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The Final Act: Members’ Voluntary Liquidation v Members’ Liquidation by the Court.

2024-06-14

The Final Act: Members’ Voluntary Liquidation v Members’ Liquidation by the Court.

Introduction.

There are many parallels between a company and a human being. A company is born at the point of incorporation. Both experience growth. Both reach maturity. This is the stage the company stabilizes, establish their brand, and optimize operations. Inevitably, they decline and die. Like human beings, some companies never go through all the phases; some are stillborn while others die prematurely.

Another key parallel is that a company, like a human being, has three components, the body, the mind and the soul. The body is the physical assets and infrastructure of a company. The mind is the strategic thinking, decision-making processes, and intellectual property of a company. This includes the collective knowledge, creativity, and innovation of its workforce. The soul includes the brand identity, values, and principles that a company stands for. This is the intangible essence that connects with customers and stakeholders, inspiring loyalty and trust.

Just like a human being dies when the body disengages with the mind and soul, the company also dies if the humans behind the strategic thinking decide or are forced to disengage. Once a company is pronounced dead, it is interred.  This interment process is called liquidation.

There are two ways in which members of a company can initiate a liquidation process. This is Members’ voluntary liquidation and members liquidation by the Court. We will give an overview of what each entails and highlight some of their key differences.

Members’ Voluntary Liquidation

Section 393 of the Insolvency Act, 2015 (the Act) provides that one of the reasons a company can voluntarily liquidate is if it passes a special resolution for voluntary liquidation.

Members’ voluntary liquidation is a decision by the mind of the company that it has served its purpose and therefore should rest. The decision may also be made where for one reason or another, the company is unable to function. This could be because the persons behind the company no longer share a common vision or values. This decision is made even though the body of the company is still strong and agile (the company is solvent). It begins with a proposal by the members to liquidate the company.

If it is proposed to liquidate the company voluntarily, the directors have to make a declaration of solvency, which is an assurance by the directors that the company can repay its debts in full within the next twelve months from the date of the resolution. This requires the directors to have thoroughly reviewed the company’s affairs as the declaration includes a statement of the company’s assets and liabilities. This declaration must be made within five weeks before or on the date of passing of the resolution for liquidation.

The declaration of solvency must be lodged with the Registrar within fourteen days of passing the liquidation resolution. Directors making such declarations without reasonable grounds may face fines up to two million shillings, imprisonment for up to five years, or both. If a company fails to lodge the declaration, it and its defaulting officers may face fines of up to two hundred thousand shillings, with additional daily fines of twenty thousand shillings for continued non-compliance.[1]

The voluntary liquidation of a company officially begins when the resolution for voluntary liquidation is passed.[2] Such a resolution must state the reason for the winding-up. The power of the members to pass such a resolution cannot be excluded by the company’s articles. However, before the resolution can be passed, the holder of a floating charge has to be informed of and consent to the liquidation.

Section 394 of the Act requires that once the resolution is passed, a Notice of the Resolution to liquidate be published within fourteen days— (a) once in the Gazette; (b) once in at least two 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).

Upon the passing of the resolution, the company is required to hold a general meeting to appoint one or more authorized insolvency practitioners as liquidators. The liquidator is the equivalent of the undertaker and is therefore responsible for the interment of the company. A liquidator’s appointment has the following consequences;

  1. The directors’ powers cease unless the general meeting or the liquidator permits their continuance.[3]
  2. The company ceases its business activities except as necessary for beneficial liquidation. However, the company’s corporate status and powers remain until the company is officially dissolved, regardless of what the company’s articles state.[4]
  3. Any transfer of the company’s shares (unless sanctioned by the liquidator) and any alteration or attempt to alter the status of the company’s members are void.[5]

If a company’s liquidation lasts twelve months or more, the liquidator must convene a general meeting within three months after each twelve-month period ends. At the meeting, the liquidator must present an account of their actions and the liquidation’s progress during the past year.[6] Once the company’s affairs are fully liquidated, the liquidator must prepare an account detailing the liquidation process and the disposition of company property, and then convene a general meeting to present this account to the members and creditors.[7] Following the general meeting, the company is dissolved.

Members’ Liquidation by Court where the Company cannot pay its debts

Only the High Court has jurisdiction to supervise the liquidation of companies. One reason a company may be liquidated by the Court is if it resolves by special resolution to be liquidated by the Court.[8] A company may be liquidated either voluntarily, by means of the board of directors passing a resolution to that effect, or an application can be made to court either by the company itself (a shareholders’ resolution is required) or by a creditor or shareholder of the company.

The procedure for liquidation by the court is provided for in the Insolvency Act (Amendment) Regulations 2018. The test for placing a company in liquidation is that it cannot pay its debts as they fall due. A company is insolvent when he/it is unable to pay his/its debts. In legal terms, however, the test for insolvency is whether or not the debtor’s liabilities, fairly estimated, exceed his/its assets, fairly valued. Inability to pay debts is, at most, merely evidence, and in itself, of insolvency. When the word “insolvent” is used to describe a debtor, it carries two possible meanings—either that the debtor’s estate has been sequestrated, that is attached by a creditor to satisfy a debt; or that his liabilities exceed his assets.

