Liquidation and Administration of Registered Companies

Grounds

Failure to comply with provisions of returns and reporting under the act, and any other breaches of the act.

Persons who can commence liquidation

· Member/contributory

· Creditors

· Provisional liquidator

· Company Supervisor when there is voluntary arrangement

· Registrar

· Directors of the company where they are unable to file a solvency statement under S182.

Process

Liquidation commences either by resolution of members, resolution of contributories or creditors resolution.

Due notice of the resolution to liquidate must be issued to all members, contributors and creditors of the company.

Application – made to High Court which has jurisdiction over dissolution of companies. It is in the prescribed format under the High Court Company Rules.

Winding up is breaking apart the company and sharing of spoils between creditors, and whatever remains is given to members, whereas liquidation is the orderly realization of a company’s assets so as to pay its debts. A company can continue business after liquidation if the realization of the assets pays of all debts and surplus remains.

The process under the liquidation is asset realization, followed by the decision of whether to dissolve or continue trading.

READ:Jambo Biscuits case on winding up.

Duties and obligations of:

a) Liquidators

b) Directors and members of the company

Supervisory obligations of the court in liquidation process.

Liquidation of unregistered companies- part 7 (s512-519) insolvency act

Unregistered companies include Cooperative Societies, Building Societies and Limited Liability Partnership within meaning of Insolvency Act. Includes the corporation under the Sectional Properties Act.

Loophole is that the definition of the unregistered company is vague.

A company cannot be liquidated voluntarily, and only court can order liquidation (s512). Members can make resolution that the company be liquidated by court, court can order liquidation on expiration of moratorium.

The debt for unregistered company should be 75,000/-. Liquidation can be ordered when a company is notified of payment of debt, and it fails to pay or secure the debt within 21 days. The same happens when judgment is entered against the company and which the company does not settle within 21 days.

Foreign companies can be liquidated as unregistered companies when they cease to transact in Kenya even though they have been dissolved in the country of incorporation.

Contributory – persons liable to contribute to company assets in the event of liquidation.

No proceedings may be begun or continued against a contributory for the debts of the company. Court has power to stay proceedings against a contributory of unregistered company if the application for stay is made by a creditor. Further, no legal proceedings may begin or continued unless approved by court.

Administration of insolvent companies

Administration is a procedure used while reorganizing a company or the realization of its assets under the protection of a statutory moratorium which prevents creditors from taking action to enforce their claims against the company during the administration process thus preventing the implementation of a strategy for the company’s rescue or asset realization.

An administrator is appointed by way of an administration order –s530. He has a duty to perform is functions as quickly and reasonably practicable. He is considered an officer of the court, whether or not appointed by court. He is an authorized insolvency practitioner.

An administrator cannot be appointed if a company is already in liquidation. An administrator cannot be appointed for banking institutions and insurance corporations as there are different regimes.

The administration order is issued if court is satisfied that the company is or is likely to become unable to pay its debts, and that the administration order is reasonably likely to achieve the objective of administration.

Through an interim admin order, the court can restrict director’s powers or reserve the discretion of the court. The court can treat the application for administration order as a liquidation application and make such orders thereunder.

Any pending application for liquidation is suspended when an administration application is ongoing. Creditors can only realize security with court’s permission, and proceedings against the company are subject to court approval.

Duty of administrator

· Convene creditor’s meeting within 70 days

· Prepare a proposal and send it to creditors within 60 days.

The administrator can also undertake to do the above.

· Duty to appear before creditor’s committee on request, subject to 7 days notice

· Duty to control company assets

· Take control of all affairs of the company

· Duty to publish notice of his appointment within 7 days,

· Distribution of properties to creditors as provided by law

Appointment of administrator by debenture holder

Court can issue administrative order on application by debenture-holder.

Appointment of an administrator by a company or its directors

Notice of intention to appoint an administrator must be given within 7 days, and it must identify an administrator with his consent. It is lodged in court, together with a statutory declaration that the company is unable to pay its debt, it is not in liquidation and that the appointment of an administrator is not prevented by a moratorium.

