Corporate insolvency refers to the financial state of a company where it is unable to pay its debts when they become due or where the value of its assets is less than its liabilities. It is a legal condition that signifies a company’s inability to meet its financial obligations, jeopardizing its ability to continue operating as a going concern.
Corporate Insolvency in Kenya
The current insolvency regime in Kenya emphasizes the rehabilitation of insolvent companies rather than immediate liquidation, particularly when the financial position of the company is redeemable. The Insolvency Act of 2015 promotes the use of administration as a preferred approach, reserving liquidation as a last resort for companies deemed irredeemable.
The primary objectives of the Insolvency Act, 2015, in advocating for administration, are twofold. Firstly, it aims to maintain the insolvent company as a going concern, preserving its operations and potential for recovery. Secondly, it strives to achieve a better outcome for the company’s creditors as a whole, compared to what would likely be the case if the company were liquidated.
It is worth noting that the Insolvency Act, 2015, collectively classifies liquidators, administrators, and bankruptcy trustees (for natural persons) as Insolvency Practitioners. These practitioners play crucial roles in the insolvency process, ensuring compliance with the provisions of the Act and facilitating the administration or liquidation proceedings in a fair and efficient manner.
The preference for administration over liquidation reflects a more holistic approach to addressing insolvency situations, considering the potential for restructuring, business turnaround, and debt restructuring measures. By striving to maintain companies as going concerns, the Insolvency Act aims to preserve employment, protect stakeholders’ interests, and maximize returns for creditors.
However, it is important to note that not all insolvent companies will be suitable for administration. In cases where the financial position is deemed irredeemable or administration is not feasible, liquidation may be the appropriate course of action to wind up the company’s affairs and distribute its assets to creditors.
The following sections outline the process for the administration or liquidation of insolvent companies:
Administration of Insolvent Companies
The appointment of an administrator can be initiated by following:
- the court;
- the holder of a qualifying floating charge; or
- the company or its directors.
A floating charge is a qualifying floating charge if it is created through a document that specifically states that Section 534 of the Insolvency Act applies to it, or purports to grant the holder the authority to appoint an administrator.
Once appointed through an administrative order, the administrator assumes control over all property believed to be owned by the company. During this period, no application for the company’s liquidation can be made, and any actions related to enforcing security over the company’s property require the consent of the administrator or approval from the court.
An administration order imposes a freeze on activities such as distress levies, legal proceedings, and winding up of the company, unless authorized by the court. Throughout the administration period, the administrator ensures that all business documents issued by or on behalf of the company clearly state the administrator’s name and indicate that the company’s affairs are being managed by the administrator.
Company Voluntary Arrangements
When a company is unable to meet its debts as they fall due, it may seek an agreement with its creditors to satisfy their claims in a manner other than full payment. Directors of the company can propose a voluntary arrangement to the company and its creditors, which can take the form of a composition to settle debts or a scheme to reorganize the company’s financial affairs.
To oversee the implementation of the voluntary arrangement, the directors must appoint an authorized insolvency practitioner. The practitioner is required to submit a report to the court, stating whether the proposal has a reasonable chance of being approved and implemented. The report should also recommend convening a meeting of creditors to consider the proposal, specifying the date, time, and venue for the meeting.
Upon the court’s direction, the insolvency practitioner, if deemed necessary, organizes the meeting of creditors to vote on the approval of the proposal, with or without modifications. The creditors are divided into three groups for voting purposes: secured creditors, preferential creditors, and unsecured creditors. Any modifications to the proposal must be consented to by the company and may involve the replacement of the supervising insolvency practitioner.
Once the proposal is approved, it is reported to the court promptly and takes effect as a binding voluntary arrangement upon the court’s approval. The insolvency practitioner overseeing the arrangement is responsible for implementing it in the best interests of the company and its creditors. They also monitor the company’s compliance with the terms of the arrangement.
Liquidation of the Company
Liquidation is an insolvency process that results in the dissolution and termination of a company. Liquidation occurs when a company is unable to pay its debts or if the value of its assets is less than its liabilities, including contingent and prospective liabilities.
