COMPANY LIQUIDATION

Liquidation: this is the legal process, by which a company’s existence is brought to an end, its assets realized, liabilities ascertained and paid and the balance, if any, fairly distributed amongst the members.

Winding up is thus the legal process by which a company’s management is removed from directors and placed under a liquidator for purposes of collecting the assets, realizing them, ascertaining and making good liabilities and distributing the remainder, if any, to members.

Who may petition for winding up?



A winding up petition may be presented to the Court by any of the following persons:

• The company itself
• Creditors of the company
• Contributors of the company
• Members or shareholders other than contributories.
• The Attorney General of the Republic of Kenya
• The Company’s Official Receiver.
• The Commissioner of Insurance.

 

• Petition by the company: A company will petition for its winding up if members so resolve by special resolution. Such petitions are however uncommon.
• Petition by creditors: A creditor may petition for winding up on the grounds that the company is unable to pay its debts. The petitioner must however prove the company’s insolvency.
• Petition by contributories: A contributory is any person who is liable to contribute the assets of the company in the event of its being wound up. This is any person with amounts unpaid on the shares held by them. oThe liability of a contributory creates a debt due from him to the company and in the event of death, the personal representative is liable.
  • In the case of bankruptcy, the trustee in bankruptcy is liable
  • At common law, a contributory has the right to petition for winding up which cannot be taken away by the Articles. It was so held in Re: Percival Gold Mines Company Limited where the Articles of the company purported to restrict the rights of contributories to petition for winding up. It was held that the article in question was invalid

A contributory cannot petition for winding up unless:

• The number of members has fallen below the statutory minimum.
• The shares in respects of which he is a contributory:

Were either allotted to him.

Have been held by him and registered in his name for at least 6 months during the 18 months before the commencement of winding up.  Devolve upon him following the death of the former holder.

Qualification of liability of a contributory

However the liability of past members is subject to the following qualifications:

• A past member cannot be called upon to contribute the assets of the company if he has ceased to be a member for one year or more before the commencement of winding up.
• A past member is not liable to contribute in respect of debts contracted after he ceased to be a member of the company.
• A past member can only be called upon to contribute if existing members are unable to satisfy the contributions necessary.
• In the case of a company limited by shares, a past member can only be called upon to contribute the amount unpaid on his shares.
• In case of a company limited by guarantee a past member can only be called upon to contribute the amount he undertook to contribute if the company was wound up during his membership or within one year of cessation of membership

 

• Petition by members or shareholders other than contributors: As a general rule, a fully paid member has no locus standi to petition for winding up, however a petition by such a member is sustainable if it is proved that:
  • He has tangible assets in the company.
  • When the company’s affairs are fully wound up there will be/is a surplus for distribution to members.
• Petition by the Attorney General: The AG may present a winding up petition if in his opinion the inspector’s report suggest that the company ought to be wound up. The petition is based on the just and equitable ground.

 

• Petition by the Official Receiver: The official receiver may petition for winding up in the following 2 circumstances:
  • Winding up a company carrying on business in Kenya if winding up proceedings have been commenced against it outside Kenya and a liquidator has been appointed to wind it up.
  • For the continuation of a voluntary winding up or a winding up subject to the supervision of the Court as a compulsory winding up

 

• Petition by commissioner of insurance: Under section 123 (1) of the Insurance Act, the commissioner of insurance may present a petition to wind up insurance company if:
  • It has failed to comply with the requirements of the Insurance Act.
  • It is unable to pay its debts.
  • It is carrying on insurance business while unregistered by the commissioner.
  • It is unable to meet reasonable expectations of the policy holders and potential policy holders.
  • It is just and equitable in the interest of policy holders.

 

Methods of liquidation

Members’ voluntary liquidation and 2) Creditors’ voluntary liquidation. 3) Liquidation by the court

Voluntary liquidation

A winding up is voluntary where the decision to wind up is taken by the company’s members, although if the company is insolvent, the creditors will be heavily involved in the proceedings.

