A Snapshop Of Winding Up Of Companies In Kenya

  1. INTRODUCTION

Liquidation or winding up refers to the process whereby the company gives up its business, sells off its assets , pays its debts and distributes whatever surplus remains amongst its members or otherwise as its constitution may provide.

 

 

Both solvent and insolvent companies may be wound up. In the case of insolvent companies, the company pays the debts to the extent that its funds allow.

The process of liquidating a company is conducted by a liquidator. On appointment of a liquidator, the powers of the directors to manage the business of the company cease.

It is important to note that throughout the process of liquidation .winding up, the company continues to exist. There is still a corporate personality and all corporate acts in the course of liquidation, for example the transfer of property and institution of legal proceedings, are done in its name rather than by the liquidator in his own name.

The company ceases to exist only after the winding up procedure has been completed, in other words, after formal dissolution of the company.

The process of liquidation must be gazetted.

In this write up, we are going to analyze how a company formed under Cap 486 laws of Kenya can be liquidated. In doing so, I will give emphasis on the provisions of the Insolvency Act 2015 and the Company’s Act 2015. We shall also look at case law both in Kenya and in the U.K.

  1. MODES OF LIQUIDATION

There are three modes in which a company may be wound up:-

(i)       Compulsory winding up by the court.

(ii)      Voluntary winding up:-

(a)    Members’ voluntary winding up.

(b)   Creditors’ voluntary winding up

(iii)  Winding up under the supervision of the court.

  1. COMPULSORY WINDING UP BY THE COURT

Section 423 of the Insolvency Act Kenya provides that only the High Court has jurisdiction to supervise the liquidation of companies registered in Kenya.

3a. CIRCUMSTANCES UNDER WHICH A COMPANY MAY BE WOUND UP BY THE COURT

Section 424 of the Insolvency Act provides that a company may be liquidated by the Court if-

(a) The company has by special resolution resolved that the company be liquidated by the Court;

(b) Being a public company that was registered as such on its original incorporation-

(i) The company has not been issued with a trading certificate under the Companies Act, 2015; and

(ii) More than twelve months has elapsed since was so registered;

(c) The company does not commence its business within twelve months from its incorporation or suspends its business for a whole year;

(d) Except in the case of a private company limited by shares or by guarantee, the number of members is reduced below two;

(e) The company is unable to pay its debts;

(f) At the time at which a moratorium for the company ends, a voluntary affangement made does not have effect in relation to the company; or

(g) The Court is of the opinion that it is just and equitable that the company should be liquidated.

(h)  A company may also be liquidated by the Court on an application made by the Attorney General on either of the grounds a-g above or according to section 426 of Insolvency Act, If in relation to a company, it appears to the Attorney General-

  1. From a report made or information obtained from investigations carried out or inspection of documents produced under the Companies Act,2015:
  2. From a report made, or information obtained, by the Capital Markets Authority under the Capital Markets Act;

iii. From information provided by the Registrar; or

  1. As a result of the company or its directors having been convicted of an offence involving fraudulent conduct that it would be in the public interest for the company to be liquidated
  2. The Attorney General may also make an application for the liquidation of a company if, after receiving from an inspector appointed to conduct an investigation into the affairs of a company under the Companies Act, 2015 a copy of a report of the investigation, the Attorney General considers that, as a result of the report, the company should be liquidated. , the Attorney General may make an application to the Court to make a liquidation order in respect of the company for its liquidation on the ground that it would be just and equitable for it to be so.

3b. PERSONS ELIGIBLE TO MAKE AN APPLICATION FOR LIQUIDATION.

Under section 425 of the Insolvency Act, An application to the Court for the liquidation of a company may be made any or all of the following:

(a) The company or its directors;

(b) A creditor or creditors (including any contingentor prospective creditor or creditors);

(c) A contributory or contributories of the company;

(d) A provisional liquidator or an administrator of the company;

(e) If the company is in voluntary liquidation-the liquidator.

(f) An Official Receiver or/by any other person authorised under the other provisions of this section may make a liquidation application to the Court in respect of a company that is in voluntary liquidation.

3c. ROLE OF THE COURT IN LIQUIDATION.

The insolvency Act provides that The Court may make a liquidation order on such an application only if it is satisfied that the voluntary liquidation cannot be continued with due regard to the interests of the creditors or contributories.

