CPA
SECTION 3: CORPORATE INSOLVENCY UNDER THE 2015 INSOLVENCY ACT
Corporate Insolvency in Kenya was
previously governed under the Companies Act, CAP 486 Laws of Kenya. However in
September 2015, the Insolvency Act regulates this feature of company law.
Unlike the previous legislation,
the Insolvency Act seeks to redeem insolvent companies through administration as opposed to liquidation. The Act focuses more on
assisting insolvent natural persons, unincorporated entities and insolvent
corporate bodies whose financial position is redeemable to continue operating
as going concerns so that they may be able to meet their financial obligations
to the satisfaction of their creditors.
The consolidation of the laws
with respect to insolvency is aimed at not only providing for and regulating
the liquidation of incorporated and unincorporated bodies but also to
enable their affairs to be managed for the benefit of their creditors by
providing alternatives to bankruptcy and liquidation.
Meaning of Insolvency
Insolvency means that a company
is unable to pay its debts. Section 384
of the Insolvency Act 2015 provides that a company is unable to pay its debts:
a) if
a creditor (by assignment or otherwise) to whom the company is indebted for KES 100,000 or more has served on the
company, by leaving it at the company’s registered office, a written demand
requiring the company to pay the debt and the company has for 21 days afterwards failed to pay the
debt or to secure or compound for it to the reasonable satisfaction of the
creditor;
b) if
execution or other process issued on a judgment, decree or order of any court
in favour of a creditor of the company is returned unsatisfied in whole or in
part; or
c) if
it is proved to the satisfaction of the Court that the company is unable to pay
its debts as they fall due.
Section 384(2) provides that a company is also unable to pay its
debts if it is proved to the satisfaction of the Court that the value of the
company’s assets is less than the amount of its liabilities (including its
contingent and prospective liabilities).
Liquidation is the dissolution or winding up of a company. It is
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.
TYPES OF WINDING UP
There are three different types
of liquidation:
a) Compulsory
liquidation
b) Member’s
voluntary liquidation
c) Creditor’s
voluntary liquidation
The parties most likely to be
involved in the decision to liquidate are:
a) The
directors
b) The
creditors
c) The
members
The directors are best placed to
know the financial position and difficulty that the company is in.
The creditors may become aware
that the company is in financial difficulty when their invoices don’t get paid.
The members are likely to be the
last people to know that the company is in financial difficulty as they rely on
the directors to tell them.
If a creditor has sufficient
grounds they may apply to the court for the compulsory winding up of the
company. Creditors may also be closely involved in a voluntary winding up if
the company is insolvent when the members decide to wind the company up.
The members may decide to wind
the company voluntarily in two cases:
i.
Member’s voluntary winding up (if the company is
solvent)
ii.
Creditor’s voluntary winding up (if the company
is insolvent)
VOLUNTARY LIQUIDATION
Section 393 provides that a company may be liquidated voluntarily:
a) when
the period (if any) fixed for the duration of the company by the articles
expires, or the event (if any) occurs, on the occurrence of which the articles
provide that the company is to be dissolved, and the company in general meeting
has passed a resolution providing for its voluntary liquidation; or
b) if the company resolves by special resolution
that it be liquidated voluntarily.
Section 394 provides that within 14 days after a company has passed a resolution for its voluntary
liquidation, it shall publish a notice setting out the resolution:
a) once
in the Gazette;
b) once
in at least 2 newspapers circulating
in the area in which the company has its principal place of business in Kenya;
and
c) on
the company’s website (if any).
Section 395 provides that the voluntary liquidation of a company
commences when the special resolution for voluntary liquidation is passed. On
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
its beneficial liquidation.
Section 397 provides that the following are void if made after the commencement of a voluntary liquidation of a
company:
a)
any transfer of the company’s shares (other than
a transfer made to or with the sanction of the liquidator);
b)
an alteration in, or an attempt to alter, the
status of the company’s members.
Member’s voluntary liquidation
This is the winding up of a
solvent company.
A voluntary winding up is a
members' voluntary winding up only if the directors make and deliver to the
Registrar a declaration of solvency
as provided for under section 398.