There are two types of voluntary liquidation:

• A members’ voluntary winding up, where the company is solvent and the members merely decide to wind up the company or ‘kill it off’
• A creditors’ voluntary winding up, where the company is insolvent and the members resolve to wind up in consultation with creditors

 

The main differences between a members’ and a creditors’ voluntary winding up are set out below.

 

1.     Appointment of liquidator       2.     Approval for liquidator’s actions   3.     Liquidation committee

members’              voluntary winding up‘ v   By members         General meeting of members     None

creditor’s                voluntary winding up   Normally by creditors though responsible to both members and creditors     Liquidation committee     Up to five representatives of creditors

 

The effect of the voluntary winding up being a creditors’ one is that the creditors have a decisive influence on the conduct of the liquidation.

Meetings in a creditors’ voluntary winding up are held in the same sequence as in a members’ voluntary winding up, but meetings of creditors are called at the same intervals as the meetings of members and for similar purposes.

In both kinds of voluntary winding up, the court has the power to appoint a liquidator (if for some reason there is none acting) or to remove one liquidator and appoint another.

Members’ voluntary liquidation

Members’ voluntary liquidation is a method of winding up where the decision to wind up is taken by the company’s members, even if the company is insolvent, Circumstances in which company may be liquidated voluntarily 

 

• Special resolution: the company members may declare by special resolution that their company be wound up voluntarily.
• Lapse of time: if the duration prescribed by the Articles has expired and members have resolved that the company be wound up.
• Occurrence of events: where an event contemplated by the Articles has occurred and members have resolved that the company be wound up

 

Circumstances in which company may be liquidated voluntarily

• Special resolution: the company members may declare by special resolution that their company be wound up voluntarily.
• Lapse of time: if the duration prescribed by the Articles has expired and members have resolved that the company be wound up.
• Occurrence of events: where an event contemplated by the Articles has occurred and members have resolved that the company be wound up

 Declaration of solvency

In order to be a members’ winding up, the directors must make a declaration of solvency and deliver to the Registrar a declaration of solvency. This is a statutory declaration that the directors have made full enquiry into the affairs of the company and are of the opinion that it will be able to pay its debts, within a specified period not exceeding 12 months.

• The declaration is made by all the directors
• The declaration includes a statement of the company’s assets and liabilities as at the latest practicable date before the declaration is made.
• The declaration must be:
  • Made not more than five weeks before the resolution to wind up is passed; and
  • Delivered to the Registrar within 14 days after the meeting.

 

If the liquidator later concludes that the company will be unable to pay its debts they must call a meeting of creditors and lay before them a statement of assets and liabilities.

N.B: It is a criminal offence punishable by fine or imprisonment for a director to make a declaration of solvency without having reasonable grounds for it. If the company proves to be insolvent they will have to justify their previous declaration or be punished.

Process of voluntary winding up

• The members are required to pass a special resolution but if the articles specify liquidation at a certain point, only an ordinary resolution is required
• The winding up commences on the passing of the resolution.
• A signed copy of the resolution must be delivered to the Registrar within 14 days.
• A liquidator is usually appointed by the same resolution (or a second resolution passed at the same time).
• 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
  • Within three months after the end of that period of twelve months; and
  • Within three months after the end of each subsequent period of twelve months.
• 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.
• As soon practicable after the liquidation of the company’s affairs is complete, the liquidator
  • Shall prepare an account of the liquidation showing how it has been conducted and how the company’s property has been disposed of; and
  • Shall then convene a general meeting of the company for the purpose of laying before it the account and giving an explanation of it.
• 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.
• The Registrar then dissolves the company three months later by removing its name from the register.

Consequences of resolution to liquidate

• On and after the voluntary liquidation of a company, cease to carry on its business, except necessary for its beneficial liquidation
• The corporate status and the corporate powers of the company continues to have effect until the company is dissolved.
• The following are void if made after the commencement of a voluntary liquidation of a company:
  • Any transfer of the company’s shares (other than a transfer made to or with the sanction of the liquidator);
  • An alteration in, or an attempt to alter, the status of the company’s members.

Creditors’ voluntary liquidation

If no declaration of solvency is made and delivered to the Registrar the liquidation proceeds as a creditors’ voluntary winding up even if, in the end, the company pays its debts in full.

