Voluntary Liquidation of a Company. Kenyan Insolvency Law

Liquidation is a formal insolvency procedure in which a company is brought to an end; all of its assets are liquidated and the proceeds from the sale of assets is used to repay creditors. There are two main types of liquidations for insolvent companies– compulsory liquidation and creditor's voluntary liquidation.

Definitions  

Voluntary liquidation is available to the company, acting through its members, if and when they wish to wind up its affairs. There are two types of voluntary liquidation: 

• A members’ voluntary liquidation (MVL) is possible where the company’s directors are able to make a declaration of solvency
• A creditors’ voluntary liquidation (CVL) is where the members wish to wind up the company’s affairs but the directors cannot make a declaration of solvency 

Matters Applicable To All Voluntary Liquidations 

Official receiver’s involvement in voluntary liquidation 

The official receiver will become involved with a company which is in voluntary liquidation due to one of the following circumstances –  

1. there is a subsequent winding-up order
2. the official receiver petitions for the winding up of a company that is in voluntary liquidation or
3. the official receiver is directed to take disqualification proceedings based on a voluntary liquidator’s conduct report.  

Circumstances in which company may be wound up voluntarily

A company may be wound up voluntarily: 

(a)   when any period fixed for the duration of the company by the articles of association expires, or an event occurs on which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring it to be wound up voluntarily;

(b)   if the company resolves by special resolution that it be wound up voluntarily; 

The company meeting

Where a company is to be wound up voluntarily it will call a general meeting at which the resolution for voluntary winding up will be proposed. Notice of the meeting stating the type of resolution proposed must be given to all members entitled to vote at least 14 days prior to the meeting in a private company. The company’s articles may require a longer period of notice. The requirements for the period of notice to be given can be waived by agreement of 90% of the members at the meeting, if held at short notice, or a higher threshold if specified by the company’s articles of association. 

A resolution requires a simple majority but a special resolution to effect winding up under requires a 75% majority. 

Notice of resolution to wind up

A copy of the resolution to wind up the company voluntarily must be forwarded to the Registrar of Companies within 14  days and advertised in the Gazette within 14 days.

Commencement of the winding up  

The winding up of the company commences when a valid resolution for winding up has been passed, irrespective of whether a liquidator has been appointed. This date will be of importance to the official receiver, for example, when considering any potential recoveries from transactions giving a preference or at an undervalue and in determining the two-year period for disqualification proceedings to be commenced. 

  

Company status whilst in liquidation  

From the commencement of the voluntary winding up, the company will cease to trade, unless the liquidator considers that it would be beneficial for trading to continue for the purpose of the winding up. The corporate status and corporate powers of the company continue until the company is dissolved notwithstanding anything to the contrary in its articles. Any act carried out by the liquidator is done by the liquidator in the name of the company and not in his own name 

A members’ voluntary liquidation.

Introduction

A company can be put into liquidation voluntarily, at the instigation of its directors, or compulsorily, by order of the Court.  The effect in either case is that a liquidator is appointed to bring the company’s existence to an end so that it can be dissolved.  Where the decision to go into liquidation is taken voluntarily and the company is insolvent and cannot pay all its creditors in full, the liquidation is termed a ‘creditors’ voluntary liquidation’.  If the company is solvent and can pay all its creditors in full, the liquidation may be a ‘members’ voluntary liquidation’.

The catalyst for a members’ voluntary liquidation is a decision by the directors that the company has no further purpose and that available assets should be realised and distributed to shareholders.  The decision may be prompted by tax planning considerations within groups of companies or as part of group or company reorganisations or reconstruction’s.  In certain types of reorganisation, the whole or part of the business of the company to be liquidated is sold to another company in exchange for shares or other securities in the purchasing company.  In rarer situations a company’s articles may provide for it to exist for a fixed period only or until a specified event occurs.

Declaration of solvency

An essential requirement for a members’ voluntary liquidation is that the directors (or a majority of them) must make a statutory declaration that they have made a full inquiry into the company’s affairs and have formed the opinion that the company will be able to pay its debts in full, together with statutory interest, within a specified period, not exceeding 12 months, from the commencement of the liquidation. (Section 398(1)). The declaration must be made not more than five weeks before the liquidation and to be effective must also be filed with the Registrar of Companies within 14 days of the commencement of the liquidation. (Section 398(2) + (3))

A director making a declaration has to have reasonable grounds for the opinion that the company will be able to pay its debts in full, together with statutory interest, in the specified period.  If a declaration is made but the company’s debts are neither paid nor capable of being paid in the period, the onus of proof lies on the director to show that he had reasonable grounds for his opinion (section 398(5)) and, if he does not, within the specified period commits an offence and on conviction is liable to a fine not exceeding two million shillings or to imprisonment for a term not exceeding five years, or to both. (Section 398(4)).

If the declaration is not lodged with the Registrar for registration according to s398 (3) 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 two hundred thousand shillings.