Once prepared, the notice is to be lodged in court within 14 days. This notice is the application for appointment of an administrator.

KEY

2 OPTIONS TO COPORATE INSOLVENCY – liquidation and administration

3things – what (definition of the process), how (process and who does what when), who (role, obligations and duties of administrator/liquidator, company directors and members, court)?

Effect of administration order of a company – stay of proceedings and stay of liquidation.Director actions subject to approval of administrator. Admin assumes role of general meeting of members and directors?

Why would a company go into administration?

 

COMPANY LIQUIDATION

Members voluntary liquidation – grounds

When a company is formed for a specific ppurpose, which purpose has since been achieved.

When a company is formed for a specific duration, and the duration has since lapsed.

Members cannot voluntarily liquidate a company if it is unable to pay its debts. Instead, they are to inform the creditors, who must then agree to commence a voluntary creditors liquidation.

A resolution requiring a special majority as prescribed by the articles of the company, if not prescribed then 75%.

Grounds for creditor’s voluntary liquidation

When a notice of debt beyond the prescribed minimum has been served upon the company and the company is unable to pay within 21 days, the company is deemed unable to pay its debt.

The creditors can look at the solvency statement and is able to satisfy the court that the company is unable to pay its debt.

When a warrant/order/decree of judgment is issued against the company and the same is not varied or lifted within 21 days.

Process

Creditors commence by issuing a notice upon the company. The directors are then under obligation to appoint an insolvency practitioner as an interim liquidator of the company. The role of the interim liquidator is to convene the first meeting of creditors within 14 days of the notice for voluntary creditor’s liquidation.

The directors must also publish in widely circulating dailies the notice of voluntary liquidation as proposed by the creditors.

Where no interim liquidator is appointed after the notice, the creditors can apply to the court to compel the directors to appoint the interim liquidator, or apply to the Official Receiver.

The first creditor’s meeting is meant to confirm the interim liquidator or appoint another, and it is also meant to convene the liquidation committee.

Liquidation by court

The following persons may apply to court for liquidation of a company:

· Members and contributories

· Creditors

· Any administrator under Part XIII

· Any interim liquidator

· The Attorney General

· The Official Receiver

Grounds for application for liquidation

1. If the company has not commenced operation in a period of not less than 12 months of incorporation (for public companies),

2. Where the company has suspended operations for a period not less than 12 months.

3. For a public company, when members fall below the statutory minimum.

4. Where the company fails to comply with the provisions of the Act

5. The AG may apply for liquidation if the company in its operations, business or its members have acted illegally, improperly or in any way against public policy. This is an application to safeguard public interest.

6. If an application is made to the satisfaction of the court that it is insolvent and/or it has no reasonable prospect to pay its debt

7. A secured creditor can apply for liquidation if the company is in material breach of its security obligations

8. When the court is satisfied that it is just and equitable that the company be liquidated. The court must be satisfied that there is no less drastic alternative in the circumstances. The court regards the conduct of the parties – eg has the application been brought to coerce the company ito paying a debt? The court regards the record of company to look at the mode of management – is it well managed or is it salvageable?

For the purposes of the Act, the court with jurisdiction is the High Court. Any application to another curt is struck out for being incompetent.

Orders which the High Court can make in application for liquidation

a) Allow the application

b) Deny the application

c) Adjourn the application upon such terms as it deems fit

d) Make/give conservatory orders on the application

e) Allow the application with modification.

The court can refuse orders for liquidation where it is satisfied that:

1. When there are alternative remedies – eg voluntary arrangements and administration.

2. When the application does not comply with the Act or the regulations

Effect of a court liquidation order

1. The Official Receiver must notify the Registrar to enter into the register the liquidation order against the name of the company. The company can only trade on including the name ‘UNDER LIQUIDATION’ on all documents and correspondence.

