LPR 408- INSOLVENCY LAW

SESSION SEVEN

8.0 CORPORATE INSOLVENCY

8.1 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: this could be members’ voluntary liquidation or creditors’
voluntary liquidation
• Liquidation by the court

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 court’s satisfaction that the company is unable to pay its debts as
they fall due
• Balance sheet test: where company’s liabilities exceed its assets (including contingent
and prospective liabilities)

Case law has interpreted the phrase “the company is unable to pay its debts” to mean that
“it is more probable than not the company will be unable to pay its debts”.
The above position was held in the English case of Re Colt Telecom Group PLC [2002] EWHC
2815 which was cited with approval by the high court of Kenya in the Nakumatt case.
The high court in Kenya has adopted the test of unreasonable delay rather than 21 days’ period
in a statutory demand. The high court, for instance has previously stated that:
53. I would consequently, for purposes of Part VIII of the Act, view it that a
company “is or is likely to be unable to pay its debts” when it is shown that the
company has failed to pay over any amount in terms of an obligation

(See HC Insolvency Cause No. 10 & 13 of 2017, Re Nakumatt Holdings Limited

[2017]eKLR)
 under a contract including to pay its employees. The failure must however
subsist for a reasonable period of time.
This could be an indication that the courts are prepared to overlook delays of twenty days in
debt repayment upon receipt of a statutory demand.

8.2 Voluntary Liquidation

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.
A resolution for winding up may be passed only seven days from the date of, and including
the date when the notice to a holder of floating charge was passed, or after such holder gives
his consent in writing.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 company’s principle area
of business
On the company’s 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.
What is a qualifying floating charge?
It is one that:
• relates to whole or substantially the whole part of the company’s 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 company’s property

16 High Court Insolvency Cause No. 10 & 13 of 2017, Re Nakumatt Holdings

Limited [2017] eKLR
Appointment of Liquidator
A liquidator appointed by the company in case of voluntary liquidation. He is appointed by
court in case of winding up by court.

Functions of Liquidator
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 company’s place of business
• on company’s 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
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 company’s 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

8.3 Liquidation by Court

The circumstances under which the high court may order for the winding up of a company
include where:
• A company resolves 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

Application for Liquidation

Application may be made by any of the following;
• 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.

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

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.
The high court may make any of the following orders upon application;
• Dismiss the application
• Adjourn the hearing, conditionally or unconditionally
• Grant 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 of Liquidators
The liquidator exercises the following functions;
• In voluntary liquidation: liquidator has power to pay debts, compromise claims e.t.c
(Part I of schedule 3)
• May exercise court’s power of settling a list of contributories
• Exercise court’s 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
Check from section 460 onwards for the functions of the liquidator.

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
ii. Effects on former directors and shareholders and others
• If they redeemed purchased the company’s 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
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.

8.3 Alternatives to Corporate Insolvency

 Two kinds of alternative to corporate insolvency may be gleaned from the Insolvency Act
of 2015:
• Administration
• Company’s Voluntary Arrangement (CVA)

These alternatives may also be referred to us non-terminal insolvency procedures

8.3.1 Administration
Administration: administration is defined by Professor Andrew Keay, et al, as follows:
“it is a temporary measure which either lays the foundation for the rescue of the
company, for example, by the approval of a voluntary arrangement, or for the winding
up on a more favourable basis than would be achieved by an immediate winding up.”
Prof Andrew Keay, et al, Insolvency Law: Corporate and Personal (at page 90,
paragraph 3).
Under section 521 of the Insolvency Act, the definition given is not a single statement of
what administration is. What is stated thereunder is basically the features of administration,
which include;
• a company is "under administration" while the appointment of an administrator of the
company continues to have effect;
• a company "enters administration" when the appointment of an administrator takes
effect;
• a company ceases to be under administration when the appointment of an
administrator of the company ends in accordance with this Part; and
• a company does not cease to be under administration only because an administrator
vacates office (whether through resignation, death, removal or otherwise).

The objectives of Administration are provided in the Act as follows:

• To maintain the company as a going concern.
• to achieve a better outcome for the company’s creditors as a whole than would likely
to be the case if the company were liquidated (without first being under administration);
• to realise the property of the company in order to make a distribution to one or more
secured or preferential creditors.