Section 427 of the insolvency act provides that on the hearing of a the Court may make such of the considers appropriate:

 (a) An order dismissing the application;

(b) An order adjourning the hearing, conditionally or unconditionally;

(c) An interim liquidation order; or

(d) Any other order that, in its opinion, the circumstances of the case require.

 However, the Court may not refuse to make a liquidation order on the ground only that the company’s assets have been mortgaged to an amount equal to or in excess of those assets, or that the company has no assets.

If the application is made by members of the company as contributories on the ground that it is just and equitable that the company should be liquidated, the Court shall make a liquidation order, but only if of the opinion that-

(a) That the applicants are entitled to relief either by liquidating the company or by some other means;

(b) That, in the absence of any other remedy, it would-be just and equitable that the company should be liquidated

The Court will not make an order for liquidation if it  is of the opinion that-

(a) Some other remedy is available to the applicants;

 (b) They are acting unreasonably in seeking to have the company liquidated instead of pursuing that other remedy.

Section 429 of the Insolvency Act provides that in a liquidation ordered by the Court-

(a) Any disposition of the company’s property; and

(b) Any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the liquidation is void, unless the Court otherwise orders.

If a company is being liquidated by the Court, any attachment, sequestration, distress or execution instigated against the assets of the company after the commencement of the liquidation is void.

3c. DISSOLUTION WHERE  LIQUIDATION  ORDER HAS BEEN MADE BY THE COURT.

The Insolvency Act under Section provides that within seven days after a liquidation order is made in respect of a company, the company shall lodge a copy of the order with the Registrar for registration and also lodge a copy of it with the Official Receiver.

When a liquidation order has been made or a provisional liquidator has been appointed, legal proceedings against the company may be begun or continued only with the approval of the Court and subject to such conditions as the Court considers appropriate.

An order for liquidating a company operates in favour of all the creditors and of all contributories of the company as if made on the joint application of all of them.

Section 433 of the Insolvency Act goes on to provide that if the Court has made a liquidation order or appointed a provisional liquidator in respect of a company, the Official Receiver may require some or all of the prescribed persons to make out and submit to the Official Receiver a statement of affairs relating to the company.

Those prescribed persons who are required to make out such a statement are required to  do so without delay and shall include in it-

(a) such particulars of the company’s assets, debts and liabilities as are prescribed by the insolvency regulations for the purposes of this section;

(b) the names and addresses of the company’s Creditors;

(c) the securities (if any) held by them respectively;

(d) the dates when the securities were respectively given; and such further or other information as the official receiver may reasonably require.

The prescribed persons are-

(a) those who are or have been officers of the company;

(b) those who have taken part in the formation of the company at any time during the twelve months before the relevant date;

(c) those who-

(i) are in the company’s employment, or have been in its employment during that period;

And

(ii) are in the official receiver’s opinion capable of giving the information required;

(d) those who are or have been within that period officers of, or in the employment of, a company that is, or within that period was, an officer of the company.

(4) prescribed persons who under this section are required under this section to submit a statement of affairs to the official receiver must do so within twenty-one days from and including the date on which notice of the requirement was given to those persons by the official receiver and verify the statement by statutory declaration.

3d. ROLE OF LIQUIDATORS IN THE LIQUIDATION PROCESS

As provided under section 460 of the insolvency Act 2015, in the event of a voluntary liquidation, the liquidator may exercise the court powers of settling a list of contributories, make calls on unpaid shares, Convene general meetings and pay companies debts.

In the event of a creditor’s voluntary liquidation, the liquidator is to assume all control of the company’s assets, dispose of perishable goods that may diminish in value and take any action necessary to protect the company’s assets.

The liquidator is entitled to distribute assets to the payment of creditors. They also have the power to dispose of onerous property this is property that has no net value for example it includes an unprofitable contract and unsalable property. Further they may transfer company assets to employees.

The liquidator must lodge from time to time reports to the registrar of companies with regards to the state of liquidation.
The liquidator has power to defend and bring a suit in the company’s name and carry out company’s business so long as is necessary for a beneficial liquidation.

The liquidator can without seeking approval, sell any of the company’s property and lastly the liquidator has the power to appoint an agent to carry out business which he/she is unable to do.

  1. WINDING UP UNDER SUPERVISION OF THE COURT

Section 431 of the Insolvency Act 2015 provides for a situation where the court is playing a supervisory role where  before the making of an application for the liquidation of a company by the Court, a resolution has been passed by the company for liquidating the company voluntarily-

In such a situation;

(a) The liquidation commences at the time of the passing of the resolution; and

(b) Unless the Court, on proof of fraud or mistake,directs otherwise, all proceedings taken in the voluntary liquidation are to be regarded as having have been validly taken.