2. Stay of all proceedings against or by the company unless with leave of court.

3. Management and control passes to liquidator. Director powers are suspended, only to be exercised following approval of the liquidator.

4. No transfer or dealing in the property of the company is valid except with the sanction of the liquidator.

5. Company under liquidation does not hold GM unless convened by the liquidator.

6. No orders for attachment or recovery of debt can be made against the company, save with approval of the court.

KEY: liquidation does not terminate employment contracts or any other contract for that matter. Suppliers can still bring valid claims for unpaid goods to the liquidator. Parties would still be bound unless the liquidator expressly waives the right or varies the contract terms.

Rights and remedies of unpaid sellers in liquidation

Distinguish between ongoing contracts and new contracts. New contracts cannot be valid, save for leave of the liquidator.

KEY: when drafting contracts, it is good practice to provide for a ‘MATERIAL ADVERSE CHANGE CLAUSE’ which relieves parties from their contractual obligations if there are material adverse changes to the condition or business of either party, e.g. where the company enters administration or liquidation.

Key parties involved in company liquidation

· The Official Receiver

· The liquidator, interim or otherwise.

· The members and the company

· Court

· The Attorney General

The Official Receiver

Established by the Act under the office of the Attorney General for administrative oversight over liquidation and administration of companies in distress.

The roles include:

a) To act as liquidator for any company where no liquidator appointed, or vacancy arises due to resignation, death or incapacity of the appointed liquidator

b) Convene the first meeting of creditors where court orders or no liquidator

c) Propose for appointment a liquidator where members of the company cannot agree

d) File in court upon investigation his report on what he considers to be causes of failure of the company

e) Receive regular updates of liquidation from company liquidators.

The company (directors)

Directors’ duties include the statement of affairs of the company and provide it to the Official Receiver or liquidator, as provided by the Act. The obligation is discharged if the statement is true, accurate and up to date.

The company has an obligation to cooperate fully with the liquidator in the liquidation process. Full cooperation includes that the directors and officers must make themselves available – leaving the country without the permission of the liquidator or the court breaches this. It also means the company must provide any information required by the liquidator. The company must not take any action likely to impede the liquidation process.

Provide records, documents and any other material on activities on the company on demand as requested by the liquidator. The directors have an obligation to comply with all reasonable

Not to enter into any contract or obligation on behalf of the company once the liquidation order is made.

The liquidator

Duties

1. Trace and secure the company assets by obtaining the statement of affairs.

2. Convene the first meeting of creditors where one has not already been held. From there, the liquidation committee is sanctioned.

3. Take over control and management of company with dispatch.

4. Prepare regular updates on the conduct of his liquidation to the Official Receiver and Court.

5. If more than one year lapses since commencement of liquidation, the liquidator must convene a general meeting of members to update them on progress of liquidation and provide reasons why liquidation should be extended.

6. Prepare a report on the reasons of the failure of the company

7. Realize the assets of the company

8. Make a distribution of the realized assets to creditors in the manner prescribed by the Act and the Regulations

9. File a final report when, in his opinion, the liquidation comes to an end i.e. when there are no more assets to be realized.

KEY: the liquidator has no obligation to keep the business running. His purpose is to realize assets and pay off creditors, bringing the business to a close.

Powers

1. Convene a meeting of creditors or members where necessary

2. Require the production of company records or any document from the officers or directors

3. Make any enquiry or conduct any investigation for liquidation purposes. He can summon any creditor or member to give any required information

4. Transfer, assign, sell, alienate or otherwise deal in the assets of the company.

5. Enter into contracts on behalf of the company, and terminate any contract which the company has power to terminate including terminate any contract of employment or of director.

6. Direct any director to exercise any powers as he determines.

7. Enter into any compromise or arrangement with any creditor for the purpose of discharging any debt.

8. Institute and defend suits on company behalf.

All powers of the liquidator are subject to the oversight and control of the court. Any person entitled to a liquidation order can apply to the court where the liquidator applies his powers capriciously or illegally.

