LIQUIDATORS, LIQUIDATION

OFFENSES & THE OFFICIAL

RECEIVER
RIARA LAW SCHOOL
 Who is a liquidator?

• Section 460 provides that the liquidator of a company shall

always be referred to as “the liquidator” or “the official receiver
and liquidator” if he happens to be the official receiver.
• This is an authorized insolvency practitioner whose primary
function is to get the assets, realize them and distribute the
realizations according to a statutory order of priority paying
any surplus to the person so entitled.
• He may carry on the company’s business but only as may be
necessary for its beneficial winding up.
• Part of the liquidators job is also to investigate the causes of
failure and to take appropriate steps to bring to book delinquent
directors.
 Appointment of the liquidator

• The procedure for appointment depends on the type of liquidation.

• Section 399 provides that in a members’ voluntary liquidation, the company in
general meeting shall appoint one or more liquidators for the purpose of
liquidating the company’s affairs and distributing its assets.
• Section 408 provides that in a creditor’s voluntary liquidation the creditors and
the company at their respective meetings may nominate an authorised
insolvency practitioner to be liquidator. The creditor’s nominee usually
occupies the office.
• Section 416 provides that the Court may appoint a liquidator if for any reason
there is no liquidator or the liquidator is unable to act
• Section 437 provides that the Court may appoint a provisional liquidator either
on or after, or at any time before, the making of a liquidation order in respect
of a company.
• Section 439 provides that In the case of a liquidation ordered by the Court, the
Official Receiver (being the liquidator) may, at any time, appoint a qualified
person as liquidator instead
 Legal status of the liquidator

• The exact position of the liquidator is difficult to define as neither the

Insolvency Act nor case law is clear on this point. However, the liquidator
can be said to occupy the following positions in relation to the company:
i. Officer of the Court - If he is appointed by the Court, he is an officer of the
Court and must act honestly and impartially. He is answerable to the Court.
ii. Trustee - He is said to be a trustee for the general body of creditors and not
for individual creditors.
iii.Agent- Case law demonstrates that a liquidator is an agent in a voluntary
winding up as long as he is acting within the scope of his authority. In the
words of Lawrence J in Stead Hazel V Cooper, “a liquidator is an agent of
the company.”
iv.Fiduciary - Although there is no direct judicial authority for the proposition
that a liquidator is a fiduciary, his obligations suggest that he is one e.g. he
must act in good faith and avoid conflict of interest.
 Powers of a liquidator – with approval

• The third schedule to the Insolvency Act divides the powers of the
liquidator into two. Those exercisable with approval of either the
court or the creditors, and those exercisable without approval.
• The following are powers exercisable with approval:
i. Power to pay any class of creditors in full.
ii. Power to make any compromise or arrangement with creditors
iii.Power to compromise calls and liabilities of contributories
iv.Power to borrow money for the beneficial realisation of the
company’s assets and to give security over those assets for the
borrowing
v. Power to bring legal proceedings under section 505, 506, 682, 683
or 692.
 Powers of a liquidator – without approval

• The following powers are exercisable without approval:

i. Power to carry on the business of the company so far as may be necessary for
its beneficial liquidation.
ii. Power to sell any of the company’s property by public auction or private
contract
iii.Power to do all acts and execute, in the name and on behalf of the company,
all deeds, receipts and other documents and for that purpose to use, when
necessary, the company’s seal
iv.Power to prove, rank and claim in the bankruptcy, insolvency or
sequestration of any contributory for any balance against the contributory’s
estate.
v. Power to draw, accept, make and endorse any bill of exchange or promissory
note in the name and on behalf of the company.
vi.Power to appoint an agent to do any business that the liquidator is unable to
do personally.
 Power of disclaimer

• Section 467 provides that a liquidator has the power to disclaim any
onerous property. The following is onerous property for the purposes of
this section:
i. an unprofitable contract;
ii. other property of the company that is unsalable or not readily saleable or is
such that it may give rise to a liability to pay money or perform any other
onerous act.
• The disclaimer operates so as to determine, as from the date of the
disclaimer, the rights, interests and liabilities of the company in or in
respect of the property disclaimed.
• Note however that it does not, except so far as is necessary for the purpose
of releasing the company from any liability, affect the rights or liabilities of
any other person.
• Section 479 provides that any person interested in disclaimed property may
make an application to the court.
 Duties of the liquidator

• Section 401 provides that the liquidator is responsible for convening

meetings of the company every three months and laying before the meeting
an account of his dealings.
• Section 402 provides that the liquidator must convene a final meeting once
the liquidation is completed and lay before it the final accounts
• Section 403 requires the liquidator to convene creditor’s meetings during a
creditor’s voluntary insolvency and prepare a statement of financial
position to be presented at the meeting
• Section 417 provides that within 7 days of his appointment the liquidator
must issue a notice to this effect
• Section 443 provides that the liquidator should ensure that the assets of the
company are realised and distributed to the company’s creditors; and if
there is a surplus to distribute it to the persons entitled to it.
• Section 443 also provides that the liquidator should co-operate with and
assist the Official Receiver
 General duties of the liquidator

i. Act bonafide for the benefit of interested parties.