  1. VOLUNTARY WINDING UP OF A COMPANY

Voluntary liquidation means liquidation by the members or creditors of a company without the interference of the court. The purpose of voluntary liquidation is that the members and creditors are left free two settle there is after debtors without going to court.

5a. CIRCUMSTANCES UNDER WHICH A COMPANY MAY BE VOLUNTARY LIQUIDATED

Section 393 of the Insolvency Act provides circumstances in which a company can wound up voluntarily:

  1. When a period fixed for the term of a company has come to an end or an even to which a company is to be relied has happened, then liquidation commences.
  2. If the company for whatever reasons passes a special resolution, the company will be wound up.

5b. FORMS OF VOLUNTARY  LIQUIDATION.

  1. Members liquidation
  2. Creditors liquidation

5c. PROCEDURE FOR VOLUNATARY WIND UP

  1. NOTICE OF RESOLUTION (Section 393 Insolvency Act 2015)

Before passing a resolution for voluntary liquidation, the company shall give notice of the resolution to the holder of any qualifying floating charge in respect of the company’s property.

  1. PASSING THE RESOLUTION(Section 393 Insolvency Act 2015)

If notice is given proposing a resolution for the voluntary liquidation of a company, such a resolution maybe passed only-

(a) After the expiry of seven days from and including the date on which the notice was given; or

(b) If the person to whom the notice was given has consented in writing to the passing of the resolution.

The provisions of the Companies Act, 2Ol5 which deal with resolutions affecting a company’s constitution apply to such a resolution under paragraph (a) of

Subsection as well as a special resolution.

  1. PUBLISHING NOTICE SETTING OUT THE RESOLUTION- (Section 394 Insolvency Act 2015)

Within fourteen days after a company has passed a resolution for its voluntary liquidation, it shall publish a notice setting out the resolution-

(a) Once in the Gazette;

(b) Once in at least two newspapers circulating in the area in which the company has its principal place of business in Kenya; and

(c) on the company’s website (if any).

If a company fails to comply with subsection (1), the company, and each officer of the company who is in default, commit an offence and on conviction are each liable to a fine not exceeding five hundred thousand shillings.

  1. DIRECTORS MEETING (Section 398 Insolvency Act 2015)

If it is proposed to liquidate a company voluntarily, the directors (or, in the case of a company having more than two directors, the majority of them) may at a directors’ meeting make a statutory declaration to the effect (a) that they have made a full inquiry into the company’s affairs; and

(b) That, having done so, they have formed the opinion that the company will be able to pay its

debts in full, together with interest at the official rate, within such period (not exceeding twelve

months from the commencement of the liquidation) as may be specified in the declaration.

(2) Such a declaration must be made within the five weeks immediately preceding the date of the passing of the resolution for liquidation, or on that date but before the passing of the resolution; and should include a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration.

(3) Within fourteen days after the date on which the resolution for liquidation is passed, the company must lodge a copy of the declaration with the Registrar for registration.

From here, the next steps will depend on whether it is a Members Liquidation or Creditors liquidation. 

MEMBERS LIQUIDATION

This is covered in section 399 to 404 of the Insolvency act 2015.

In a voluntary liquidation of a company if there is a declaration of its insolvency, then the company will be wound and this will become a members’ voluntary liquidation.

5. APPOINTMENT OF A LIQUIDATOR

On the appointment of a liquidator all the powers of the directors cease unless the general meeting or liquidator sanctions their continuance.

6. DECLARATION OF INSOLVENCY BY THE LIQUIDATOR

The liquidator will state that he/she has made a full inquiry into the company affairs and are of the opinion that the company has no debts and that for those debts it has it will be able to pay them within 12 months from the date of commencement of liquidation or otherwise. Such a declaration of insolvency shall be made within 30 days immediately preceding the date of passing the resolution. It embodies a statement of the company`s assets and liabilities at the latest practicable date of declaration.

A declaration of insolvency is a solemn declaration order by a director declaring a company is solvent and is able to pay its debts in full within 12 months. The shareholders will appoint a liquidator who shall proceed with liquidation process of the company. When a company has resolutions of voluntary liquidation its required to give a notice within 30 days before the meeting publish in the Kenya Gazette, two newspapers of national circulation, their website, failure to which the directors will be liable for a fine or imprisonment.

