Winding-up of a company is the process of bringing the existence of the company to an end. The liquidator is the chief executioner who is empowered to oversee the proceedings. It is an elementary principle of Company Law that upon the making of a winding-up order and the appointment of a liquidator, the powers of the directors of the company ceases, and become vested in the appointed liquidator. This is well captured in the Companies and Allied Matters Act (CAMA), Sections 422(9); 464(2); 473(2)  thereof.

However, one significant point that was not contemplated in the CAMA relates to the company employees. What becomes of the employees of the company upon the making of a winding-up order and the appointment of a liquidator? The CAMA did not make any express provision stating that the making of a winding-up order and the appointment of a liquidator automatically terminates the employment of the company’s servants or employees. The Nigerian court was recently called upon to deal with this lacuna in the case of Gbedu & Ors v. Itie [2020] 3 NWLR (Pt. 1710) 104. 

The Story

What happened in Gbedu & Ors v. Itie was that the Bureau of Public Enterprises (3^rd Respondent) filed a winding-up petition against Nigerian Sugar Company (2^nd Respondent) at the Federal High Court, Ilorin Division. On 18^th March 2005, the Court made an Order compulsorily winding-up the Company. The Court also appointed a liquidator – Joseph I. Itie (1^st Respondent). On 6^th April 2006, the employees of the Company (The Appellants) were disengaged from the service of the Company and were subsequently paid their entitlements.

Aggrieved, the Appellants filed an action challenging their termination as well as the amount they were paid as entitlements. The trial Court and the Court of Appeal dismissed their case. They appealed to the Supreme Court.

The apex Court was called upon to determine whether the trial Court and the Court of Appeal was right in holding that upon the making of a winding-up order and appointment of a liquidator, the appointments of the Appellants as employees automatically ends.

The Supreme Court noted, in agreement, the observation of the Court of Appeal that CAMA does not articulate in one clear provision the termination of the appointment of the employees of a company under liquidation as a consequence of the making of a winding-up order. More so, the apex Court confirmed that there is a dearth of local authorities on the point. The implication was that the Court of Appeal relied on several foreign cases (Fowler v. Commercial Timber Co. Ltd (1930) All ER 224; Chapman’s Case (1866) LRIEQ 346) and authoritative books (O. Orojo, Company Law and Practice in Nigeria Vol. 1, p. 540; Halsbury’s Laws of England, Vol. 7, para. 543; Loose on Liquidator, 5^th ed., p. 97) in coming to the conclusion that:

The answer to the question therefore, is that by the said winding-up Order and the appointment of a liquidator, the servants of the company were discharged from the date of the Order, in this case, the Order was made on March 18, 2005.

The Supreme Court did not find any compelling reason to disturb the conclusion of the Court of Appeal especially in the absence of any contrary authority put forward by the Appellants. In laying the issue to rest more permanently, Rhodes-Vivour, JSC held:

Once an order of compulsory winding-up of a company is made, the Board of Directors seizes to function. They no longer have powers. All their powers are taken over by the liquidator. The Managing Director and all employees of the company are dismissed, and the dismissal takes effect from the date the winding-up order was made by the court.

The expression that the making of a winding-up order operates as an automatic “dismissal” of the company employees must be understood in the context of bringing the employment contract to an end or termination, and not dismissal as is commonly understood in industrial relations.

Is there a Miscarriage of Justice?

The Appellants had earlier argued that the conclusion of the Court of Appeal on the issue is not only perverse but had occasioned a grave miscarriage of justice since there was nothing in the CAMA to that effect. The Supreme Court was not persuaded. Rhodes-Vivour reasoned that the statutory lacuna and the unavailability of local authorities should not render a Judge helpless or robotic, as the Judge is permitted to do some research, refer to and rely on foreign authorities that may be helpful. According to his Lordship:

When a case contains issues that appear new or that have not been decided in the jurisdiction in which the Judge presides, the Judge is not expected to surrender and say since these issues have not been decided before so there is no remedy available for the claimant. No, a Judge is not a robot. He is expected to do some research, and in that exercise, it would be very helpful if he restricts his research to the jurisdiction in which such issues have been dealt with repeatedly, for a guide as to how to resolve the issues before him. This is not to say that the Judge is bound by authorities beyond our shores, rather the Judge is expected to rely and follow them only where our laws are silent on the issue, or where the foreign authorities are very helpful.

