Member’s Voluntary Liquidation Of Companies And Limited Liability Partnerships In Kenya.

Liquidation in simple language is simply closing down/ killing off or winding up a business. In legal speak, liquidation involves the process of collecting all the business’s property, converting that property into cash, and distributing the cash to various creditors.   Liquidation of businesses can occur in one of two ways, one can legally close down a business. The other option is striking off. Notably, and unlike a strike-off of a business, liquidation can either be voluntary or involuntary.  Voluntary liquidation is twofold either;

1. a member’s voluntary liquidation – which simply means that the Company’s shareholders deem the company solvent and for varied reasons including but not limited to the viability of the business, resolve to wind up the company. The key distinguisher here is that the Company is solvent.
2. a creditors voluntary liquidation – This comes about whereby in the course of a member’s voluntary liquidation, the business is actually found to be insolvent thereby converting the MVL to a CVL.

Involuntary liquidation, on the other hand, is liquidation by the Insolvency Court which commences on the application of the Company, the directors, or creditors.

Voluntary Liquidation of Companies

A company may be liquidated voluntarily in the following circumstances: -

1. 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 has in a general meeting passed a resolution for its voluntary liquidation; or
2. if the company resolves by special resolution that it be liquidated voluntarily.

The Insolvency Act defines a company to include limited liability partnerships within the meaning of the Limited Partnerships Act, 2011 and therefore, the process of liquidating LLPs is similar to that of liquidating companies incorporated under the Companies Act, No. 17 of 2015. While the provisions of the LLP Act under section 30 as read with the fifth schedule of the Act still provide for the procedure of winding up an LLP, the provisions of the Insolvency Act take precedence. This is based on the doctrine of implied repeal as explained in the case of Juma Nyamawi Ndungo & 5 others v Attorney General; Mombasa Law Society (Interested Party) eKLR where the Court held that if there are 2 statutes inconsistent with one another they cannot stand together and therefore, the earlier Act is impliedly repealed by the latter. In this article, we shall discuss the process of a member’s voluntary liquidation of Companies and Limited Liability Partnerships in Kenya.

Pre- Liquidation

• Director’s Declaration of Solvency

As earlier stated, the crucial distinguishing factor for an MVL over a CVL is the solvency status of a business. In the case of an MVL, the directors of the company are required to confirm the solvency of the Company, prior to passing a resolution for winding up by swearing a Declaration of Solvency. The statutory declaration is to the effect that they have made a full inquiry into the company’s affairs and have formed the opinion that the company will be able to pay its debts in full together with interest at the official rate, within a period not exceeding 12 months from the commencement of the liquidation. Such a declaration would be obsolete and of no legal consequence if passed more than 5 weeks preceding the Resolution for Voluntary Winding Up. Moreover, such a declaration must be lodged for the Registration with the Registrar of Companies.

• Notice to Holders of Floating Charges

The Company shall then issue a notice to any persons holding floating charges (if any). Seven (7) days must lapse after the issue of this notice and the person(s) to whom the notice was given must consent in writing prior to the passing of the liquidation resolution.

The Liquidation proceedings

Passing of the Resolution

A Member’s Voluntary Liquidation commences with the passing of the resolution for voluntary liquidation. Within five (5) weeks after passing the Declaration of Solvency and at least seven (7) days from the date of issuance of the Notice to Holders of Floating Charges, the Company may pass the resolution to voluntarily liquidate. The consequences of the resolution to liquidate are:

• the Company ceases to carry on its business, except in so far as is necessary for its beneficial liquidation;
• any transfer of the Company’s shares (other than a transfer made to or with the sanction of the liquidator) is void; and
• an alteration in or an attempt to alter the status of the Company’s members is void.

It is also important to note that the Company’s corporate status and corporate powers continue to have effect until the Company is dissolved, even if the Company’s articles provide otherwise.

 Filing of Resolution with Registrar of Companies

Within fourteen (14) days from the date of passing of the resolution for liquidation, the Company shall then lodge the copy of the Directors Declaration of Solvency together with the resolution with the Registrar of Companies, for registration.

