balance due, after deducting the net amount realised, or account to the liquidator for any surplus remaining from the net amount realised after satisfaction of the whole debt, including any interest payable in respect of that debt up to the time of its satisfaction and after making proper payments to the holder of any other charge over the asset subject to the charge. Therefore, a secured creditor’s rights are discretionary. A secured creditor may realise any asset subject to a charge, where they are entitled to do so, can claim as a secured creditor in the order of preferences, or surrender the charge for the general benefit of all creditors and claim as an unsecured creditor.

The implication of the above provision is that the rights of the secured creditor to deal or realise security over company assets are not affected by the petition for winding. In the event of default, secured creditors can exercise their powers to sell the company’s assets which have been charged to them as security in order to satisfy the debts in accordance with the law. Should there be any shortfall therefrom, secured creditors may file proof of debt and they will consequently be regarded

as unsecured creditors. Secured creditors are required to hand over the remaining proceeds from the sale of the company’s asset to the liquidator to be credited into the estate of the company.

Creditors generally seek security for the purpose of protecting their interests if the debtor fails to repay. If security is to achieve this objective, upon the commencement of insolvency proceedings, the secured creditor should not in any way be delayed or prevented from immediately foreclosing upon its collateral.

A secured creditor “stands outside the winding up” and can realise and enforce its security by sale de hors the winding up proceedings or without intervention of the court (see Wrenbury in Food Controller v. Cork, [1923] AC 647; Kenya National Capital Corporation Ltd v. Albert Mario Cordeiro & another [2014] eKLR (Civil Appeal 274 of 2003); (27 February 2014); Siraje Ndugga v. Kabito Karamagi and another (Receivers of Spencon Services Limited in Receivership) H. C. Misc. Cause No. 219 of 2020 and African Textile Mill Ltd (in liquidation) v. Co-operative Bank Ltd (in liquidation), H. C. Civil Suit No. 20 of 2005). Therefore, creditors with a mortgage or fixed charge over assets secured in this way are outside the scope of the insolvency. A sale outside the winding up or without the intervention of the Court would be valid and cannot be challenged as invalid nor can it be challenged as void.

Questions of priority arise only between interests which compete with each other for payment out of the same fund. According to section 12 (6) (a) of The Insolvency Act, No. 14 of 2011, in the distribution of non-charged assets of the company, tax obligations rank second last after claims of other preferential creditors including; remuneration and expenses properly incurred by the liquidator, the reasonable costs of any person who petitioned court for a liquidation, all wages or basic salary of employees, etc. It is after paying preferential debts in accordance with the above order of priority, that the liquidator applies the assets in satisfaction of all other claims (see section 13 (1) of the Act). The general rule is that unsecured creditors are entitled to share pari passu in the company's fund (see section 13 (2) of the Act).

The rights of unsecured creditors over the company’s assets are virtually “frozen” upon the commencement of the liquidation to avoid a further deterioration of the company’s financial position and proliferation of its liabilities. After a petition for winding up has been presented, no creditor is allowed to take out or continue attachment or execution proceedings against the company. After a company goes into liquidation, unsecured creditors cannot commence or continue legal action against the company, unless the court permits it. A creditor must complete execution before the winding up application has been presented. Otherwise, a creditor cannot retain the assets. Any disposition or sale of the company’s assets, transfer of shares or alteration in the status of company’s contributories made after the commencement of the winding up by the Court without the Court’s sanction or approval is void.

Section 97 (1) (c) specifically prohibits the levying of distress against the company or its property, upon the commencement of liquidation. Therefore, once the petition was filed on 21st 5 April, 2021, it follows that the 2nd defendant’s warrant of distress issued on 26th May, 2021 in a bid to recover unpaid taxes of shs. 457,360,192/= was illegal and void. The sale that eventually took place 20th November, 2021 too was illegal.

Upon the 1st defendant’s default, the plaintiff was entitled to foreclosure and sale of the mortgaged assets, but for the 2nd defendant’s unlawful actions. As a borrower, the 1st defendant could have stopped the process of foreclosure by redeeming its property before a foreclosure sale (see section 54 of The Security in Movable Property Act, 2019). To redeem the property, the 1st defendant had to pay the full balance due before the foreclosure sale. Alternatively, the 1st defendant was required to prove that the plaintiff as foreclosing mortgagee did not comply with the foreclosure laws or the terms of the mortgage. The 1st defendant not having sought to assert its right of redemption, and not having challenged the process, I find that the plaintiff is entitled to foreclose.

2. whether the plaintiff is entitled to take possession of the charged assets.

A charge or mortgagee has the option to enforce their mortgage security through a foreclosure or judicial sale but for the most part, the exercise of a contractual or statutory power of sale is the more favourable remedy for mortgagees. If the deed does not contain a power of sale clause, statutory power of sale provisions are set out in section 48 of The Security Interest in Movable Property Act, 2019. According to that section, where a debtor is in default, sell any or all of the collateral in its condition. For that purpose, unless otherwise agreed, a secured party has the right to take possession of the collateral without a court order, provided this can be effected without a breach of the peace (see as well section 47 (2) (c) of The Security in Movable Property Act, 2019).

The defendants’ right, title and equity of redemption to and in the mortgaged property having been foreclosed, it is ordered and adjudged that the defendants forthwith deliver to the plaintiff or as the plaintiff directs, possession of the mortgaged property or of such part of it as is in the possession of the defendants.

As regards those assets already disposed of by the 2nd defendant in execution of the warrant of distress, the right of the secured creditor to avoid preferences and fraudulent transfers is fundamental to corporate insolvency policy. Only in corporate insolvency proceedings are preferences subject to attack; transfers made by an insolvent debtor with intent to prefer one creditor over another (see Accord Iraqi Min. of Defence v. Arcepey Shipping Co., S.A. [1980] 1 All E.R. 480 and Polly Peck Intern., P.l.c. v. Nadir (No. 2) [1992] 4 All E.R. 769).

Of similar importance is the fundamental policy of corporate insolvency to ensure that similarly situated creditors are given equal treatment. A preferential transfer focuses on whether a creditor has received a payment that results in that creditor getting better treatment than other creditors in light of the insolvency.

I find in this case that not only was the action of the 2nd defendant in issuing the warrant of distress of 26th May, 2021 after the 1st defendant had filed for winding up on 21st April, 2021 a contravention of section 97 (1) (c) of The Insolvency Act, No. 14 of 2011, but also the sale that took place on 20th November, 2021 provided a benefit to the 2nd defendant as creditor, out of turn and possibly in excess of what the 2nd defendant as creditor would have received in liquidation if that sale had not been made. From both perspectives, recovery by the 2nd defendant as an unsecured creditor depletes the insolvent debtor's estate to the disadvantage of other creditors and the proceeds of that sale ought to be recovered from the 2nd defendant.

On the other hand, a secured creditor is entitled to receive the value of its collateral up to theamount of its debt. Thus, payment to a fully secured creditor does not deplete the insolvent debtor's estate to the disadvantage of other creditors.