Corporate Insolvency in Kenya (Members' Liquidation)
Insolvency refers to circumstances whereby a company is unable to pay its debts and is described under Section 384 of the Insolvency Act of Kenya (No. 18 of 2015) to include the following situations:
1. A creditor whom is owed at least KES 100,000 by the company has served a written demand at the registered office of the company, and the company has failed for 21 days to repay the debt;
2. Execution of any court order through attachment of the insolvent company’s assets remains unsatisfied; or
3. If the company is unable to pay its debts as they fall due and its assets are less than its liabilities.
Insolvent liquidation arises when creditors or members by their own resolution or through an application to the court initiate a process to ensure full or partial repayment of their debts. If a company goes into liquidation, this often ultimately leads to the dissolution of the company. The year 2020 and 2021 have been noted by corporate insolvency lawyers such as Koya & Company Advocates in Kenya as having a number of liquidations and winding up of companies in Kenya due to cash flow problems, and creditors of such companies (or the company itself) are seeking relief under the corporate insolvency laws of Kenya.
Members Voluntary Liquidation
This is a voluntary liquidation of the company whereby members resolve by a special resolution to liquidate the company voluntarily. After the resolution is passed, the directors should issue a notice of this liquidation within 14 days of the resolution in the Kenya Gazette, the company’s website and two local newspapers.
When does the Voluntary Liquidation Commence?
This type of winding up under company law and insolvency law commences immediately the resolution is approved and the company should stop carrying out business except as may reasonably be required for the liquidation of the company. Nevertheless, the company is still a company until formally dissolved.
What are the Consequences of the Members’ Voluntary Liquidation?
Any transfer of the company’s shares by a shareholder is only valid unless done with the approval of the liquidator and any alteration of the status of the company’s members made after the resolution to liquidate the company is void.
Corporate liquidation by members need not be prompted by insolvency as the members may simply decide to terminate the company once the company has come to the end of its usefulness to members, provided the company has enough funds to pay off outstanding debts.
Further, the powers of the directors cease after a resolution by members to have the company go under liquidation.
Directors’ Declaration of Solvency during Members’ Voluntary Liquidation
Members voluntary liquidation is a solvent liquidation because the directors of the company will make a statutory declaration that they have investigated the financial status of the company and have formed the opinion that the company will have enough funds to pay off the company’s debts within the year after the member’s resolution to voluntarily liquidate the company is made (declaration of solvency).
The directors shall lodge this declaration of solvency at the Registrar. It is a criminal offence to issue this declaration of solvency without having reasonable grounds to form the opinion that the company is solvent and will remain so for at least a year after the liquidation has commenced.
Role of the Liquidator
A liquidator is appointed by members during a general meeting although the court may also appoint a liquidator if members fail to appoint one or the appointed liquidator is shown to the court to be unsuitable.
The role of the liquidator is to liquidate the company’s affairs and to distribute assets in accordance with the rules under the Insolvency Act. The liquidator is required to be an authorised insolvency practitioner as authorised by the government.
During the pendency of the liquidation, the liquidator shall convene a general meeting of the company within a quarter of the end of each year of liquidation and give an account of the liquidation and what he has accomplished in the preceding period and the progress of the liquidation. He shall need to show which assets of the company have been disposed of and to whom and at what value.
Order of Distribution of Assets in a Liquidation
A. Preferential Creditors
First priority claims
These include the costs of the insolvency process until they are fully paid i.e.
i. The liquidator’s remuneration; and
ii. Reasonable costs incurred during any court proceedings.
Second priority claims
After the first priority claims are fully paid, second priority claims may be paid to the extent they are unpaid. These include the following:
i. Wages and salaries payable to employees of the company.
ii. Statutory deductions from employees (e.g. PAYE, NSSF, NHIF).
Third priority claims are the taxes payable by the bankrupt such as income tax, customs duty and excise duty which are unpaid.
B. Secured Creditors rank ahead of unsecured creditors as follows:
i. Fixed charge;
ii. Floating charge
C. Unsecured Creditors rank after secured creditors;
D. Shareholders are last to be paid.
Shareholders are paid the extent of the capital they put in. Preference shareholders may also benefit from a liquidation preference if this is in the shareholder agreement.
The provision of general advice herein does not constitute an advocate-client relationship with any reader. All information, content, and material in this article are for general informational purposes only. Readers of this article should get in touch with us to obtain advice with respect to any particular legal matter.