To commence a creditors’ voluntary winding up the directors convene a general meeting of members to pass a special resolution (private companies may pass a written resolution with a 75% majority). They must also convene a meeting of creditors, giving at least seven days’ notice of this meeting. The notice must be advertised in the Gazette and such other manner as the directors think fit. The notice must either:

• Give the name and address of a qualified insolvency practitioner to whom the creditors can apply before the meeting for information about the company, or
• State a place in the locality of the company’s principal place of business where, on the two business days before the meeting, a list of creditors can be inspected.

The meeting of members is held first and its business is as follows:

o To resolve to wind up o To appoint a liquidator, and o To nominate up to five representatives to be members of the liquidation committee.

The creditors’ meeting should preferably be convened on the same day but at a later time than the members’ meeting, or on the next day, but in any event within 14 days of it.

One of the directors presides at the creditors’ meeting and lays before it a full statement of the company’s affairs and a list of creditors with the amounts owing to them. The meeting may nominate a liquidator and up to five representatives to be members of the liquidation committee. If the creditors nominate a different person to be liquidator, their choice prevails over the nomination by the members.

Of course, the creditors may decide not to appoint a liquidator at all. They cannot be compelled to appoint a liquidator, and if they do fail to appoint one it will be the members’ nominee who will take office.

However, even if creditors do appoint a liquidator there is a period of up to two weeks before the creditors’ meeting takes place, at which they will actually make the appointment. In the interim it will be the members’ nominee who takes office as liquidator.

Winding up by the court

The High Court has jurisdiction to wind up companies registered in Kenya.

Creditor who petitions on the grounds of the company’s insolvency must show that the company is unable to pay its debts. There are three permitted ways to do that.

• A creditor owed more than Ksh.100, 000 serves the company at its registered office a written demand for payment and the company fails to pay the debt or to offer security for it within 21 days.

If the company denies it owes the amount demanded on apparently reasonable grounds, the court will dismiss the petition and leave the creditor to take legal proceedings for debt.

• A creditor obtains judgement against the company for debt, and attempts to enforce the judgement. However, they are unable to obtain payment because no assets of the company have been found and seized.
• A creditor satisfies the court that, taking into account the contingent and prospective liabilities of the company, it is unable to pay its debts.

 

Who may petition the court?

• The company or its directors;
• A creditor or creditors
• A contributory or contributories of the company
• A provisional liquidator or an administrator of the company
• if the company is in voluntary liquidation-the liquidator

A company may be wound up by the Court if:

• Members have by special resolution declared that it be would up by the Court.
• The number of member has fallen below the statutory requirement.
• The company has failed to commence business within a year of incorporation.
• The company has suspended its business for a whole year.
• The company is unable to pay its debts (insolvency)
• The company registered as a public limited company more than a year previously but has not yet been issued with a trading certificate
• The Court is of the opinion that it is ‘just and equitable’ that the company be wound up.

Winding up on the Just and Equitable Ground

A company may be wound up by the Court if the Court is of the opinion that it is just and equitable that the company should be wound up.

There is no exhaustive list of the circumstances in which a company may be wound up on this ground, however judicial authority shows that a company may be wound up on the just and equitable  ground in the following instances:

 Fraudulent / illegal purpose

In Re: Thomas Edwards Brimsedd and Sons Ltd, it was held that a company would be wound up on this ground. If it is established that it was formed to pursue a fraudulent or illegal purpose

The petitioner must prove the fraud or illegality.

 Failure to substratum

If the principal or paramount purpose for which the company is incorporated fails or is no longer attainable it becomes just and equitable to wind up the company.

This was the case in Re: German Date Coffee Company Ltd where the company’s principle object was to acquire a German patent to manufacture coffee from dates as a substitute which it failed to acquire and a shareholder petitioned for its winding up. It was held that it was just and equitable to wind up the company.

A similar holding was made in Re: Bakin Consolidated Oil Fields Ltd where a company had been formed to take over 2 existing oil companies in Russia but the oil industry was nationalized before the takeover.

