Good News to Companies: NoMore Advertising of Liquidation Petitions


Good News to Companies: NoMore Advertising of Liquidation Petitions

A threat by a creditor to file a liquidation petition, previously known as a winding up petition, against a company, especially when followed by the actualization of the threat, has a chilling effect on the company. Every company dreads it. This is not because of the amount involved, which by law could be as low as KES 100,000, but because, upon the filing of the petition all creditors are invited, by an advert in a newspaper with nationwide circulation, to either support or oppose the petition.

In the hands of a creditor, a liquidation petition is a formidable weapon to hold against the head of a company, like the sword of Damocles, to force an immediate settlement of a debt. Invariably, most creditors join to support. To them, the petition is a short cut and a less expensive way to have their debts settled. In other words, they simply piggy back on the main petition. All they need to file is a simple document called a notice to appear in which the creditor indicates the amount owed and the whether he supports or opposes the petition. Thereafter, he would only file a proof of debt form. Very few companies can survive a run in by all its creditors. On advertisement, all creditors descend on the company like vultures. It is therefore not an understatement to say that a liquidation petition is every company’s nightmare. Mercifully, thanks to the new Insolvency law, this is no longer the case.

The lifespan of companies registered under the Companies Act begins when a company obtains a certificate of incorporation up to the time a liquidation order is issued by a court or a resolution to voluntarily liquidate the company is made. The new Companies and Insolvency Acts, have, respectively, provided for and changed in a very significant way, not only the manner in which companies come into being but also how they cease to exist. Under the winding up rules made under the repealed Companies Act, every petition for winding up had to be advertised, inviting creditors to either support or oppose the same. Unfortunately, it would appear that even petitions filed after the coming into effect of the new insolvency laws are being advertised. To many, failure by the law to provide for advertisement of a liquidation petition was an omission. It is however contended that this is not the case. This is a practice hangover.

An advertisement of a petition can have great ramifications on a company’s commercial reputation. For instance, the company’s suppliers may cease to supply. It may also affect the ability of the company to raise finance or impact on its existing facility.

Under the insolvency law, creditors will only be invited on the table if a liquidation order has been granted by the court. However, nothing stops a creditor to file his own petition which may be consolidated with an existing one at the hearing.

It follows that a company which suffers loss as a result of an advertisement of a petition can sue the creditor who has advertised for the same.

Daniel Musyoka