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.
a) The
declaration is made by all the directors or, if there are more than two
directors, by a majority of them.
b) The
declaration includes a statement of the company's assets and liabilities as at
the latest practicable date before the declaration is made.
c) The
declaration must be:
i.
Made not more than 5 weeks before the resolution to wind up is passed, and
ii.
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.
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.
In a members' voluntary winding
up the creditors play no part since the assumption is that their debts will be
paid in full. Section 401 provides
that the liquidator shall call special and annual general meetings of
contributories (members) to whom they report:
a) Within
3 months after each anniversary of the commencement of the winding up
the liquidator must call a meeting and lay before it an interim account of his transactions during the year.
b) When
the liquidation is complete the liquidator calls a meeting to lay before it his
final accounts.
After holding the final meeting
as provided for under section 402
the liquidator sends a copy of his accounts to the Registrar who dissolves the
company 3 months later by removing
its name from the register of companies.
Creditor’s 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.
It is when a company being wound
up voluntarily is insolvent.
Section 403 provides that on forming the view that the company is
or will be unable to pay its debts, the liquidator shall:
1. Convene
a meeting of creditors on a date not
later than 30 days after the day on
which the contributory formed that opinion;
2. Send
notices of the creditors’ meeting to the creditors by post at least 7 days before the day on which that
meeting is to be held;
3. Publish notice of the creditors’ meeting once
in the Gazette AND once in at least two newspapers circulating in the area in
which the company has its principal place of business in Kenya; and on the company’s website (if any); and
4. Advertise
the meeting in such other manner and place as the liquidator considers
desirable in the interests of the creditors;
5. During
the period before the day on which the creditors’ meeting is to be held,
provide creditors, free of charge, with such information concerning the affairs
of the company as they may reasonably require; and
6. Specify
in the notice of the creditors’ meeting the duty imposed by paragraph (e).
The liquidator shall also prepare
a statement setting out the financial position of the company, lay that
statement before the creditors’ meeting; and attend and preside at that
meeting. The statement should specify:
i.
the prescribed details of the company’s assets,
debts and liabilities;
ii.
the names and addresses of the company’s
creditors;
iii.
the securities (if any) respectively held by
them and the dates on which they were respectively given; and
iv.
such other information (if any) as may be
prescribed by the insolvency regulations;
To commence a creditors'
voluntary winding up the directors convene a general meeting of members to pass a special resolution to wind-up the insolvent
company (private companies may pass a written resolution with a 75% majority).
They must also convene a meeting of
creditors, giving at least 7 days’
notice of this meeting.
The meeting of members is held
first and its business is as follows:
·
To resolve to wind up
·
To appoint a liquidator, and
·
To nominate up to 5 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 5
representatives to be members of the liquidation committee. This is provided
for under section 409.
Section 408 provides that 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.
Section 411 provides that on the appointment of a liquidator, all
the powers of the directors cease, except so far as the liquidation committee,
or if there is no such committee, the creditors, sanction their continuance.
i.e. directors become functus officio.
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.
In either case the presence of the
members' nominee as liquidator has been exploited in the past for the purpose
known as 'centrebinding'.
In Re Centrebind Ltd (1966)
the directors convened a general meeting, without making a statutory
declaration of solvency, but failed to call a creditors' meeting for the same
or the next day. The penalty for this was merely a small default fine. The
liquidator chosen by the members had disposed of the assets before the
creditors could appoint a liquidator. The creditors' liquidator challenged the
sale of the assets (at a low price) as invalid. It was held that the first
liquidator had been in office when he made the sale and so it was a valid
exercise of the normal power of sale.
In a 'centrebinding' transaction the assets are sold by an obliging
liquidator to a new company formed by the members of the insolvent company. The
purpose is to defeat the claims of the creditors at minimum cost and enable the
same people to continue in business until the next insolvency supervenes. The
Government has sought to limit the abuses during the period between the
members' and creditors' meetings. The powers of the members' nominee as
liquidator are now restricted to:
1. Taking
control of the company's property
2. Disposing
of perishable or other goods which might diminish in value if not disposed of
immediately, and
3. Doing
all other things necessary for the protection of the company's assets.