‘Bubble companies’

In Re: London and Country Coal Company Ltd , it was held that it is just and equitable to wind up a company if it was established that there was no bonafide intention on the directors to pursue the declared objects or pursue them in the proper manner.

Oppression of minority

A company would be wound up on the just and equitable ground if it was proved that its affairs were being conducted in a manner oppressive/prejudicial to the minority.  The petitioner must prove the oppression or oppressive conduct in the affairs of the company and that the same was continuous and it affected members in their capacity as members.

Loss of confidence in management

Case law demonstrates that it is just and equitable to wind up a company if member have justifiably lost confidence in its management.

The petitioner must prove a consistent course of conduct on the part of the management which justifies the loss of confidence as was the case in Loch V John Blackwood Company Ltd. where after Blackwood’s death his engineering business was converted to a company managed by one of his trustees for the benefit of the 3 beneficiaries of the estate. The business was very profitable but the trustee did not avail to the beneficiaries any information about the company which they were entitled to nor called general meetings. The beneficiaries petitioned for winding up on the grounds of loss of confidence in the management. The Court agreed and granted the winding up order.

Exclusion or expulsion from management.

A company would be wound up on the just and equitable ground if it is shown that the petitioner has been unfairly excluded from its management.

This was the case in Re: Westbourne Galleries Company Ltd where a partnership was incorporated to a company but one member was unfairly left out of the board. The directors refused to declare dividend as all the profits of the company were payable to them as directorship allowances. The petitioner argued that the unfair treatment he was subjected to made it just and equitable for the company to be wound up. The Court granted the order.

 

In addition a winding up order may be made if a director is unfairly expelled from the board or excluded from participating in board meetings as was the case in Re: Lundie Bros Co. Ltd where the petitioner who was the chairman of the board held 10,000 of the 20,000 shares of the company. The balance was held by 2 brothers equally. All members were directors earned £20 a week. The 2 brothers used their voting power on the board to remove the petitioner from his position and reduce his earnings to £2 per week. It was held that it was just and equitable to wind up the company.

Deadlock in management of its affairs

It is just and equitable to wind up a company if its management cannot function in any respect due to a deadlock. This may arise where the company’s shares and voting rights are equally divided between 2 persons or groups or persons with irreconcilable differences.

 

This was the case in Re: Yenidje Tobbacco Company Ltd, where Rathman and Weinberg who were tobacco dealers merged their businesses to a company and were the only members and directors with equal number of shares and voting rights. The 2 quarreled consistently and could only communicate through the Company Secretary. Rathman sued Weinberg alleging fraud and the 2 made the company lose over £1,000 in a case involving the dismissal of a factory manager. Although the company was making enormous profits, Weinberg petitioned for winding up and the Court was satisfied that it was just and equitable to wind up the company the Court was of the opinion that circumstances which could lead to the winding up of a partnership were applicable in this case.

Proceedings for compulsory liquidation

When a petition is presented to the court a copy is delivered to the company in case it objects. It is advertised so that other creditors may intervene if they wish.

The petition may be presented by a member. If the petition is presented by a member they must show that:

• The company is insolvent or alternatively refuses to supply information of its financial position, and
• They have been a registered shareholder for at least 6 of the 18 months up to the date of their petition. However this rule is not applied if the petitioner acquired their shares by allotment direct from the company or by inheritance from a deceased member or if the petition is based on the number of members having fallen below two.

 

Once the court has been petitioned, a provisional liquidator may be appointed by the court. The official receiver is usually appointed, and their powers are conferred, by the court. These powers usually extend to taking control of the company’s property and applying for a special manager to be appointed.

N.B: The official receiver is an officer of the court. They are appointed as liquidator of any company ordered to be wound up by the court, although an insolvency practitioner may replace them.