Strictly liquidation of members should take place in 1 year. If it continues for more than 1 year, the liquidator must summon a general meeting of the company at the end of the 1st year and each successful year, before the shareholders to account for his actions. If as soon as the company affairs are fully wound up the liquidator must make a final account and call for a general meeting which must be advertised in the kenya gazette.in this final meeting, the members will resolve to wind up the company.

Within 14 days after this final meeting, the liquidator must send a copy of the accounts of the company to the registrar and minutes of the meeting 3 months after the date of registration of the accounts and minutes or return’s of the company is dissolved. If the accounts and returns are not filed are required to the registrar of the liquidator will be liable for 100 kshs everyday of default

7. APPOINTMENT OF A LIQUIDATOR (SECTION 399 INSOLVENCY ACT 2015)

The company in general meeting shall appoint one or more liquidators for the purpose of liquidating the company’s affairs and distributing its assets.

On the appointment of a liquidator, all the powers of the directors cease, except in so far as the company in general meeting or the liquidator sanctions their continuance.

A liquidator should be an authorized insolvency practitioner.

8.GENERAL MEETING

If the liquidation of a company continues for a period of twelve months or more, the liquidator shall convene a general meeting of the company-

(a) Within three months after the end of that period of twelve months; and

(b) Within three months after the end of each subsequent period of twelve months.

(2) The liquidator has to lay before the meeting an account of the liquidator’s acts and dealings, and of the conduct of the liquidation, during the preceding year.

(3) If a liquidator fails to comply with this section commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.

9. PREPARATION OF ACCOUNT OF THE LIQUIDATION

As soon practicable after the liquidation of the company’s affairs is complete, the liquidator-

(a) must prepare an account of the liquidation showing how it has been conducted and how the company’s property has been disposed of.

10. SECOND GENERAL MEETING

The liquidator then convenes a general meeting of the company for the purpose of laying before it the account and giving an explanation of it.

The meeting shall be convened by publishing, at least thirty days before the meeting, an advertisement-

(i) Once in the Gazette;

(ii) Once in at least two newspapers circulating in the area in which the company has its

principal place of business in Kenya; and

(iii) On the company’s website (if any);

11. LODGING A COPY OF ACCOUNT AND MINUTES TO REGISTRAR.

(3) Within seven days after the meeting, the liquidator lodges with the Registrar a copy of the account, together with a return giving details of the holding of the meeting and of its date.

(4) If the copy and return are not lodged in accordance with subsection (3), the liquidator commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.

12. DISSOLUTION OF THE COMPANY

Section 897 (4) of the Companies Act states that as soon as practicable after striking the name of the company off the Register, the Registrar shall publish in the Gazette a notice that the company’s name has been struck off the Register and the date of the striking off.

 

CREDITORS LIQUIDATION

This is covered under section 405 to 414 of the Insolvency Act 2015.

In a case where the company wants to be voluntarily wound up it must call a meeting of creditors to which voluntary liquidation of the company is proposed.

5. NOTICE OF MEETING TO CREDITORS

The   notice of the creditors’ meeting states either-

(a) the name and address of a person authorised to act as an insolvency practitioner in relation to the company who, during the period before the day on which that meeting is to be held, will provide creditors free of charge with such information concerning the company’s affairs as the creditors may reasonably require; or

(b) a place in the area in which the company has its principal place of business in Kenya where, on the two business days occurring immediately before the day on which that meeting is to be held, a list of the names and addresses of the company’s creditors will be available for inspection free of charge.

A meeting of the company’s creditors should be convened  for a day not later than the fourteenth day after the day on which there is to be held the company meeting at which the resolution for voluntary liquidation is to be proposed;

the notices of the creditors’ meeting should be send  to the creditors not less than seven days before the day on which that meeting is to be held; and

the  notice of the creditors’ meeting should be Published-

(i) Once in the Gazette;

(ii) Once in at least two newspapers circulating in the area in which the company has its principal place of business in Kenya; and

(iii) on the company’s website (if any).

6. PREPARATION OF STATEMENTS BY THE DIRECTORS

(l) The directors of the company must;

(a) Prepare a statement setting out the financial position of the company that complies with

(b) Lay that statement before the creditors’ meeting

(c) Appoint one of their number to preside at that meeting.

(2) It is the duty of the appointed director to attend the meeting and preside over it.

