Uganda has published new regulations under the Companies Act (“the Act”) that provide for, among other things, striking off a company from the companies register. Striking off refers to the administrative process of removing a company from the register if a company is dormant or in default of its statutory obligations. A strike-off process can also be used by the registrar to enforce compliance with the statutory filing requirements by companies.
Recently, the registrar struck off over 500 companies, some of which were trading but had fallen into default with their statutory filing obligations. The strike-off caused consternation for those companies that had employees running contracts and banking relationships, leaving their stakeholders stranded and unsure of how to react.
The Companies Regulations 2023 are welcome and should placate these market issues.
The background
When Uganda amended its Companies Act in 2012, the registrar’s strike-off power was limited to foreign companies only. The old provision, permitting the striking off of defunct Uganda companies, was not included in the new law and had earlier been repealed by the Insolvency Act. It was, therefore, a relief last year when the Companies Act was amended to reintroduce the strike-off power for Ugandan companies.
The new regulations deal with the procedural aspects of striking off.
The strike-off process and consequence
The registrar may strike off a company on his or her own accord or at the request of another company. To do so, 30 days’ notice is required, and it is to be published in the Gazette or other media of wide circulation. A company that is struck off the register is required to cease business, if at all, and any person who operates a company that has been struck off will be guilty of committing an offence.
Restoration
The struck-off company may apply for restoration within 12 months from the date of the striking-off. In addition, any person may apply for restoration within five years from the date of striking off. The registrar may restore the struck-off company if:
- The company shows readiness to comply with the Companies Act;
- Was operational in business at the time it was struck off
- There is a proper reason for it to continue in existence; or
- The directors or shareholders were under a disability
Deregistration
The regulations introduce a step called deregistration, which is new to Uganda. Where a struck-off company fails to apply for restoration or where its application for restoration has been rejected, it shall be deregistered by the registrar. The registrar is then required to notify the official receiver to enter the name of the company in the register of dissolved companies and issue a certificate of dissolution.
This deregistration step is new to Ugandan legislation. Under Hong Kong company law, deregistration is when a company applies to be struck off. Kenya and Tanzania have no equivalent, and it is disappointing that there is no attempt at harmonisation of laws among members of the East African Community. By comparison, Kenya has the more detailed legislation on this issue.
This deregistration step is, however, problematic as it suggests that a company is not entirely defunct after being struck off and is only completely defunct upon deregistration. It is likened to purgatory in catholic doctrine. The strike-off provision in the Act already mentions cancelling the registration of a company as the consequence of a strike-off, so what further action should be taken? The name of the struck-off company becomes available for use following deregistration, and it appears that the intention of the regulations is to make the name available after twelve months from deregistration. However, by the slip of a pen, the name is to be available within 12 months of the strike-off, whatever that means.
If any asset of a deregistered company comes to light, a shareholder of any person with an interest in the asset may apply to court for a vesting order.
The good and the bad
It is fitting that the authority to strike off rests with the registrar, unlike in other jurisdictions where the authority is held by or shared with the courts, making this recourse inexpensive and much quicker. It may be especially relevant where the company seeking to be struck off is dormant because it never commenced business. Before this amendment, such companies would have to go through an expensive and unnecessary formal winding-up process.
There is some contention that the regulations on restoration and deregistration are outside the scope of the Act. This is because the Act does not mention these two ideas, and they are only brought up in the rules, causing conflicts between the law and the rules, rendering them invalid. There is, however, a low risk of these regulations being voided, given the circumstances of companies that may find these provisions applicable and their unlikely prejudice to anyone.
Both the Act and regulations are not specific on the fate of property of a struck-off and deregistered company. In some other jurisdictions, such property is vested in the Government. There are a number of other inconsistencies in the regulations which could simply be resolved by a purposive interpretation and application of the regulations. For instance, a company seeking to be struck off is required to file a declaration of solvency stating that it has no assets or liabilities and provide a schedule of such.
The origin of this error is easy to see: an incomplete adaptation of the form for voluntary winding up to fit a voluntary striking-off. Solvency, being a test of assets in excess of liabilities, makes sense in a winding up but not for a defunct company.
As the local Ugandan saying goes, ‘We will work with what we have; the nose of a chicken also serves as its forehead’. Welcome back, striking-off
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Read the original publication at ENSafrica.