Creditors’ Liquidation – Insolvency
Creditors’ voluntary liquidation is one where creditors resolve to liquidate the company. It is also one where the liquidation started off as a members’ voluntary liquidation but is converted into a creditors’ liquidation because the directors cannot validly make a declaration of solvency of the company – which is a requirement in a members’ voluntary liquidation.
During a creditors’ liquidation, the company convenes a meeting of the company’s creditors. This meeting shall be advertised in the Kenya Gazette, newspapers and the company’s website. In the intervening period before the meeting, members can access free of charge, information on the company’s financial and business affairs from an insolvency practitioner designated by the company in the notice of the creditors meeting. Each creditor can also access information on all the other creditors of the company to assess the extent of debts owed by the company.
Duty of the Directors Before the Creditors’ Meeting in a Liquidation
The statutory duties of the board include:
- Appointing a director to preside for the board at the creditors’ meeting.
- Preparing a financial statement on the company stipulating information on: creditors’ security interests over the company’s assets e.g. debentures and the dates these security interests were created by creditors.
- Presenting the company’s financial statement at the meeting.
Conduct of the Creditors’ Meeting
At the creditors’ meeting, creditors may resolve to appoint a registered liquidator who shall be a licensed insolvency practitioner under the regulations by the office of the Official Receiver which is the government entity in charge of the conduct of bankruptcies and insolvencies in Kenya.
If members also nominate a liquidator, the choice of liquidator by the creditors shall prevail. However, if creditors fail to nominate a liquidator, the liquidator to act shall be the one chosen by members.
At the meeting, the creditors may resolve to appoint a liquidation committee to conduct the company insolvency to its conclusion. If the creditors do not appoint a liquidation committee the company may do so, however such an appointment by the company is liable to be disqualified and removed by the creditors via their own resolution.
Effect of Appointing a Liquidator
The powers of directors to act for companies in liquidation cease except to the extent that may be allowed by the creditors.
Duties of the Liquidator
- The liquidator has control of the winding up process of the company.
- The liquidator shall pay off all/part of the proved debts of the company.
- The liquidator shall convene at least an annual meeting of the company and a meeting of the creditors where he shall outline to these meetings the acts done as a liquidator and the progress of the liquidation thus far.
- On conclusion of the liquidation, the liquidator shall hold a final meeting where he shall present a report showing how the winding up process has been conducted and how the company’s assets have been liquidated to pay off debts.
- The liquidator shall lodge the report of the liquidation with the Registrar giving details of when the final meeting was held.
- The liquidator is bound to distribute assets in satisfaction of liabilities in accordance with creditors’ and members’ rights and interests as per the governing agreements creating the debt liabilities and shareholder agreements as the case may be.
- To defend/ bring suits against any person in the interests of the company.
- To enforce calls against contributories who are required to contribute to the liabilities of the company.
- To assume control of the company’s assets.
- Take all actions to protect the company’s assets.
Removal of a Liquidator
The liquidator may be removed by resolution of a creditors’ meeting or by court order or once the company receivership is completed.
Order of Distribution of Assets in a Liquidation
First priority claims
These include the costs of the insolvency process until they are fully paid i.e.
- The liquidator’s remuneration; and
- 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:
- Wages and salaries payable to employees of the company.
- Statutory deductions from employees (e.g. PAYE, NSSF, NHIF).
Third priority claims
These are the taxes payable by the bankrupt such as income tax, customs duty and excise duty which are unpaid.
Secured Creditors rank ahead of unsecured creditors as follows:
- Fixed charge;
- Floating charge
Unsecured Creditors rank after secured creditors;
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 information 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/a qualified advocate to obtain legal advice with respect to any particular legal matter.