Voluntary Liquidation: A Strategic Exit or the End of the Road?

Navigating Voluntary Liquidation with Confidence

1. Introduction

Closing a company isn’t always a sign of failure—it can be a well-planned strategic move. Whether a business has achieved its goals, is no longer financially viable, or its owners wish to step away, voluntary liquidation provides a structured way to wind things down. But what exactly does this process entail?

Voluntary liquidation allows companies to close in an orderly manner, ensuring debts are settled and assets are fairly distributed. Depending on financial health, this can take two forms: Members’ Voluntary Liquidation (MVL) for solvent companies or Creditors’ Voluntary Liquidation (CVL) for those unable to pay their debts.

In this article, Daniel Musyoka and Solomon Opole will unpack the meaning and process of voluntary liquidation for anyone who is not interested in the technical aspects of what the process entails. 

• What is Voluntary Liquidation

Voluntary liquidation is a formal process through which a company ceases its business operations and winds up its affairs. In Kenya, companies may opt for liquidation for various reasons—from achieving an orderly distribution of assets among members to addressing insolvency.

There are two main types of voluntary liquidation:

1. Members’ Voluntary Liquidation (MVL): Initiated by a solvent company where the shareholders (members) decide to wind up the business.
2. Creditors’ Voluntary Liquidation (CVL): Initiated when a company is insolvent, meaning it cannot pay its debts as they fall due, and creditors play a key role in the process.
3. The Meaning and Procedural Steps

Members’ Voluntary Liquidation (MVL)

Members’ voluntary liquidation is a process used by solvent companies. In an MVL, the directors certify that the company can pay its debts within 12 months and then recommend to the members that the company should be wound up. The process is aimed at efficiently distributing any surplus assets to shareholders once all liabilities have been settled.

The Process

1. Declaration of Solvency: The company’s directors prepare a declaration stating that the company is solvent—that is, it can pay its debts in full within a period not exceeding 12 months from the start of the winding-up process.
2. Special Resolution: The members (shareholders) meet and pass a special resolution agreeing to wind up the company. The resolution confirms the directors’ declaration and authorizes the commencement of the liquidation process.
3. Appointment of a Liquidator: A licensed liquidator (who is an insolvency practitioner) is appointed to oversee the winding-up. The liquidator’s responsibilities include gathering and realizing the company’s assets, settling its liabilities, and ensuring the lawful distribution of any surplus among the members.
4. Asset Realization and Liability Settlement: The liquidator collects and sells the company’s assets. The proceeds are used to pay off any outstanding debts and obligations.
5. Distribution of Surplus: Once all liabilities have been cleared, any remaining funds are distributed among the members according to their shareholdings.
6. Final Reporting and Deregistration: The liquidator prepares final accounts and a report on the liquidation process. These documents are filed with the Registrar of Companies, culminating in the formal deregistration of the company.

Creditors’ Voluntary Liquidation (CVL)

A Creditors’ voluntary liquidation occurs when a company is insolvent—unable to pay its debts as they become due. In a CVL, the decision to liquidate is typically initiated by the company’s board or its members, but because the company lacks sufficient funds, creditors become actively involved. The process is aimed at maximizing the return to creditors by realizing the company’s assets and distributing the proceeds in an orderly manner.

