Jomo Kenyatta University of

Agriculture & Technology, School of

Law
Insolvency Law, Class 6

Corporate Insolvency

Introduction
Corporate insolvency means bankruptcy of a company.
The term used to refer to corporate insolvency is
liquidation.
There are three kinds of liquidation:
voluntary liquidation: members
creditors voluntary liquidation
Liquidation by the court

voluntary

liquidation

or

Inability to pay debt

A company is unable to pay its debts where:
It fails to honour a 21-day statutory demand served on it by a
creditor, for a debt of Kshs 100,000 or more
Execution or any other process issued by court is returned
unsatisfied in part or whole; or
It is proved to the courts satisfaction that the company is
unable to pay its debts as they fall due
Balance sheet test: where companys liabilities exceed its
assets (including contingent and prospective liabilities)

1. Voluntary Liquidation
Can either be a members voluntary liquidation or creditors voluntary
liquidation
It is termed us voluntary because it is not at the instance of a court order
Happens when:

The period for the existence of company as prescribed by the articles has expired, or an
event required to occur for winding up of the company has occurred, and the AGM has
passed a resolution for winding up
Passing of a special resolution for winding up

However, notice must be given to a holder of any qualifying floating charge

before resolution for winding up is passed.
Resolution may be passed only seven days from the date of, and including the
date when the notice to a holder of floating charged was passed, or after such
holder gives his consent in writing.

Voluntary winding up
The company is supposed to publish the notice of resolution for
winding up within fourteen days of passing of the resolution.
The notice must be published:
Once in the gazette
Once in at least two newspapers that have circulation in the companys
principle area of business
On the companys website, if any

Failing to publish the notice is a criminal offence; each officer

(including the liquidator) of the company is liable to a fine not
exceeding Kshs 500,000/=.
Upon conviction, if the breach continues, each day of breach is an offence
attracting fine not exceeding kshs 50,000 for each day

Voluntary liquidation
What is a qualifying floating charge?
One that relates to whole or substantially the whole part
of the companys property
A number of qualifying floating charges that relate to
the whole or substantially the whole part of the property
of the company
Where a number of charges and securities, at least one
of which is a qualifying floating charge, relate to the
whole or substantial the whole part of a companys
property

Voluntary liquidation
Appointment of Liquidator
Liquidator appointed by the company in case of voluntary liquidation
Appointed by court in case of winding up by court
Functions
Upon completion of the liquidation, the liquidator shall:

Prepare an account of the liquidation showing how it has been conducted

Convene a general meeting of the company for purposes of laying the account
Publishing a notice about the meeting:

once in the gazette

once in at least 2 newspapers circulating in companys place of business
on companys website, if any

Specify the time, place, date and purpose of the meeting

Within 7 days after the meeting, file a copy of the account together with the returns
giving details of the holding of the meeting, with the Registrar of companies

Voluntary liquidation
Where the liquidator is of the opinion that the company will be unable to pay its debts, he
shall:

Convene a meeting of creditors within 30 days of forming that opinion

Send notices to the creditors concerning the meeting
Publish notice of the creditors meeting (gazette, newspaper and companys website)
Advertise the meeting in any other manner in the interest of the creditors
Provide information to creditors concerning the company before the meeting is held. Information is given
free of charge
Specify in the notice to creditors, the right to access information about the company prior to the meeting
Prepare financial statement of the company and lay it in the meeting
Attend and preside over the meeting

Once creditors are involved, that is, as from the time the creditors meeting is called
onwards, the voluntary liquidation becomes the creditors voluntary liquidation.
Read the Insolvency Act for further enlightenment on members voluntary liquidation and
the creditors voluntary liquidation

2. Liquidation by court
Circumstances include:

Company resolving by special resolution to be liquidated by court

For a public company, certificate of registration has not been issued 12 months after registration
Company fails to start business 12 months after incorporation or suspends business for a period
of one year
Number of the members of the company is reduced below 2, except for companies limited by
shares or guarantees
The company is unable to pay its debts
Where a voluntary arrangement does not have effect in regards to the company
Where the court is of the opinion that it is just and equitable to liquidate the company
Where the Attorney-General makes an application for liquidation in the following situations:

Where a public company, certificate of registration has not been issued 12 months after registration
Pursuant to a report from an inspector appointed by the A.G. to investigate the affairs of the concerned
company
Application under section 426 of the Insolvency Act

Liquidation by court
Who may make an application for liquidation?

