When a company reaches the end of its life, whether because it is insolvent or simply no longer needed, it is wound up. Liquidation of a company in Kenya turns its assets into cash, pays what it can to creditors, and dissolves the company. This guide explains the voluntary and compulsory routes, the order in which creditors are paid, and what directors should know.
This guide is for directors, shareholders and creditors facing the end of a company, whether by choice or through insolvency, and for their advisers. If the business may still be viable, read our guide to company administration and business rescue first. If you are a director concerned about personal liability, see our guide to directors’ duties in insolvency.
In practice, liquidation under the Insolvency Act, 2015 comes in two broad forms, and which applies depends mainly on whether the company can pay its debts.
In practice, once liquidation begins, a liquidator takes over from the directors. The liquidator, who may be the Official Receiver or a licensed insolvency practitioner, gathers in the company’s assets, investigates its affairs and dealings, turns the assets into cash, and distributes the proceeds to creditors according to their priority. Finally, when the process is complete, the company is dissolved and ceases to exist. The directors’ powers largely cease on liquidation, and they must cooperate with the liquidator and hand over the books and records.
Liquidation follows a statutory order of payment, and understanding it explains who bears the loss when a company fails.
| Rank | Class | Examples |
|---|---|---|
| 1 | Secured creditors (fixed charge) | A lender with a charge over specific assets |
| 2 | Liquidation costs and the liquidator’s fees | The expenses of the winding up |
| 3 | Preferential creditors | Certain employee entitlements and taxes |
| 4 | Floating-charge creditors | A lender with a floating charge |
| 5 | Unsecured creditors | Trade suppliers and other ordinary debts |
| 6 | Shareholders | Any surplus, in a solvent liquidation |
The practical lesson is that ordinary unsecured creditors rank low, which is why security and, for suppliers, terms of trade matter so much.
A common confusion is between liquidation and striking a company off the register. Striking off removes a dormant, solvent company that has stopped trading and has no outstanding liabilities. Liquidation is the formal process for a company with assets to realise or debts to settle, especially an insolvent one. Using the wrong route, or striking off a company that still owes money, causes problems, so the choice should be deliberate.
What is the difference between voluntary and compulsory liquidation? Voluntary liquidation is started by the company or its members; compulsory liquidation is ordered by the court, usually on a creditor’s petition.
Who runs the liquidation? A liquidator, who may be the Official Receiver or a licensed insolvency practitioner, and who takes control from the directors.
Who gets paid first? Secured creditors and the costs of the liquidation, then preferential creditors, then floating-charge and unsecured creditors, with shareholders last.
Is winding up the same as striking off? No. Striking off is for a dormant, debt-free company; liquidation is the formal process for one with assets or debts.
Can a solvent company be liquidated? Yes, through a members’ voluntary liquidation, which returns the surplus to shareholders.
For example, the recurring problems are confusing striking off with liquidation and leaving creditors unpaid; directors continuing to trade an insolvent company and exposing themselves personally; and creditors failing to act early to protect or enforce their position. Others misjudge their ranking, assuming they will be paid when they sit near the back of the queue.
Our insolvency and restructuring team acts for companies, directors and creditors in members’ voluntary, creditors’ voluntary and compulsory liquidations: advising on the right route, dealing with the liquidator and the Official Receiver, protecting and enforcing creditors’ claims, and guiding directors on their duties. To discuss winding up a company, contact John Maina or Kenneth Likoko, Partners, at OLM Law Advocates LLP.
This article is a general guide only and is not legal advice. Please seek advice on your specific circumstances.
OLM Law Advocates LLP advises companies, directors, lenders and creditors on business rescue, administration, liquidation and personal insolvency.
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