ii. Must exercise powers for the particular purpose for which they were given
iii. Avoid conflict of interest.
iv. Act honestly and impartially
v. Exhibit the degree of care and skill appropriate to the circumstances.
vi. Secure control of the company’s assets and realize the assets
vii. Ascertain and pay the company’s debts
viii. Ensure that minutes of the respective meetings are held.
ix. Keep proper books of accounts.
x. Pay monies received into a separate account for purposes of the winding
up.
xi. At least twice a year, he is bound to deliver to the official receiver an
account of his receipts and payments.
 Removal of the liquidator
• Section 467 (2)provides that in a voluntary liquidation a liquidator may be
removed from office only by:
i. an order of the Court; or
ii. in the case of a members’ voluntary liquidation by a general meeting of the
company convened specially for that purpose; or
iii.in the case of a creditors’ voluntary liquidation by a general meeting of the
company’s creditors convened specially for that purpose.
• Section 467(4) provides that a liquidator (not being the Official Receiver)
automatically vacates office if the liquidator ceases to hold an authorisation
to act as an insolvency practitioner.
• Section 467(5) provides that a liquidator may, in the circumstances
prescribed by the insolvency regulations, resign office by lodging with the
Registrar a notice of resignation
• Section 468 provides that in the case of a compulsory liquidation the
liquidator may only be removed by an order of the Court; or by a general
meeting of the company’s creditors convened specially for that purpose.
 Release of the liquidator

• Section 469 and section 470 detail the conditions under

which the liquidator may be released from office in a
voluntary and in a compulsory liquidation respectively.
• Upon release the liquidator is discharged from all liability
both in respect of acts or omissions of the liquidator’s in
the liquidation and otherwise in relation to conduct as
liquidator
• Note however, that despite the release a court is free to
sanction a delinquent liquidator accordingly.
 Dissolution of the company

• Dissolution refers to the point in time when the company’s name is struck
off the register of companies.
• Section 494 provides that as soon as practicable after receiving the final
account and return prepared by the liquidator, the Registrar shall register
them. At the end of three months from the registration of the account and
return, the company is dissolved.
• However, the Court may, on the application of the liquidator or any other
person who appears to the Court to have a legitimate interest in the
matter, make an order deferring the date at which the dissolution of the
company is to take effect for such period as the Court considers
appropriate.
• Section 495 provides for early dissolution of the company in situations
where the realisable assets of the company are insufficient to cover the
expenses of the liquidation; and the affairs of the company do not require
any further investigation
 Liquidation Offenses

• Section 498 identifies offences committed in anticipation of liquidation. an

officer of the company commits an offence if, within the twelve months
immediately preceding the commencement of the liquidation of the company,
the officer :
i. concealed any part of the company’s property to the value of fifty thousand
shillings or more; or concealed any debt due to or from the company;
ii. fraudulently removed any part of the company’s property to the value of fifty
thousand shillings or more;
iii.concealed, destroyed, mutilated or falsified any document affecting or
relating to the company’s affairs or property;
iv.made any false entry in any document affecting or relating to the company’s
affairs or property;
v. fraudulently parted with, altered or made any omission in any document
affecting or relating to the company’s affairs or property; or
vi.pawned, pledged or disposed of any property of the company that has been
obtained on credit and has not been paid for.
 Liquidation Offenses

• Section 499 involves offenses to defraud the creditors of a company in

liquidation. An officer or former officer of the company commits an offence
if the officer or former officer:
i. has made or caused to be made a gift or transfer of, or charge on, or has
caused or connived at the levying of execution against, the company’s
property; or
ii. has concealed or removed any part of the company’s property since, or
within the two months preceding, the date of any unsatisfied judgment or
order for the payment of money obtained against the company.
• Section 500 identifies the offenses of misconduct during liquidation. The
following offenses may be committed by officers of the company:
i. Failure to disclose company property
ii. Failure to deliver property under his control
iii.Failure to deliver any documents
iv.Failure to inform the liquidator of any false debts proved
 Liquidation Offenses
• Section 501 makes it an offense to falsify documents in relation to the
company that is in liquidation.
• Section 502 provides that it is an offense to make a material omission in the
statement of financial position of the company.
• Section 503 provides that it is an offense for any officer to make a false
representation to creditors of the company commits or to commits any other
fraudulent act in order to secure the creditor’s consent.
• Section 504 provides that the court has the power to sanction any officer of
the company, promoter or liquidator who has misapplied or retained, or
become accountable for, money or property of the company; or committed
misfeasance or a breach of any fiduciary or other duty in relation to the
company.
• The court may make an order compelling the person to repay, restore or
account for the money or property and to contribute such amount to the
company’s assets as compensation for the misfeasance, breach of fiduciary or
other duty as the Court considers fair and reasonable.
 Fraudulent Trading