Clearly, the move by the Court to close the gap by establishing the foregoing rule cannot be held to be overreaching.

The employment of company employees is contractual and finds relevance in the management of the company which is under the control of the managing director as the executive head of the management team of the company. Thus, if the appointment of a liquidator and the making of a winding-up order automatically displaces the managing director, the employees must be reasonably expected to fall under. Recall that the whole idea of paving the way for the liquidator was to make his job of dissolving the company seamless, and without undue obstructions from those originally in control of the company. The abrupt termination of the employment contract is clearly by operation of law and the company cannot be held liable for its inability to continue with the contract.

Bearing this in mind, it is difficult to see any injustice in the rule on automatic termination of employees’ employment upon the making of a winding-up order and appointment of a liquidator.

Perhaps, the only material point is that the employees (such as the Appellants) whose employment were terminated are entitled to receive their entitlements in line with their contracts. In the instant case, the Appellants contended that they were underpaid their entitlements based on some alleged collective agreements. The Supreme Court however found that the said collective agreements were not incorporated into the Appellants’ individual employment contracts and that there was no nexus between the said collective agreements and the respective appointments of the Appellants. It consequently upheld the dismissal of the Appellants’ claims in this regard.

Commenting on the earlier Court of Appeal Judgment (which was upheld by the Supreme Court) in this case, learned authors, Udofa and Ekeh, noted (“The Status and Role of Liquidators in the Winding-Up of Companies in Nigeria”, European Journal of Business and Management (2016) 8:20 p. 151):

It is significant to observe that the effect of a winding-up order and appointment of a liquidator on a contract of employment depends on whether the winding-up is compulsory or voluntary. The above case of Gbedu, illustrates the position under compulsory winding-up of companies. In a members’ voluntary winding-up, the effect of the appointment of liquidator(s) is that all the powers of the directors shall cease, except so far as the company in general meeting or the liquidator, sanctions the continuance thereof. Thus, upon the appointment of a liquidator, the directors become functus officio, except in special circumstances. Similarly, in creditors’ voluntary winding-up, upon the appointment of the liquidator or liquidators, the powers of the directors shall cease, except as the Committee of Inspection or the creditors sanction the continuance thereof.

In a compulsory winding-up, the effect of the appointment of liquidator(s) is that directors’ powers shall cease, except so far as the courts may by order sanction the continuance thereof.

We must note that in none of the winding-up methods identified above did the CAMA expressly make provisions on the fate of the company employees. Therefore, in view of the position of the Supreme Court and the foreign authorities relied on by the Court, it may not be totally correct to state that the foregoing rule on automatic dismissal of employees as stated in Gbedu’s case applies only to compulsory winding-up. The referenced authorities touched on several kinds of winding-up. For instance, Loose and Griffiths, quoted by the Supreme Court, identified that “employees are automatically dismissed in the case of creditors’ voluntary winding-up…”

Conclusion

Let us conclude this piece by considering more practical consequence of the foregoing rule on automatic dismissal of company employees on the face of winding-up order and appointment of liquidator. Where the winding-up order is made and the liquidator is appointed, does the employees of the company enjoy the corresponding right to automatically stop work since their appointment automatically ends? What if a particular employee(s) is quite vital to the extent that his or her automatic disengagement may harm the company?

We believe that it is at this stage that the discretion donated to the courts (in compulsory winding-up), the general meeting/liquidator (in members’ voluntary winding-up) and the creditors (in creditors’ voluntary winding-up) becomes crucial. The courts, the general meeting/liquidator and the creditors, as the case may be, may sanction the continuance of exercise of power by the company directors and by extension, to the company employees until such time as they may determine.