Company Liquidation & The Ripple of Liabilities

The Liquidation Process

The Insolvency Act, Companies Act and the Employment Act are the guiding statutes in the process of liquidation (“winding up”) a company in Kenya. The Insolvency Act sets out that a company may wind up its operations either voluntarily or by an order of the court.

Members of a company or creditors may voluntarily wind up the company. The difference between the two being that in a members’ voluntary liquidation, directors have to make a statutory declaration otherwise the liquidation stands as a creditors’ liquidation. Further to this, only a director would make the statutory declaration in a case where the company, though solvent is to undergo liquidation.

Creditor’s Voluntary Liquidation

When a company cannot meet its debt obligations to its creditors, the company takes up the creditors’ voluntary liquidation spearheaded by the creditors to wind up. In adherence to the Insolvency act, the board of the company must pass a special resolution that the company cannot meet its obligations to its creditors and thus would like to voluntarily wind up its operations.

However, before passing such a resolution the company needs to give a 7 days’ notice of its intentions to pass the resolution to the creditors (especially holders of floating charges) before conducting the meeting to discuss and pass the resolution. The board of the company should then sit and pass the resolution if the notice is green flagged at the end of the 7 days.

Then the company shall convene a meeting of all creditors within 14 days after the special resolution is passed to discuss the winding up. The company must send out a notice to the creditors of not less than 7 days notifying them of the meeting. The notices can be delivered physically, put up on the company’s website (if any) or in two newspapers with a circulation that is within the company’s principal place of business.

The directors are required to prepare and lay before the creditors, a statement of the company’s financial position. The nomination of a qualified insolvency practitioner is to be done in this meeting as well. The insolvency practitioner is to take charge and guide the winding up process. The company may front the practitioner or have one fronted by the creditors. A liquidation committee may also be appointed whose number shall not exceed 5.

Upon appointment of the liquidator the powers of the directors shall cease except in so far as the liquidation committee or the creditors in its absence shall sanction. Where a liquidator continues in office for more than 12 months he shall convene a meeting of the creditors and the company within 3 months after the lapse the 12 months and every other subsequent 12 months.

Notably, the voluntary liquidation of a company commences once the resolution for voluntary liquidation is passed and after the commencement of voluntary liquidation of a company, the company shall cease to carry on its business, except in so far as may be necessary for the benefit of its liquidation.

After the winding up of the company’s affairs is complete the liquidator shall as soon as practicable prepare a liquidation report and within 30 days after the preparation of the report, he shall share it with the creditors and the company in a meeting convened by him. The company is required to state the same fact in all its invoices letters and other communications. Finally, the insolvency practitioner hands in the concluded winding up report to the Registrar of companies for the Company name to be removed from the register of companies.

In case of any disputes with the creditors on the voluntary winding up process, they may apply to the courts to be allowed to either keep the company as a going concern or to have the court sanction a supervised winding up.

Employee Payments & Other Priority Payments

The liquidator is empowered to make payments to the company’s employees. Payments which the company had decided to make to the employees on cessation of business before the commencement of the liquidation process.

The debts of the company while undergoing liquidation are payable in the order of priority. First priority claims are the expenses of the liquidation process. Wages, salaries and other dues payable to employees fall under second priority claims. The total amount to be given priority for any one employee may not exceed Kshs. 200,000 as at the commencement of the liquidation process. Falling under third priority claims are tax dues which are to be paid after the first and second priority claims have been paid. Claims having the same priority, rank equally and subject to any maximum payment are payable in full unless the property of the company is insufficient to meet them in which case they abate in equal proportions.

An employee or his representative may make an application to the Cabinet Secretary, upon his employer becoming insolvent and the employee’s employment being terminated, to obtain pay from the National Social Security Fund. The amount payable is that which in the opinion of the cabinet secretary the employee is entitled to with respect of the debt owed to him. This amount shall not exceed Kshs. 10,000 or one half of the monthly remuneration whichever is greater in respect of any one month payable.

Liability of Company Directors Upon Winding-Up

Generally, a company is a body corporate with a separate independent identity in law that is distinct from its shareholders, directors and agents unless there are factors warranting a lifting of the veil. 

In lifting the corporate veil, the mask of incorporation is lifted with the result that the shareholders are no longer agents of the company but are treated in their own rights and they become liable not in their capacity as directors or shareholders of the company but in their personal capacity. The lifting the corporate veil is however a delicate and strict exercise regulated by law and the court. Courts have over time identified the specific circumstances which warrant the lifting of the corporate veil in order to directly deal with the individuals behind the fraudulent schemes within the company.

The veil can be lifted in four circumstances. First, there must be fraud or improper conduct on the part of the company and Directors/Shareholders. Second, the company must be basically intended to evade tax obligations. Third, the company was being used to conduct criminal activities. Fourth, there was discovery of fraudulent and improper design by the Directors/Shareholders of the company.

Further in Masefield Trading (K) Ltd V Rushmore Company Limited & Another [2008] eKLR ,  it was held that the above rule grants the court jurisdiction to summon any officer of a company to attend court so that he may be examined on the assets and means of the company to settle the sum decreed to be paid by the company.  By examining such an officer, the court may or may not lift the veil of incorporation. Notably, this Rule is applicable where the court has given an order that a company settles a given sum and the company fails to do so for any reasons including insolvency of the said company.Such an order allows for examination of officers of a corporation on credit worthiness of a judgment debtors.

Courts have also held that the inability of a company to satisfy a court decree merely because the company had no assets is not sufficient to lift the veil of incorporation. Such was the holding in HCCA No 728 OF 2000 Electrowatts Limited Vs Countryside Suppliers Limited and Another [2014] eKLR where the court declined to lift the corporate veil merely because the company had no assets capable of satisfying a court decree.

This therefore means that for liability of the company’s debts to pass to the directors/shareholders of the company being wound-up, the creditors need to approach court and demonstrate fraud, tax evasion, or criminal conduct by the directors so as to have them personally liable. If the company being wound up is supposed to pay some amounts as ordered by court, it will also be for the court to assess and determine whether there are sufficient reasons given by the creditors to allow them go after the directors/shareholders personally.

CONCLUSION

In view of the foregoing, the safest way for insolvent companies to wind up is through a creditor’s voluntary liquidation as outlined above. The liabilities of the company shall then be paid in order of their priority as provided for under the Insolvency Act and further recourse obtained by the employees through the Cabinet Secretary for labour Relations from the National Social Security Fund.

By Otieno R.

otieno@alakonyalaw.co.ke

This Article is provided free of charge for information purposes only; it does not constitute legal advice and should be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary as set in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact us on info@alakonyalaw.co.ke

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