Office of the Attorney General

He can move the court to make liquidation order so as to defend public interest if he holds the view that the company in its business,, membership or directors is against public interest.

The AG can also move after ordering an investigation into the membership or the business of the company – e.g. after discovery that the company deals with enemy states. FIND: ENEMY STATES (3) or is owned by undesirable elements or where the company is being run as a fraud.

Court

KEY: Does not have duties, only has powers. Conducts oversight.

Powers

1. Making liquidation order

2. Making any such other orders deemed fit for proper liquidation e.g. conservatory orders, injunctions

3. Appointment of a liquidator on recommendation of Official Receiver where creditors and company is unable to agree

4. Receive reports of the liquidator and make any orders deemed fit

5. Make orders on application of liquidator for production of any record borne by any person which may assist in liquidation

6. Impose sanctions for offences related to liquidation.

Persons obligated to contribute to company assets during liquidation

1. Current members and contributories – liable to contribute any unpaid capital due from them.

2. Current guarantors

3. Past members and contributories, subject to the following conditions – the debt for purposes of liquidation must have been incurred when they were still members, they must have not ceased to be members for a period of not less than 12 months before the liquidation.

4. Any person that the court may find liable or as a cause of the failure of the company.

Realizable assets

The liquidator has recourse to all assets of the company except:

a) Secured assets under a floating debenture which has become fixed

b) Secured assets for which the creditor has already exercised his rights under the instrument.

READ: SECURITIES, DEBENTURES AND CRYSTALLISATION OF DEBENTURE in liquidation.

COMPANY ADMINISTRATION

Administration is the placement of a company under distress to an independent qualified expert – Insolvency Practitioner – for the purpose of reviving the company (also known as TURNAROUND ARTIST)

The objective of administration is revival of companies in distress. Administration is not to realize assets, but to keep the company as a going concern for the benefit of creditors and members.

Administration provides protection against suits, but does not suspend operations, management and control.

Process of administration

Persons who can apply to court for an administration order include:

1. members and contributories

2. directors of the company

3. creditors

4. official receiver

5. any supervisor appointed under voluntary arrangement

Grounds for court consideration before making administration order

1. When the company’s net assets are more than its liabilities, including contingent liabilities. In such cases, a company may have more long term assets eg high value land compared to short term assets eg receivables. This company has reasonable prospects of paying its debts, even if they demanded today.

2. When the company reasons for failure is other than financial reasons.

3. When there has been fundamental shift in the business of the company, requiring someone with expertise to restructure the company.

4. A company with little history of financial default will be candidate for administration.

KEY: The court when faced with an application for administration may order any other recourse, including liquidation.

Effect of administration order

1. All proceedings against the company for recovery of any debt or decree is stayed.

2. No suit can be instituted for or against the company without leave of court and approval of administrator.

3. The company continues to operate, save that the directors mght not exercise certain powers as provided in the regulations without approval of the administrator.

4. Every company must have in their documents and correspondence UNDER ADMINISTRATION

5. Unlike liquidation, the company may not enter into contracts beyond certain thresholds without the approval of the administrator.

6. The administrator must be notified every time members hold a general meeting, and he is entitled to attend and make representations.

READ: Duties and powers of administrators. How does administration terminate.

READ: voluntary arrangement – how is it done?

KEY; know the reasons of choosing either voluntary liquidation by members or creditors, administration and voluntary arrangements. Know the process and procedure. Know the effect of liquidation, administration and voluntary arrangements.


READ: insolvency provisions regarding companies.

READ: movable securities – formerly known as chattels. Chattels Mortgage Transfer Act – Chapter 28 laws of Kenya. Chattels mortgage, power of attorney, letter of lien, letter of pledge, and letter of hypothecation.

KEY: THE government is developed the movable assets security bill 2016 which will update the use of movable assets as securities.