If the members' liquidator wishes
to perform any act other than those listed above, he will have to apply to the
court for leave.
Provisions applying to both kinds of Voluntary Liquidation
Section 415 provides that on the liquidation, the company’s
property:
a) are
to be applied in satisfaction of the company’s liabilities equally and without
preference; and
b) subject
to that application, are, unless the company’s articles otherwise provide, to
be distributed among the members according to their rights and interests in the
company.
Section 416 provides that the Court may appoint a liquidator if for
any reason there is no liquidator or the liquidator is unable to act.
The Court may, on cause shown,
remove a liquidator and appoint another one.
Only an authorized insolvency
practitioner is eligible for appointment.
The acts of a person appointed by
the Court as a liquidator of a company are valid despite any defect in the
person’s appointment or qualifications.
Within 7 days after being appointed as liquidator of a company, the
liquidator shall publish a notice of the liquidator’s appointment
COMPULSORY LIQUIDATION BY THE COURT
Section 423 of the Insolvency Act provides that only the High Court has jurisdiction to
supervise the liquidation of companies registered in Kenya.
Section 424 provides that a company may be liquidated by the Court
if:
a)
the company has by special resolution resolved
that the company be liquidated by the Court;
b)
being a
public company that was registered as such on its original incorporation:
i.
the company has not been issued with a trading
certificate under the Companies Act, 2015; and
ii.
more than 12
months has elapsed since it was so
registered;
c)
the company does not commence its business
within 12 months from its
incorporation or suspends its business for a whole year;
d)
except in the case of a private company limited
by shares or by guarantee, the number of members is reduced below 2;
e)
the company is unable to pay its debts;
f)
the Court is of the opinion that it is just and
equitable that the company should be liquidated.
A company may also be liquidated
by the Court on an application made by the Attorney General under section 425(6). If, in relation to a
company, it appears to the Attorney General that it would be in the public
interest or just and equitable for the company to be liquidated:
a) from
a report made or information obtained from investigations carried out or
inspection of documents produced under the Companies Act, 2015;
b) from a report made, or information obtained,
by the Capital Markets Authority under the Capital Markets Act;
c) from
information provided by the Registrar; or
d) as
a result of the company or its directors having been convicted of an offence
involving fraudulent conduct, that it would be in the public interest for the
company to be liquidated,
Section 425 provides that an application/petition to the Court for
the liquidation of a company may be made any or all of the following:
a) the
company or its directors;
b) a
creditor or creditors (including any contingent or prospective creditor or
creditors);
c) a
contributory or contributories of the company;
d) a
provisional liquidator or an administrator of the company;
e) if
the company is in voluntary liquidation—the liquidator.
If the court issues a liquidation
order they may appoint the official receiver to oversee the liquidation
process. Section 434 identifies the
obligations of the official receiver as follows:
a) if
the company has failed—to discover why the company failed; and
b) generally,
to investigate the promotion, formation, business, dealings and affairs of the
company, and to make such report (if any) to the Court as the Official Receiver
considers appropriate.
The official receiver is
authorized by section 435 to carry
out a public examination of any officers of the company involved in promotion,
formation and management of the company. A person who, without reasonable
excuse, fails at any time to attend the person’s public examination under section 435 is guilty of a contempt of
Court and is liable to be punished accordingly.
Winding up on the Just and Equitable Ground
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:
1.
Fraudulent
/ illegal purpose
In Re: Thomas Edwards Brinsmead
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.
2.
Failure
of substratum
If the principal or paramount
purpose for which the company is incorporated (i.e. its substratum) 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
principal 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.
3.
‘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.
4.
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 (members qua
members).
5.
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.
6.
Wrongful
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.
7.
Deadlock
in management and membership.
It is just and equitable to wind
up a company if its membership and 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 Tobacco 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.
The Power of the Court after Hearing a Winding up Petition
Upon hearing the winding up
petition the Court may:
·
Dismiss it.