Administration Order
This is defined under section 530 as:
“is an order (by the high court) appointing a person as the administrator of a company
and providing for the administration of the company by that person”.
Several possibilities arise when a company enters into administration. The administrator, who
is an external manager, may possibly rescue the company. If rescue is not possible, the
administrator may sell the business temporarily thereby preventing inter alia, job losses.
The administrator may immediately sell the assets of the company to fetch better prices than it
is possible on immediate winding up.
The court which is entertaining an application to put a company under Administration must
be satisfied that the prescribed conditions have been met. The court must be satisfied that the
company is or is likely to become unable to pay its debts.17 Secondly, it must be satisfied that
the Administration order is reasonably likely to achieve an objective of Administration.18
As earlier pointed out, the interpretation of the test as to whether a company is or is likely
to become unable to pay its debts was given in Re Nakumatt Holdings Limited [2017]eKLR
in which the High court endorsed the English decision in Re Colt Telecom Group PLC [2002]
EWHC 2815. “Likely” has been interpreted to mean that the company will be more probable
than not unable to pay its debts.
On the test of whether the Administration order is reasonably likely to achieve an objective
of Administration, the English and Kenyan courts ascribe to varying tests. In England,
“reasonably likely” has been interpreted to mean the existence of a “real prospect” that an
objective of Administration will be achieved.19 On the other hand, the high court in Kenya
disagrees with the above interpretation, and instead declaring that the word “likely” connotes
probability, therefore the word “reasonably likely” means that something less is required.
Consider the following citation from the ruling of Onguto, J:
55. In this regard, and again drawing from the English decisions which have
interpreted a statutory provision almost in pari materia our s.522 and s.531 (b) of the
Act, the phrase ‘reasonably likely” has been interpreted in the context of
administration proceedings to mean “a real prospect” that an objective of
administration will be achieved: See Re Mutual International Insurance Co. Ltd [2004]
EWHC 2430.
56. I would however approach and lay the test differently.
57. My view is that the use of the word ‘Iikely’ connotes probability and the degree of
the probability is then founded in the qualifying word or the general context of the
statute. The qualifying word is ‘reasonably’ which in my view does not result in an
actual or existent probability. The statute could thus not have meant that the prospect
of achieving any of the objectives or all of the objectives under s.522 of the Act must
be real. In my view, the use of the phrase “reasonably likely” indicates that something
less is required. It is not and should not be that achieving the objectives is a real
prospect or real probability. If the facts indicate a reasonable possibility of the company
being maintained and rescued as a going concern, then the court must be deemed to
have been satisfied under s.531(b) of the Act and it may then exercise its discretion in
favour of granting the order… 59. I would consequently adopt and state that the words
‘reasonably likely’ must be read to mean ‘reasonable prospect’ and not a higher
threshold. Each case however must be considered on the basis of its own facts as
presented to the court, noting that the court retains a discretion whether or not to make
the order.20
Transparency of information by applicant for Administration order is critical. If the applicant
fails to disclose information that would help determine whether an Administration order in the
circumstances would help achieve an objective of the administration, the court may decline to
grant an Administration order. In the United Kingdom, there is a mechanism to guide the parties
on the bear minimum information an applicant is required to disclose. The Statement of
Insolvency Practice (SIP) 16 of 2015 (U.K) regulates the kind of information an applicant is
required to disclose. This is not the case with Kenya; there are no formal rules to regulate
information disclosure. The courts are therefore left to exercise their discretion in this matter.

Appointment of Administrator
The administrator may be appointed by either of the following, as the circumstances dictate:
• The high court
• The holder of a floating charge
• The company or its directors

If it is the court appointing, any of the following persons may make an application to court for
appointment;
• The company itself
• The directors of the company
• One or more creditors of the company
• A combination of the above persons
• Any other person prescribed by insolvency regulations

The powers and functions of an administrator are covered by the fourth schedule of the
Insolvency Act. These include, but not limited to;
1. Power to take possession of, collect and get in the property of the company and, for that
purpose, to take such proceedings as the administrator considers necessary.
2. Power to sell or otherwise dispose of the property of the company by public auction or
private contract.
3. (l) Power to borrow money for the beneficial realisation of the company's assets and to
give security over those assets for the borrowing. (2) This power may be exercised
without the consent of secured creditors of the company so long as-
4. (a) approval for the exercise of the power is supported by creditors holding at least
seventy-five percent in value of the total amount that is owed by the company to its
creditors; and (b) the priorities of the secured creditors are preserved in relation to the
assets of the company so that those creditors would be in no worse position than would
be the case if the company were liquidated.
5. Power to appoint an advocate solicitor or accountant or other professionally qualified
person to assist the administrator in the performance of the administrator' s functions.
6. Power to bring or defend any action or other legal proceedings in the name and on
behalf of the company.

For more on the powers of the administrators, check the fourth schedule of the Insolvency
Act, 2015.
Under the Insolvency Act (section 522),the objectives of administration include:
• To maintain the company as a going concern
• To achieve a better outcome for the creditors as a whole than it would be possible in
liquidation
• To realize the company property to make distribution thereof to one or more secured
creditors
The process of administration is covered under section 563-575 of the Insolvency Act,
2015.