(3) The statement must specify

(i) The details of and liabilities prescribed by the purposes of this section; the company’s assets, debts the insolvency regulations for

(ii) The names and addresses of the company’s creditors;

(iii) the securities held by them respectively;

(iv) the dates when the securities were respectively given; and

(v) such further or other information as may be so prescribed; and

(b) is verified by a statutory declaration signed by two or more of the company’s directors.

(4) If the directors, without reasonable excuse, fail to comply with subsection (1)(a), (b) or (c), each of them commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.

(5) A director who, without reasonable excuse, fails to comply with a duty imposed by subsection (2) commits an offence and on conviction is liable to a fine not exceeding two hundred thousand shillings.

7. NOMINATION OF LIQUIDATOR

1) The creditors and the company at their respective meetings may nominate an authorized insolvency practitioner to be liquidator for the purpose of liquidating the company’s affairs and distributing its assets.

(2) The liquidator is the insolvency practitioner nominated by the creditors unless they fail to make a nomination, in which case the liquidator is the insolvency practitioner (if any) nominated by the company.

(3) The creditors at the meeting  may, if they think appropriate, appoint a liquidation committee of not more than five persons to perform the functions imposed or conferred on such committees by or under this Act.

(2) If such a committee has been appointed, the company may, either at the meeting at which the resolution for voluntary liquidation is passed or at any time subsequently in general meeting, appoint a number of persons, not exceeding five, to be members of the committee.

(3) However, the creditors may resolve that all or any of the persons so appointed by the company are disqualified from being members of the liquidation committee.

(4) If the creditors so resolve, the persons referred to in the resolution cease to be members of the committee, unless the Court, on the application of any of those persons,quashes the resolution.

(5) On the hearing of an application to the Court made by any of the creditors, the Court may appoint other persons to act as members of the committee in place of the persons mentioned in the resolution.

6) On the appointment of a liquidator, all the powers of the directors cease, except so far as the liquidation committee, or if there is no such committee, the creditors, sanction their continuance.

8. GENERAL MEETING

A liquidator who continues in office for more than twelve months should convene a general meeting of the company and a meeting of the creditors to be held-

(a) within three months after the end of that period of twelve months; and

(b) within three months after the end of each subsequent period of twelve months.

(2) The liquidator should lay before each of the meetings an account of the liquidator’s acts and dealings and of the conduct of the liquidation during the preceding

year.

 

(5) A liquidator who, without reasonable excuse, fails to comply with a requirement of this section commits an offence and on conviction is liable to a fine not exceeding one million shillings.

9. PREPARATION OF ACCOUNTS BY THE LIQUIDATOR

As soon practicable after the liquidation of the company’s affairs has been completed, the liquidator should prepare an account of the liquidation and an explanation showing how it has been conducted and how the company’s property has been disposed of

10. NOTICE OF GENERAL MEETING

Within thirty days after preparing the account, the liquidator by a notice convene a general meeting of the company and a meeting of the creditors to enable those attending the meetings to consider the account and explanation.

The liquidator should ensure-

(a) that the notice is published-

(i) once in the Gazette;

(ii) once in at least two newspapers circulating in the area in which the company has its

-principal place of business in Kenya; and

-on the company’s website (if any); and

-that the notice specifies the time, date, place and purpose of the meeting.

11. GENERAL MEETING.

This is a meeting under the notice above.

 

12. LODGING A COPY WITH THE REGISTAR

Within seven days after the date on which the meetings are held; or if they are not held on the same date-after the date on which the later one is held,the liquidator should lodge with the Registrar a copy of the account, together with a return giving details of the holding of the meetings and the dates on which they were held.

 

13. DISSOLUTION OF THE COMPANY

Section 897 (4) of the Companies Act states that as soon as practicable after striking the name of the company off the Register, the Registrar shall publish in the Gazette a notice that the company’s name has been struck off the Register and the date of the striking off.

 

CONCLUSION

All the three ways of liquidating a company have the same effect;

The ultimate result of the liquidation proceedings is that the company ceases to to be in existence .

This is provided for under section 494 of the Insolvency Act. The company’s assets are sold and proceeds distributed to the creditors and surplus to contributories.

BIBILIOGRAPHY

  1. Insolvency act 2015
  2. The companies act 2015
  3. Kenyalawresoursecenter
  4. Len Sealy and Sarah Worthington Cases and Materials in company law  8th Edition

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