Effects or consequences of a liquidation order

Once the winding up order is made, the following consequences flow:

• The company cease to carry on business except such as may be required for the beneficial winding up.
• Any disposition of property of the company including things in action, any transfer of shares or alteration in the status of members is void
• Any attachment, distress or execution put in force against the estate or effects of the company is void
• Legal proceedings commenced by or against the company are stayed.
• Director’s powers become functus officio (unexcercisable)
• By virtue of his office the official receiver becomes the provisional liquidator and if not other person is appointed liquidator by the Court, he becomes the liquidator.
• Servants of the company are ipso facto dismissed (by that very fact of winding up order being issued). However those who continue to render services and receive wages are presumed to have entered into a new contract of service with the liquidator
• Floating charges of the company crystallize and become fixed.

 

Proving of Debts in Winding up Process

All debts and claims whether past present or future certain or uncertain must be proved within the prescribed duration failing which they are inadmissible and the company is discharged.  Sufficient evidence of the company’s indebtedness must however be furnished.

If the amount is uncertain a reasonable estimate must be made, however, statute barred debts are inadmissible.

Priority of claims

• All costs charges and expenses properly incurred in the winding up process including the liquidator’s remuneration must be paid out of the assets of the company in priority to all other claims.
• Preferential claims or payments: the following claims must be paid in priority to all other debts:
  • All taxes and local rates due from the company for not more than one year.
  • All government rent in arrears for not more than one year.
  • Wages and salaries payable to any clerk or servant of the company other than directors for services rendered to the company during the 4 months preceding the commencement of winding up.
  • Any amount payable under the Work Injury Benefits Act.
  • Any amount payable under the NSSF Act and NHIF Act.

 

• Secured creditors
• Unsecured creditors
• Other creditors (Deferred creditors)
• The balance if any is distributed between members.

Secured creditors

These are creditors whose debts are secured by specific assets of the company. In a winding up, a secured creditor has 4 options. He may:

• Rely on the security and not prove his debt.
• Realize his security and prove for any deficiency
• Value the security and prove for the balance if any.
• Surrender the security and prove for the whole debt.

Offences Relating To Liquidation

• Fraudulent Preference: Fraudulent preference is a charge, mortgage, conveyance delivery of goods act relating to company property made by or on behalf of the company within 6 months of commencement of the winding up.

Such a transaction is deemed void, however it must be evident that it was entered into voluntarily, when the company was insolvent, to prefer a creditor over another.

• Misfeasance / Malfeasance: The Companies Act does not define the term misfeasance. It is said to be a wrongful act of omission committed or omitted by a person charged with a specific responsibility.

A misfeasance is an act of omission committed or omitted in violation of the principles of common law or equity. It is neither a crime nor a tort and does not include acts or omissions of negligence.

Misfeasance proceedings may be instituted against promoters, directors, liquidators, auditor etc and the principal remedy to the company is damages.

The Court has the jurisdiction in winding up to assess the damages payable by officers of the company including the liquidator for any misfeasance committed.

Examples of misfeasance include:

• Payment of dividends out of capital.
• Making of improper payment to promoters by directors.
• Making of secret profit by directors or promoters.
• Making fraudulent preferences.
• Selling a company property at undervalue.
• Applying the company’s assets in ultra vires or illegal transactions.

In Reliance Wholesale Company Ltd V Mills the company owed its directors £ 7,500 and the amount was repayable as and when it becomes available. On one occasion, the director found signed cheques at the company’s office he filled £ 5,500 in one of them but in a subsequent conversation with the other director he was instructed not to cash it, but he did. The company thereafter went into liquidation and the liquidator applied to have the amount returned on the ground that the director was guilty of or misfeasance. The Court agreed and ordered the director to account for the same.

The Liquidator

This is the person appointed to realize the company’s assets, ascertain and pay its liabilities and distributes the remainder, if any, to the members or a person appointed to wind up the affairs of the company.

Once the decision to liquidate has been taken, the company goes under the control of a liquidator who must be a qualified and authorised insolvency practitioner.

Qualifications to act as a Liquidator

A liquidator must be an authorised, qualified insolvency practitioner and disqualifies undischarged bankrupts and body corporate.

Appointment as a Liquidator

His appointment depends on the type of winding up:

 

• In a winding up by the Court, the official receiver is the liquidator or any other person appointed by the Court on application.
• In a member’s voluntary winding up, he is appointed by members in the General Meeting.
• In a creditor’s voluntary winding up, he may be appointed by:
  • Members
  • Creditors
  • Both creditors and members.
  • The Court on application.