Division 3: section 399 to 404

399. Appointment of liquidator. (l) In a members' voluntary liquidation, the company in general meeting shall appoint one or more liquidators for the purpose of liquidating the company's affairs and distributing its assets.

(2) 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.

(3) Only an authorised insolvency practitioner is eligible for appointment under subsection (1).

400. (1) If a vacancy occurs (whether by death, resignation or otherwise) in the office of liquidator appointed by the company, the company in general meeting shall, subject to any arrangement with its creditors, appoint another authorised insolvency practitioner to fill the vacancy.

(2) For the purposes of subsection (l), a general meeting may be convened- (a) by a contributory; or (b) if there was more than one liquidators-by the continuing liquidator or liquidators.

(3) The company shall hold the meeting- (a) in the manner provided by this Act or by its articles; or (b) in such manner as the Court determines on an application made by a contributory or by the continuing liquidator or liquidators.

401. (1) 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 shall 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) A liquidator who fails to comply with this section commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.

(4) The Cabinet Secretary may extend the period of three months referred to in subsection (1)(a) or (b) if satisfied that there are extenuating circumstances for doing so, and if the Cabinet Secretary grants such an extension, that subsection is to be interpreted accordingly.

(5) This section is subject to sections 404 and 410

402. (l) As soon practicable after the liquidation of the company's affairs is complete, the liquidator- (a) shall prepare an account of the liquidation showing how it has been conducted and how the company's property has been disposed of; and

(b) shall then convene a general meeting of the company for the purpose of laying before it the account and giving an explanation of it.

(2) The liquidator- The liquidator has a wide range of powers to enable realisation of the company’s assets, agreement of creditors’ claims and distributions to creditors and members.  Certain powers (e.g., compromising creditors’ claims) may be exercised only with the sanction of the members.  The liquidator is able to operate bank accounts in the name of the company and to invest funds, subject to paying funds not required for the immediate purposes of the liquidation

(a) shall convene the meeting by publishing, at least thirty days before the meeting, an advertisement- (D 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); and

(b) shall specify the time, date, place and purpose of the meeting.

(3) Within seven days after the meeting, the liquidator shall lodge 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.

(5) If, after being convicted of an offence under subsection (4), a liquidator continues to fail to lodge the copy and the return, the liquidator commits a further offence on each day on which the failure continues and on conviction is liable to a fine not exceeding fifty thousand shillings for each such offence.

(6) If a quorum is not present at the meeting, the liquidator shall, instead of the return referred to in subsection (3), make a return that the meeting was duly convened and that no quorum was present; and on such a return being made, subsection (3) as to the lodging of the return is taken to have been satisfied.

(7) If the liquidator fails to convene a general meeting of the company as required by subsection (1), the liquidator commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.

403. (1) This section applies if the liquidator is of the opinion that the company is unable to pay its debts in full (together with interest at the official rate) within the period stated in the directors' declaration under section 398.

(2) On forming the view that the company is or will be unable to pay its debts, the liquidator shall- (a) convene a meeting of creditors for a date not later than thirty days after the day on which the contributory formed that opinion; (b) send notices of the creditors' meeting to creditors by post at least seven days before day on which that meeting is to be held; (c) publish notice of the creditors' meeting -

(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); and

(d) advertise the meeting in such other manner and place as the liquidator considers desirable in the interests of the creditors;

(e) during the period before the day on which the creditors' meeting is to be held, provide creditors, free of charge, with such information concerning the affairs of the company as they may reasonably require; and

(f) specify in the notice of the creditors' meeting the duty imposed by paragraph (e).

(3) The liquidator shall also-

(a) prepare a statement setting out the financial position of the company that complies with subsection (4);

(b) lay that statement before the creditors' meeting; and

(c) attend and preside at that meeting.

(4) A statement complies with this subsection if it- (a) specifies-

(i) the prescribed details of the company's assets, debts and liabilities;

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

(iii) the securities (if any) respectively held by them and the dates on which they were respectively given; and

(iv) such other information (if any) as may be prescribed by the insolvency regulations; and is verified by a statutory declaration signed by the liquidator. If the company's principal place of business was located in different places at different times during the relevant period, the duty imposed by subsection (2)(c) applies separately in relation to each of those places.

(6) If the company had no place of business in Kenya during the relevant period, the references in subsections (2)(c) and (5) to the company's principal place of business are taken to be references to its registered office.

(7) In this section, "the relevant period" means the period of six months immediately preceding the day on which were sent the notices convening the company meeting at which it was resolved that the company be liquidated voluntarily.

(8) A liquidator who, without reasonable excuse, fails to comply with this section commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.

404. As from and including the date on which the creditors' meeting is held in accordance with section 403-

(a) this Part has effect as if-

(i) the directors' declaration under section 398 had not been made; and

(ii) the creditors' meeting and the company meeting at which it was resolved that the company be liquidated voluntarily were the meetings referred to in section 406; and

(b) the liquidation becomes a creditors' voluntary liquidation.