The company or its directors

Creditor(s), including contingent or prospective creditor(s)
A contributory (ies) of the company
Provisional liquidator or administrator of the company
Liquidator, where the company is in voluntary liquidation
The attorney-general

A contributory can only petition the high court for winding up if the
number of members is reduced below 2, or where shares were allotted
to him for at least 6 months within a period of 18 months preceding the
commencement of winding up. Alternatively, the shares must have
devolved to him as a result of the death of the holder

Liquidation by court: Application by

the Attorney-General
As already observed the Attorney-General may make an
application for liquidation in the following situations:
Where a public company, certificate of registration has not
been issued 12 months after registration
Pursuant to a report from an inspector appointed by the A.G.
to investigate the affairs of the concerned company
Application under section 426 of the Insolvency Act

Liquidation by court: Application by

the Attorney-General under Section
426
Under section 426, the A.G. may make an application for winding
up. This happens if it appears to him just and equitable to make an
application where;
He has received a report from an investigator under companies Act or from
information obtained from the production and inspection of documents
A report is made or information obtained by the Capital Markets Authority
Pursuant to a report provided by the Registrar of companies
As result of a company or directors having been convicted of an offence
involving fraudulent conduct

The above however does not apply where the company is already
under liquidation.

Liquidation by the court

Which orders may the high court make?

Dismiss the application

Adjourn the hearing, conditionally or unconditionally
Interim order of liquidation
Any other order that the circumstances of the case require

Public Examination
The official receiver may at any time during the liquidation by court,
but before dissolution, apply to the high court for public
examination of any person who:
Is or has been an officer of the company
Has acted as provisional liquidator, liquidator or an administrator of the
company
In alternative to the persons above, any person who has been concerned in,
or has taken part in the promotion, formation or management of the
company

Creditors or contributories of a company may request the official

receiver in writing to apply for public examination of the categories
of persons above.

Liquidators: Functions
In voluntary liquidation: liquidator has power to pay debts, compromise
claims e.t.c (Part I of schedule 3)
May exercise courts power of settling a list of contributories
Exercise courts power of making calls
Convene a general meeting of the company for purposes of obtaining a
special resolution or for other appropriate purpose
Pay company debts and adjust the rights of the contributories among
themselves
In liquidation by court may convene a general meeting for creditors and
contributories to ascertain their wishes
Chech from section 460 onwards for the functions of the liquidators

Effects of Liquidation
i. Effects on Members
Every former and present member is liable to contribute to its assets to any amount
sufficient for payment of debts, liabilities, liquidation expenses and for adjustment of
the rights of the contributories
Former members exempted from contribution if:

The person ceased to be a member for a period of 12 months or more prior to commencement of
the liquidation
Debt or liability is contracted after the person ceased to be a member
Former member not liable unless the court is satisfied that the existing members cannot satisfy
the contribution required
Contribution not required from unpaid shares
Dividends, profits not taken to be liability of the company. Members cannot be forced to pay this
Where an insurance policy or a contract limits liability of members
Company limited by guarantee: member not liable to contribute beyond what he committed
himself to in the guarantee

Effects of liquidation
ii. Effects on former directors and shareholders and others
If they redeemed purchased the companys shares by paying from the capital
of the company, they are liable to contribute towards payment of the debts
They become liable to contribute only if the assets of the company and the
contributions already made are not sufficient for payment of its debts and
liabilities.
The person from whom the shares were redeemed or purchased is also liable
However, the liquidation of the company must have commenced within 12
months from the date when the payment was made.
A person who has contributed may make an application to court to compel
another person who is jointly and severally liable in that contribution, to
contribute

Other Effects
Effects of liquidation by court
Disposition of property: any property disposed of at
the commencement of liquidation is void
Transfer of Shares: void if done after commencement of
liquidation
Alteration of members status: void if done after
commencement of liquidation
Attachment, sequestration, distress or execution against
the assets after commencement of liquidation is void