The court must decide whether all of the requirements in terms of the Act for the granting of a liquidation order have been met. It is for the court to exercise its discretion once all of the requirements have been established. In the absence of special or unusual circumstances which any party opposed to the liquidation must establish, the court should ordinarily grant a liquidation order once the requirements are met.

As Caney J said in Rosenbach & Co (Pty) Ltd v Singh’s Bazzar (Pty) Ltd 1962 (4) SA 593 (D) at 597 E-F:

“The Court has a discretion to refuse a winding-up order …but it is one which is limited where a creditor has a debt which the company cannot pay; in such a case the creditor is entitled, ex debito justitiae, to a winding-up order.”

Liquidation by court starts when the application for liquidation is made. Once the liquidation order is made, the company must lodge a copy of the liquidation order with the Registrar and the Official Receiver (OR) within seven days. The liquidation order benefits all creditors and contributories as if made on their joint application. At this stage, legal proceedings against the company can only proceed with Court’s approval.[9]

Any disposition of company property, transfer of shares, or alteration in member status after liquidation commences is void unless the Court orders otherwise. Equally, any attachment, distress or execution instigated against the assets of the company after the commencement of the liquidation is void.

Functions of a Liquidator in Court Liquidation.

The Liquidator has an obligation to realize and distribute assets to creditors, and any surplus to entitled persons. They also have a duty to provide the OR with reasonable assistance, which includes providing information and allowing the inspection of records and documents.[10]

Once a liquidation order is issued, the liquidator assumes control of all the company’s assets.[11] Additionally, the Court can order the company’s property to vest in the liquidator upon application by the liquidator. The liquidator can initiate or continue legal proceedings related to the property for effective liquidation and recovery of the company’s assets.

When liquidation is nearly complete, the liquidator must convene a final general meeting of creditors. At the meeting, creditors consider the liquidator’s report and decide on the liquidator’s release. The liquidator must retain sufficient funds from the company’s property to cover the expenses of convening and holding the final meeting.

Key Distinctions between Members’ Voluntary Liquidation and Members Voluntary Liquidation by Court.

  1. Members’ voluntary liquidation requires the company to be solvent, unlike members’ liquidation by court which applies where the company is insolvent.
  2. The Court and the Official Receiver (OR) do not play any role in members’ voluntary liquidation and are only involved if the voluntary liquidation becomes contentious. On the other hand, the Court and OR play a central role in members’ liquidation by court. The OR is often the initial liquidator. Additionally, the OR is responsible for conducting investigations into the reasons for a company’s failure.
  3. Under members’ voluntary liquidation, the process is generally run by the company’s shareholders and directors. On the other hand, the court controls and oversees the other form of liquidation and may require regular reports and updates from the liquidator.
  4. Investigation into a company’s affairs is done at an arguably lower threshold for members’ voluntary liquidation. However, liquidation by Court requires a thorough investigation into the company’s promotion, formation, business, dealings, and reasons for failure. A detailed report is often submitted to the court.
  5. Public examination of officers and directors is not a typical occurrence under members’ voluntary liquidation. These actors may only be examined where there is suspicion of misconduct. On the other hand, the Official Receiver can apply to the court for a public examination of the company’s officers, provisional liquidator, or anyone involved in the company’s management or promotion.
  6. Under the member’s voluntary liquidation, the Liquidator calls a final meeting of the company’s members or creditors to present the final accounts and report. Following this meeting, the company is dissolved. On the other hand, the liquidator (if not the Official Receiver) must call a final meeting of the company’s creditors and the Court has to approve and make a final order to dissolve the company.

Conclusion

In the grand theatre of winding up companies, members’ voluntary liquidation and members’ liquidation by court are two different processes with similar outcome. In one scene, we have the members’ voluntary liquidation, which we can liken to a cast gracefully bowing out after concluding a well-choreographed performance. The shareholders and directors, like a close-knit cast in a play, decide to bring down the curtain on their own terms. They have achieved their goal, have paid their debts and left the stage with their dignity intact.

In the second tale, we witness the Dickens-esque drama that Court liquidation entails. Here, we see disgruntled stakeholders dissatisfied with the show, and call upon the court to bring down the curtains. The company’s fate is no longer in its hands, and unlike its counterpart, this performance seldom ends with a standing ovation.

Both scenarios unquestionably lead to the same conclusion, the dissolution of a company. They also lead us to the conclusion that whether voluntary or court-mandated, the winding up of a company is a significant legal issue, with outcomes that resonate through the lives of its characters long after the curtain has fallen.

The decision on which route to take depends majorly on the reason for the liquidation.


[1] Ibid, Section 398.

[2] Section 395 of the Insolvency Act.

[3] Section 399.

[4] Ibid, Section 396.

[5] Ibid, Section 397.

[6] Section 401.

[7] Section 403.

[8] Section 424. Other reasons are; if a public company has not received a trading certificate within twelve months of incorporation; it fails to commence business within twelve months of incorporation or suspends business for a whole year; its membership falls below two, except for private companies limited by shares or guarantee;  it cannot pay its debts; a voluntary arrangement does not take effect at the end of a moratorium under section 645; or the Court finds it just and equitable to liquidate the company.

[9] Section 432

[10] Section 443.

[11] Section 444.

Daniel Musyoka, Solomon Opole, Peter Juma