·
Adjourn the hearing conditionally or
unconditionally.
·
Make any interim orders.
·
Make such order or further order as it may deem
fit.
If the petition is based on the
company’s failure to hold the statutory meeting or deliver a copy of the
statutory report to the Registrar, the Court may in lieu of winding up, order
that the meeting be held or the report be delivered to the Registrar.
Effects or consequences of a winding up order
Its effects date backwards to an
earlier date than that of the order itself. This is the date of commencement of
winding up which is the earlier of:
·
The date of presentation of the winding up
petition to the Court; or
·
The date of passage of the resolution for
voluntary winding up.
Once the winding up order is
made, the following consequences flow:
a) The
company ceases to carry on business except such as may be required for its
beneficial winding up.
b) Any
disposition of property of the company including things in action, any transfer
of shares or alteration in the status of members is void
c) Any
attachment, distress or execution put in force against the estate or effects of
the company is void
d) Legal
proceedings commenced by or against the company are stayed.
e) Director’s
powers become functus officio
(unexcercisable)
f)
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.
g) 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
h) Floating
charges of the company crystallize and become fixed.
A winding up order operates in favour
of all creditors and contributories as if it was issued on a joint petition of
both creditors and contributories. A copy of the winding up order must be
delivered to the Registrar for registration.
THE LIQUIDATOR
This term was first incorporated
into the Companies Act in 1856. 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. This is a person appointed to wind up the
affairs of the company.
Qualifications to act as a Liquidator
The Act does not expressly
prescribe the qualification of the holder of the office of liquidator, but
expressly disqualifies undischarged bankrupts and body corporate. Additionally,
a liquidator has to be a qualified bankruptcy practioner.
Appointment of a Liquidator
His appointment depends on the
type of winding up:
a) In
a winding up by the Court, the official receiver is the liquidator or any other
person appointed by the Court on application.
b) In
a member’s voluntary winding up, he is appointed by members in the General
Meeting.
c) 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.
1.
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.
2.
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”
3.
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 scope of his authority. In the words of Lawrence J in Stead Hazel V Cooper,
a liquidator is an agent of the company.
4.
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
1. He
must act bonafide for the benefit of
interested parties.
2. He
must exercise unfettered discretion.
3. He
must exercise powers for the particular purpose for which they were given.
4. He
is bound to avoid conflict of interest.
5. He
must exercise discretion personally unless appointed jointly.
6. He
must act honestly and impartially
7. He
must exhibit the degree of care and skill appropriate to the circumstances.
8. He
is bound to secure control of the company’s assets.
9. He
is bound to realize the assets
10. He
must ascertain and pay the company’s debts
11. He
is bound to ensure that minutes of the respective meetings are held.
12. He
is bound to keep proper books of accounts.
13. He
is bound to pay monies received into a separate account for purposes of the
winding up.
14. 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 Exercisable with Sanction of the Court
1. To
bring or defend any action or other legal proceedings in the name of and on
behalf of the company.
2. To
carry on any business of the company as may be necessary for the beneficial
winding up.
3. To
appoint an advocate to assist him in the performance of his duties.
4. To
pay any classes of creditors in full.
5. To
make any compromise or arrangement with creditors or persons claiming to be
creditors.
6. To
compromise all calls liabilities to calls, debts and other liabilities.
Powers of the Liquidator exercisable without sanction of the Court
1. To
sell moveable and immoveable assets of the company.
2. To
do all such acts and execute deeds in the name of and on behalf of the company.
3. To
draw accept or endorse negotiable instruments in the name of and on behalf of
the company.
4. 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.
6. To
raise money on the security of the company’s assets.
7. To
employ agents to perform tasks he cannot.
8. To
do so other acts as are necessary for the winding up and distributing of the
assets of the company.
Release 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:
a) Distributed
a final dividend if any to creditors;
b) Adjusted
the rights of contributories amongst themselves; and
c) 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.
Rights of Parties in relation to winding up
Liquidation rights can take two
forms: an initial liquidation preference and participation rights.
