In Part 1 of this article, we explored the various insolvency procedures that are available to an individual undergoing financial hardship. In this second part of the article, we are going to explore liquidation as an insolvency procedure for a corporate entity undergoing financial hardship.
A company is defined under the Insolvency Act, 2015 to include an unincorporated entity. There are a number of reasons why a company might become insolvent; the most common reasons being; loss of market; when companies don’t adapt to the changing or shrinking marketplace or when the company’s services has been overtaken by technology, lawsuits, management failures, inadequate skills, fraud, loss of finance, excessive overheads, expansion etc. The Insolvency Act imposes criminal liability on the directors of a company that continues to trade knowing that the company is insolvent.
In Kenya, the directors and/or shareholders are able to initiate several forms of insolvency processes if they believe the company is about to become insolvent. Prior to the year 2015 liquidation was the only option available for a company undergoing insolvency. The Insolvency Act, 2015 was then enacted to provide various alternatives in an attempt to rescue the business. Once the directors of a company recognize the company as being insolvent or likely to become insolvent, they can explore various options available to the company. These are:
– Company Voluntary arrangement
– Administrative receivership
In this second part of the article, we will look at the process of liquidation in detail;
Liquidation is a terminal process for any company. It marks the end of a company’s business. A liquidator is appointed to collect into the assets of the company, turn them into cash and distribute the proceeds to the creditors in a defined order of priority. In most instances the process of liquidation is irreversible and the company will never trade again There are two main forms of liquidation to wit;
- Compulsory Liquidation
- Voluntary Liquidation
Compulsory liquidation is also referred to as liquidation by the court. In this type of liquidation, a petition is made to court and if granted an order is made to liquidate the company. This procedure commences when either the company itself, creditors, directors, shareholders, administrator, the attorney general or a provisional liquidator files a petition in court to liquidate a company. There are many reasons for making a liquidation order, the most common being that the company is insolvent. Insolvency will usually be established by failure of the company to comply with a statutory demand requiring the company to pay what is owed within 21 days, or by an execution against the company’s assets in order to fulfill a judgment that remains unsatisfied. The Attorney General may also petition to liquidate a company on the grounds of public interest.
Once the court grants the petition, a liquidation order is made and a liquidator is appointed. The liquidator will either be the Official Receiver or an insolvency practitioner. The liquidator will collect into the assets of the company and distribute to the creditors. If there is a surplus, it will be distributed to the shareholders. Thereafter, the liquidator will apply to have the company struck off from the register of companies. The process of striking off the company is commenced by the registrar upon receiving an application from the liquidator. A notice is placed in the Kenya Gazette inviting objections to the strike off. If no objection is received within 3 months, the company is deemed dissolved. Dissolution formally marks the end of the company.
In voluntary liquidations, members resolve to have the company liquidated. The process will be a members’ voluntary liquidation if the company’s directors make a statutory declaration that the company can pay its debts within a year, otherwise it will be a creditors’ voluntary liquidation.
- Members Voluntary Liquidation
This procedure is used for a solvent company. The company is still under the control of the shareholders, who resolve to liquidate and appoint a liquidator. There are many reasons why a solvent company could be closed. The company could have finished the objective for which it was formed; owners of the company may wish to close down the company and retire; a subsidiary which has outlived its usefulness may be closed; directors of a company may wish to close the company and free up funds or relocate.
The directors of the company swear a declaration within 5 weeks preceding the resolution to liquidate. The declaration is accompanied by a statement of assets and liabilities with a statement that all the creditors will be paid within 12 months. A shareholders meeting will then be convened within 21 days to pass the resolution to liquidate. A liquidator is often appointed with the resolution to liquidate. The liquidator will then proceed to realize the assets, pay creditors and distribute ay surplus to members, hold a final meeting of creditors and eventually apply for dissolution of the company.
- Creditors Voluntary Liquidation
A creditors’ voluntary liquidation is commenced by a resolution of the directors but it is under the control of the creditors who can appoint a liquidator of their choice. The liquidator is an authorized insolvency practitioner. This option is mostly used by the directors of the company who want to take action at an early stage and reduce personal liability for wrongful trading. The directors convene a general meeting which passes a special resolution to liquidate the insolvent company. Private companies usually pass a written resolution with a 75% majority. Thereafter, a meeting of creditors should be convened within 14 days (but usually follows immediately). A statement of affairs, report on history of the business and causes of the failure of the company are presented to the meeting.
One a resolution to liquidate is passed, the company ceases to trade, its assets are realized and the funds distributed to the creditors. The liquidator also holds annual meetings of the creditors. The liquidator calls a final meeting of the creditors where the final accounts are presented and the liquidator issues a report of the liquidation.