The Process

1. Board Resolution and Acknowledgement of Insolvency: The directors acknowledge that the company is insolvent. A resolution is passed recommending the winding-up of the company on the grounds of insolvency.
2. Calling a Meeting of Creditors and Members: A meeting is convened where both members and creditors are invited. Creditors are informed about the company’s financial situation and the need for liquidation.
3. Appointment of a Liquidator: At the meeting, creditors play a significant role in nominating and appointing a liquidator. The liquidator must be an officer qualified to manage the liquidation process, ensuring transparency and fairness in asset realization.
4. Asset Realization: The liquidator takes control of the company’s assets, conducts an inventory, and proceeds to realize (sell) them. The sale of assets is generally executed in a manner that maximizes returns.
5.  Settlement of Claims: The liquidator prioritizes claims according to the following statutory guidelines:
6. Secured Creditors: Often have the first claim on proceeds from asset sales.
7. Preferential Creditors: Certain employees’ claims or tax liabilities may receive preferential treatment.
8. Unsecured Creditors: These creditors are paid only after secured and preferential claims have been satisfied.
9. Final Distribution and Dissolution: If there is any surplus after satisfying all creditors’ claims, it may be distributed among the members. However, in most cases of insolvency, the available funds are fully absorbed by creditors. The process concludes with final reporting to the creditors and the necessary filings with the Registrar of Companies, officially dissolving the company.
10. Conversion of a MVL to CVL

A Members’ Voluntary Liquidation (MVL) can convert into a Creditors’ Voluntary Liquidation (CVL) if, during the liquidation process, the company is found to be insolvent—meaning it cannot pay all its debts in full within the specified timeframe. An MVL converts into a CVL when:

1. The Liquidator Discovers Insolvency – After the declaration of solvency is made, if the liquidator finds that the company cannot settle its debts (including interest) within the expected period, it is deemed insolvent.
2. Insufficient Assets to Pay Creditors – If the liquidator determines that the company’s assets are not enough to cover its liabilities, it cannot proceed as an MVL.
3. Inability to Settle Debts Within 12 Months – Under an MVL, directors must declare that the company will settle all debts within a maximum of 12 months. If this timeline cannot be met, it signals insolvency.

How Does the Conversion Happen?

1. Liquidator’s Notification – The liquidator notifies the Creditors and Registrar of Companies that the company is insolvent.
2. Creditor Involvement – A meeting of creditors is called, where they are informed of the situation.
3. Appointment of a New Liquidator – Creditors can appoint a new liquidator or confirm the existing one to continue the process.
4. CVL Process Begins – The liquidation proceeds as a CVL, prioritizing the interests of creditors instead of members.

This conversion is crucial because an insolvent company must treat creditors fairly, ensuring that assets are distributed according to insolvency laws.

• Key Differences Between MVL and CVL
• Financial Health: MVL is for solvent companies; directors must declare solvency. CVL is for insolvent companies that cannot meet their debt obligations.
• Control and Decision-Making: In an MVL, shareholders have full control over the process. In a CVL, creditors have significant influence, especially regarding the appointment of the liquidator and the oversight of the liquidation process.
• Outcome: An MVL typically results in an orderly distribution of surplus funds to members. A CVL focuses on maximizing asset value to satisfy creditors’ claims, often leaving little or no surplus for members.
• Legal Framework in Kenya

Both MVL and CVL in Kenya are governed primarily by the Insolvency Act, 2015 and the Companies Act 2015, along with relevant insolvency and regulatory guidelines. Key requirements include:

1. Directors’ Declaration: For MVL, a formal declaration of solvency is required.
2. Resolutions: Both types of liquidation require a special resolution from the members, with CVL also necessitating a creditors’ meeting.
3. Appointment of a Licensed Liquidator: The liquidator must be qualified and licensed to ensure compliance with statutory procedures.
4. Filing and Reporting: Throughout the process, various forms and final accounts must be submitted to the Registrar of Companies to ensure legal closure.

Understanding these legal steps is crucial for any company considering liquidation, ensuring that the process is both orderly and compliant with the law.

• Conclusion

Both members’ and creditors’ voluntary liquidations serve as structured pathways for winding up a company in Kenya, tailored to its financial condition. For solvent companies, the MVL process allows for an orderly dissolution with benefits distributed among shareholders. Conversely, when a company is insolvent, the CVL process is designed to protect the interests of creditors by ensuring that assets are realized and distributed in a fair manner. A clear understanding of the legal framework and procedural steps is essential for all stakeholders involved.