An initial liquidation preference provides that, in the event of a
sale, the holders of preferred stock receive a specified amount per share prior
to any payments to the holders of common stock.
Participation rights allow a preferred shareholder to share the
proceeds of a sale on a pro rata basis with the common shareholders as though
the preferred shares are common shares
DISTRIBUTION OF ASSETS
In a compulsory liquidation (and
often in a voluntary one) the liquidator follows a prescribed order for
distributing the company's assets:
|
|
Order
|
Explanation
|
|
1
|
Liquidation Costs
|
These include the costs of selling the assets, the liquidator's
remuneration and all costs incidental to the liquidation procedure
|
|
2
|
Preferential 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.
·
Employees' wages (subject to a statutory
maximum)
·
Accrued holiday pay
·
Contributions to an occupational pension fund
|
|
3
|
Debts secured by floating charges
|
Subject to the ‘prescribed part' (see below)
|
|
4
|
Debts owed to unsecured ordinary creditors
|
A proportion of assets (known as the ‘prescribed part') is
'ring-fenced' for unsecured creditors.
|
|
5
|
Deferred debts
|
These include dividends declared but not paid and interest accrued on
debts since liquidation
|
|
6
|
Members
|
Any surplus (unlikely in compulsory and creditors' voluntary
liquidations) is distributed to members according to their rights under the
articles or the terms of issue of their shares
|
It is important to remember that
creditors with fixed and floating charges may appoint a receiver to sell the
charged asset - any surplus is passed onto to the liquidator. In the event of a
shortfall they become unsecured creditors for the balance.
Offenses Related to Liquidation
1.Statutory Offenses
Section 498 provides that an officer or former officer of the
company commits an offence if, within the 12
months immediately preceding the commencement of the liquidation of the
company, the officer or former officer:
a) concealed
any part of the company’s property to the value of KES 50,000 or more; or concealed any debt due to or from the
company;
b) fraudulently
removed any part of the company’s property to the value of KES 50,000 or more;
c) concealed,
destroyed, mutilated or falsified any document affecting or relating to the
company’s affairs or property;
d) made
any false entry in any document affecting or relating to the company’s affairs
or property;
e) fraudulently
parted with, altered or made any omission in any document affecting or relating
to the company’s affairs or property; or
f)
pawned, pledged or disposed of any property of
the company that has been obtained on credit and has not been paid for.
Section 499 provides that an officer or former officer of the
company commits an offence if the officer or former officer:
a) has
made or caused to be made a gift or transfer of, or charge on, or has caused or
connived at the levying of execution against, the company’s property; or
b) has
concealed or removed any part of the company’s property since, or within the 2 months preceding, the date of any
unsatisfied judgment or order for the payment of money obtained against the
company.
Section 501 makes it an offense to falsify documents in relation to
company in liquidation.
Section 502 makes it an offense to make a material omission from
statements relating to financial position of company in liquidation
Section 503 provides that it is an offence to make false
representations to creditors of a company in liquidation.
2.Fraudulent Preference
This 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 particular creditor over another.
3.Misfeasance
This is a wrongful act of
omission committed or omitted by a person charged with a specific
responsibility. In the words of Lord Esher in Re: B Johnson (Builder)
Company Ltd,
“There is no
such distinct wrongful act known to the law as misfeasance”
According to the judge, 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. For example, 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:
1. Payment
of dividends out of capital.
2. Making
of improper payment to promoters by directors.
3. Making
of secret profit by directors or promoters.
4. Making
fraudulent preferences.
5. Selling
a company property at undervalue.
6. 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.
LIABILITY OF PAST MEMBERS
Members of the company, both past
and present, are liable to contribute to the assets of the company, such
amounts as necessary to meet its debts and other liabilities as well as the
expenses of winding up. 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
DISSOLUTION OF COMPANIES AFTER LIQUIDATION
Section 494 provides that as soon as practicable after receiving
the final account and return prepared by the liquidator, the Registrar shall
register them.
At the end of 3 months from the registration of the
account and return, the company is dissolved and its name officially withdrawn
from the register of companies.