 

Once appointed, a liquidator other than the official receiver must notify his appointment in the Kenya Gazette and is obliged to deliver to the official receiver, such books or information as he may require.

 

The Legal Position of the Liquidator

The exact position of the liquidator is difficult to define as neither the Companies Act nor case law is clear on this point.

• Liquidator as an officer of the Court

If he is appointed by the Court, he is an officer of the Court and must act honestly and impartially. He is answerable to the Court.

 

• The liquidator as an agent

Case law demonstrates that a liquidator is an agent in a voluntary winding up as long as he is acting within the stage of his authority. In the words of Lawrence J in Stead Hazel V Cooper, a liquidator is an agent of the company.

According to Rower J in Knowles V Scott:

“I think at any rate, agency more nearly defines his true position than trusteeship”

 

• Liquidator as trustee

He is said to be a trustee for the general body of creditors and not for individual creditors. In the words of Rower J in Knowles V Scott:

 

“In my judgment the liquidator is not a trustee in the strict sense. No doubt in a sense and for certain purposes a liquidator may fairly enough be regarded as a trustee”

 

• Liquidator as a fiduciary

Although there is no direct judicial authority for the proportion that a liquidator is a fiduciary, his obligations suggest that he is one e.g. he must act in good faith and avoid conflict of interest.

Duties and Obligations of the Liquidator

• He must act bonafide for the benefit of interested parties.
• He must exercise unfettered discretion.
• He must exercise powers for the particular purpose for which they were given.
• He is bound to avoid conflict of interest.
• He must exercise discretion personally unless appointed jointly.
• He must act honestly and impartially
• He must exhibit the degree of care and skill appropriate to the circumstances.
• He is bound to secure control of the company’s assets.
• He is bound to realize the assets
• He must ascertain and pay the company’s debts
• He is bound to ensure that minutes of the respective meetings are held.
• He is bound to keep proper books of accounts.
• He is bound to pay monies received into a separate account for purposes of the winding up.
• At least twice a year, he is bound to deliver to the official receiver an account of his receipts and payments.

Powers of the liquidator

The liquidator has certain powers exercisable with and without sanction of the Court or committee of inspection.

Powers exercisable with sanction of the Court

• To bring or defend any action or other legal proceedings in the name of and on behalf of the company.
• To carry on any business of the company as may be necessary for the beneficial winding up.
• To appoint an advocate to assist him in the performance of his duties.
• To pay any classes of creditors in full.
• To make any compromise or arrangement with creditors or persons claiming to be creditors.
• To compromise all calls liabilities to calls, debts and other liabilities.

Powers exercisable without sanction of the Court

• To sell moveable and immoveable assets of the company.
• To do all such acts and execute deeds in the name of and on behalf of the company.
• To draw accept or endorse negotiable instruments in the name of and on behalf of the company.
• To prove rank and claim in the bankruptcy and insolvency of a contributory 5. To take out letters of administration in his official name on a deceased contributory.
• To raise money on the security of the company’s assets.
• To employ agents to perform tasks he cannot.
• To do so other acts as are necessary for the winding up and distributing of the assets of the company.

Release/Discharge of the Liquidator

When the liquidator has collected all the property of the company or as much as he can without protracting the winding up and has:

• Distributed a final dividend if any to creditors;
• Adjusted the rights of contributories amongst themselves; and
• Made a final return to contributories; he must apply to the Court for his release or discharge.

 

The Court then orders him to prepare a report on his account and on the basis of the report and any objection as may be made by any creditor, contributory or interested party; the Court determines whether or not to release the liquidator.

If the liquidator’s release is withheld the Court may hold him liable on application for acts or commissions committed or omitted in the course of winding up.

If the Court releases the liquidator; the order discharges him from all liabilities arising in the course of winding up.

However the discharge may be revoked if it is proved that it was procured by fraud, misrepresentation and concealment of material facts.

Otherwise a discharge order operates as the removal of liquidator from office.