Gazettement

Further, within fourteen (14) days after passing the resolution to voluntarily liquidate, the Company is required to publish a notice setting out the resolution for liquidation as follows: -

1. Once in the Kenya Gazette;
2. 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).

The Liquidator shall also lodge a copy of the notice with the Registrar of Companies, within fourteen (14) days after such publication. The advertisement serves the purpose of informing all the creditors and contributories of the Company that the Company is in liquidation and the failure to do so exposes the company to criminal liability. This is primarily for the reasons: -

1. Liquidation commences when the resolution for voluntary liquidation is passed; and
2. As succinctly held by the Court in Flower City Limited v Polytanks & Containers Kenya Limited (Insolvency Cause 033 of 2020) KEHC 34 (KLR) (Commercial and Tax) (22 February 2021) (Ruling), insolvency proceedings are class actions by their very nature, and it is for this reason that the law requires the proceedings be advertised.

Appointment of Liquidator

Once the resolution for winding up has been passed, the Company shall convene a general meeting and thereby appoint one or more liquidators for the purpose of liquidating the Company’s affairs and distributing its assets. Only an authorized insolvency practitioner is eligible for such an appointment. Within Seven (7) days after being appointed as liquidator of the Company, the Liquidator will publish a notice of his appointment: -

1. once in the Kenya Gazette;
2. 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).

On the appointment of the liquidator, all the powers of the directors cease, except in so far as the Company in a general meeting or the liquidator sanctions their continuance.

Collating a Company’s Assets and Liabilities

The Company’s properties on liquidation:

• are to be applied in satisfaction of the Company’s liabilities equally and without preference; and
• 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.

Distribution of Company’s Assets vis-à-vis Liabilities

This distribution is subject to the Second Schedule of the Act on preferential payments. This Schedule gives the order in which the liabilities of the Company are to be settled as follows: -

1. the remuneration of the liquidator and the fees and expenses properly incurred by that liquidator in performing the duties imposed and exercising the powers conferred by or under the Act;
2. reasonable costs which include the reasonable costs incurred between the advocate and client in procuring the order concerned (if applicable);

• wages, salaries, compensation, and other payment to employees in respect to services provided to the Company during the four months before the commencement of liquidation (if applicable); and

1. any compensation for redundancy owed to employees on the termination of their employment before or because of the commencement of the liquidation (if applicable).

 Finalizing the Liquidation Process

As soon as practicable after the liquidation of the Company’s affairs is complete, the Liquidator shall: -

1. prepare an account of the liquidation showing how it has been conducted and how the Company’s property has been disposed of; and
2. convene a general meeting of the Company for the purpose of laying out before it the account and explaining it.

The Liquidator shall convene the meeting by publishing at least thirty (30) days before the meeting an advertisement of the proposed meeting specifying the time, date, place, and purpose of the meeting:

• once in the Gazette;
• 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.

Within seven (7) days after the meeting, the Liquidator shall lodge with the Registrar a copy of the account, together with a return giving details of the holding of the meeting and of its date. If a quorum is not present at the meeting, the Liquidator shall make a return that the meeting was duly convened, and that no quorum was present. This shall satisfy the requirement of lodging the return. In the event that the liquidation of the Company continues for a period exceeding twelve (12) months, the Liquidator is required to lay before a members general meeting an account of his acts and dealings and the conduct of the liquidation during the preceding year and must convene such general meetings of the Company as follows:-

• Within three months after the end of the period of twelve (12) months; and
• Within three months after the end of each subsequent period of twelve (12) months.

Post Liquidation –Dissolution of the Company

As soon as practicable after receiving the account and return, the Registrar shall register them. At the end of three (3) months from the registration of the account and return, the Company shall stand dissolved.The Debt Recovery Restructuring and Insolvency team at CM Advocates LLP prides itself in having a wide variety of resources, skills, and experience on matters of Insolvency including but not limited to the liquidation of Companies and Limited liability partnerships (LLPs) having a high-end client portfolio. We are practical and innovative in our approach and offer quick turnaround timelines. We will be delighted to receive your feedback, and inquiries and offer our services on this and any other of our practice areas.Please click here to download the alert.

How Can we Help?

The Debt Recovery Restructuring and Insolvency team at CM Advocates LLP prides itself in having a wide variety of resources, skills, and experience on matters of Insolvency including but not limited to the liquidation of Companies and Limited liability partnerships (LLPs) having a high-end client portfolio. We are practical and innovative in our approach and offer quick turnaround timelines. We will be delighted to receive your feedback and inquiries and offer our services in this and any other of our practice areas.

Contact Persons & Contributors

Dianah M. Gichuru –Partner & Head of Unit Brian Okwalo- Associate Wamuyu F. Mathenge - Associate

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