8.3.2 Corporate Voluntary Arrangements

This is covered under section 624- of the Insolvency Act, 2015. Under section 624(c),
voluntary arrangement is defined as a composition or scheme of arrangement that has effect as
provided by section 630 of the Insolvency Act.
The directors of a company may make a voluntary arrangement proposal to the
company and its creditors. under the proposal, the company may make a composition for the
satisfaction of its debts or a scheme for arrangement of its financial affairs.
In the proposal, the directors provide for the appointment of a person to supervise the
implementation thereof. This person must be a qualified insolvency practitioner.
A proposal for voluntary arrangement may be made even if the company is under
administration or liquidation. The proposal is made by an administrator, where the company is
under administration, and by a liquidator where it is under liquidation.

Procedure
Where the provisional supervisor is not an administrator or an administrator, the
supervisor submits a report to the high court within thirty days of receipt of the notice the thirty-
day period may be extended by the high court.
The report states the following;
• whether, in that supervisor's opinion, the proposal has a reasonable prospect of being
approved and implemented;

• whether, in that supervisor's opinion, meetings of the company and of the company's
creditors should be convened to consider the proposal; and
• if that supervisor believes that those meetings should be convened-the date on which,
and the time and place at which, it is proposed to hold the meetings.

The directors are required by law to submit to the supervisor the following documents,
which will help him to prepare the report;
• a document setting out the terms of the proposal; and
• a statement of the company's financial position containing-
(i) such particulars of its creditors and of its debts and other liabilities and of its assets
as may be prescribed by the insolvency regulations for the purposes of this subsection;
and
(ii) such other information as may be so prescribed.

Creditors’ and Company’s Meetings

In regards to corporate voluntary arrangements, two separate meetings are held,
namely, the company’s meetings and the creditors’ meetings.
The provisional supervisor, who is not a liquidator or an administrator, is supposed to
convene a company’s or a creditors’ meeting to be held on the date and the time stated in the
report which the provisional supervisor submitted to court. If the provisional supervisor is a
liquidator or administrator, he has the discretion to call for creditors’ and company’s meetings
at the date, time and place that the supervisor considers appropriate, having regard to where
the creditors carry on their businesses as well as where they reside.
The supervisor is required to notify every creditor that is aware of, about the company’s
meeting and the creditors’ meeting. The purpose of the meetings is to decide whether to
approve the proposal as it is, or to approve it with modifications.
At least seven days before any meeting, the directors may notify the provisional
supervisor about any changes they intend to make to the original voluntary arrangement
proposal.
At the conclusion of every company and creditors’ meeting, the chairperson of the
respective meeting is supposed to report the results of the meeting to the high court. Thereafter,
he is supposed to immediately give notice of the results of the meeting to those who attended
the meeting, and those who is aware of, and were entitled to attend the meeting but failed to do
so.

Creditors’ Meetings

Several creditors’ meetings may be held at different times. The first business of every
creditor’s meeting is to elect a chairperson from among its members. At the first creditors’
meeting, the chairperson is required to divide the members into three groups for purposes of
voting. The first group comprises secured creditors, the second preferential creditors, while the
third comprises unsecured creditors.
A proposal, or modification thereof, that affects the rights of a secured creditor, may
not be approved unless;
• the secured creditor consents to it; or
• if the creditor does not consent to it, the
creditor-
(i) would be in a position no worse than if the company was in liquidation;
(ii) would receive no less from the assets to which the creditor's security relates, or
from
their proceeds of sale, than any other secured creditor having a security interest in
those assets that has the same priority as the creditor's; and
(iii) would be paid in full from those assets, or their proceeds of sale, before any
payment from them or their proceeds is made to any other creditor whose security
interest in them is ranked below that of the creditor, or who has no security interest in
them.
Approval of Proposal
i. Company’s Meeting

A proposal presented in the first company’s meeting is deemed to have been approved
where;
• a majority of the members of the company have voted to approve it in the
company’s meeting. Members may vote either in person or by proxy.

ii. Creditors’ Meeting

A proposal presented to the first creditor’s meeting is deemed to have been approved where;
• A majority of the creditors vote to approve it either in person or by proxy

The proposal is deemed to have been approved even if only the creditors’ meeting
approves it, despite having been rejected in the company’s meeting.

Once it has been approved, any member of the company or creditor may make an
application to the high court for the approval of the approval of the proposal. The high court,
on hearing the application, may make any of the following orders;
• make an order approving the proposal (with or without the modifications (if any) put
to the meetings in accordance with section 628); or
• make such other order as it considers appropriate.

There are cases where a majority of preferential creditors, or a majority of unsecured

creditors, may not approve a proposal. In this case, the high court may still approve the
proposal, only on the following conditions;
• that the proposal has been approved by a majority of the secured creditors
• that the proposal does not discriminate among the members of the dissenting group
or groups and that they will not be in a worse of condition than if the company were
to be liquidated
• that the proposal respects the group of preferential creditors over unsecured creditors

Once the high court grants an order approving the proposal, it takes effect one day from
the date it was approved by the high court.