There are two primary methods of liquidation:
Voluntary Liquidation
Voluntary liquidation occurs when the company’s shareholders or directors make a collective decision to wind up the company. This process typically involves the appointment of a liquidator who oversees the distribution of the company’s assets to creditors and resolves any outstanding obligations.
There are two types of Voluntary liquidation:
Members’ Voluntary Liquidation
In this type of voluntary liquidation, the company’s members (shareholders) appoint one or more liquidators through a resolution passed at a general meeting. Members’ voluntary liquidation is considered a solvent liquidation as it occurs when the directors of the company make a statutory declaration, known as a declaration of solvency. In this declaration, the directors state that they have thoroughly investigated the financial position of the company and are of the opinion that the company will be able to settle all its debts within one year from the date of the members’ resolution to voluntarily liquidate the company.
The declaration of solvency is a significant component of members’ voluntary liquidation, as it provides assurance to creditors and stakeholders that the company has sufficient funds and assets to satisfy its obligations. After making the declaration of solvency, the directors are required to lodge this document at the Registrar of Companies. The declaration serves as an official record of the directors’ assessment of the company’s solvency and their commitment to fulfilling all financial obligations.
Creditors’ Voluntary Liquidation
In a creditors’ voluntary liquidation, a meeting of the company’s creditors is convened within 14 days after the resolution for liquidation is proposed. It becomes a creditor’s voluntary liquidation if the directors of the company fail to file a declaration of solvency with the Registrar of Companies. The company is required to send notices to all creditors and publish the notice once in the Kenya Gazette, at least twice in newspapers circulating in the area where the company’s principal place of business is located, and on the company’s website (if applicable).
During the creditors’ meeting, the liquidator is nominated by the creditors. If the creditors fail to nominate a liquidator, the company itself will nominate one. The appointed liquidator must also be an authorized insolvency practitioner. Before the creditors’ meeting, the directors of the company are required to prepare a statement of the company’s financial position and present it at the meeting.
Procedure for Voluntary Liquidation
The following steps outline the procedure for voluntary liquidation in Kenya:
- Notice to Floating Charge Holder
Before passing the resolution, any holder of a floating charge, which covers a significant portion of the company’s assets, must be given notice of the intended resolution.
- Passing the Resolution
After seven (7) days of providing notice or upon receiving written consent from the holder of the floating charge to pass the resolution, the special resolution may be passed by the company’s members.
- Registration and Publication
The special resolution must be lodged with the Registrar of Companies within fourteen (14) days of its passing. Additionally, a notice outlining the resolution must be published once in the Kenya Gazette and in at least two (2) newspapers circulating in the area where the company’s principal place of business in Kenya is located and the company’s website (if applicable).
Once the resolution is passed, the company must cease its regular business activities, except to the extent necessary for its beneficial liquidation. Any transfer of the company’s shares or alteration of the status of its members after the passing of the resolution will be considered void.
Liquidation by the Court
Liquidation by the Court occurs when a company is compelled to undergo liquidation through a court order. The High Court of Kenya has jurisdiction over the supervision of company liquidation proceedings under the new law. Liquidation by the Court occurs through an application made to the Court by various parties, including:
- The company or its directors;
- Creditors, including contingent or prospective creditors;
- Contributories (shareholders) of the company;
- Provisional liquidators or administrators; and
- The Official Receiver.
To entertain a liquidation application, the Court must establish that the company is unable to pay its debts. The circumstances in which a company is deemed unable to pay its debts include:
- Failure to pay, secure, or reach a satisfactory arrangement in response to a written demand for a debt of one hundred thousand shillings or more by a creditor. (the demand here is for 21 days).
- Unsatisfied execution or other legal process resulting from a judgment, decree, or court order in favor of a creditor, either partially or entirely.
- Proven inability to the satisfaction of the Court to meet its financial obligations as they become due
In such cases, the Court evaluates the evidence presented and determines whether the company’s financial circumstances justify the commencement of the liquidation process. The Court’s involvement ensures proper oversight and adherence to legal procedures throughout the liquidation proceedings.
Liquidation by the Court provides a mechanism for creditors, shareholders, and other interested parties to seek the winding up of a company that is unable to meet its financial obligations. The process involves a thorough assessment of the company’s financial status and the fair distribution of its assets to satisfy its debts.
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