• Section 505 allows the court on the application of a liquidator to

find the directors and other officers of a company guilty of the
offense of fraudulent trading. This will be so where in the course
of the liquidation of the company, the liquidator forms the view
that a business of the company has been carried on with intent to
defraud creditors of the company or creditors of any other
person, or for any fraudulent purpose; and the specified persons
participated (directly or indirectly) in the business with the
knowledge that the business was being carried on in that manner.
• This may result into a disqualification order being entered
against the responsible person. The maximum period of
disqualification is 15 years.
 Wrongful Trading

• Section 506 provides that wrongful trading will only apply in

situations where officers of an insolvent company acted contrary
to the requirements of the act. A company is in insolvent
liquidation if, at the time the liquidation commences, its assets
are insufficient for the payment of its debts and other liabilities
and the expenses of the liquidation.
• If the person in question knew or ought to have known that there
was no reasonable prospect that the company would avoid being
placed in insolvent liquidation then they are liable for wrongful
trading.
• If the court is satisfied a disqualification order may issue, and
the maximum period of disqualification is 15 years.
 Distribution of Assets
Order Explanation
1. Expenses of These include the costs of selling the assets, the liquidator's remuneration
liquidation and all costs incidental to the liquidation procedure

2. Second priority claims • Employees' wages

• Accrued holiday pay
• Contributions to an occupational pension fund
• Compensation for redundancy
The limit per employee is Sh. 200,000

3. Third priority claims Unpaid taxes e.g. income tax, withholding tax, customs duty

4. Floating charge Proceeds from realization of assets will be used to satisfy the debts of
holders floating charge holders subject to a statutory maximum

5. Debts owed to A proportion of assets (known as the ‘prescribed part') is 'ring-fenced' for
unsecured ordinary unsecured creditors.
creditors

6. Deferred debts These include dividends declared but not paid and interest accrued on
debts since liquidation
 The Official Receiver

• Section 701 provides that the Official Receiver and any deputies shall be
appointed by the Cabinet Secretary. The Official Receiver and the Deputy
Official Receivers are officers of the Court.
• The Official Receiver holds office for a maximum of seven years, as is specified
in the document of his or her appointment and is eligible for re-appointment.
• A person is not qualified for appointment as Official Receiver or Deputy
Official Receiver unless the person is an advocate, a registered accountant or a
chartered public secretary.
• The following persons are ineligible for appointment as Official Receiver or
deputy:
i. Undischarged bankrupt
ii. Any individual who has entered into the alternatives to bankruptcy procedures
iii.Any person who has a disqualification order pending against him
iv.Any person convicted of offence punishable by imprisonment for a term of two
years or more
v. A member of parliament
 The Official Receiver
• The remuneration of the Official Receiver and the Deputy will be determined
by the Salaries and Remuneration Commission.
• Section 703 provides that the Official Receiver is incorporated as a
corporation sole with the corporate name “Official Receiver in Insolvency”.
As a corporation sole the Official Receiver:
i. has perpetual succession;
ii. is required to have an official seal;
iii.may bring proceedings, and be proceeded against in the Official Receiver’s
corporate name;
iv.may acquire, hold and dispose of and otherwise deal with real and personal
property;
v. may do and be subjected to all other things that a body corporate may by law
do.
• The Official Receiver may not employ staff, but the Cabinet Secretary may,
subject to the approval of the National Treasury appoint public officers to
assist the Official Receiver and Deputy Official Receiver in performing their
functions
 Vacation of office of the Official Receiver

• The office of Official Receiver or Deputy Official Receiver becomes vacant

if:
i. the person dies;
ii. the person’s term of office expires without reappointment;
iii. the person resigns the office by letter in writing addressed to the Cabinet
Secretary and the Cabinet Secretary accepts the resignation;
iv.a bankruptcy order is made in respect of the person, or the person enters
into any of the procedures that are an alternative to bankruptcy
v. The person becomes subject to a disqualification order
vi.the person is convicted of offence punishable by imprisonment for a term of
two years or more;
vii.the person is nominated for election as a member of Parliament;
viii.the person engages in any paid employment outside the duties of the office;
or
ix.the person is removed from office
Removal of the Official Receiver from office

• Section 704(2) provides that The Cabinet Secretary may

remove from office a person holding the office of Official
Receiver or Deputy Official Receiver if satisfied on
reasonable grounds that the person is not or is no longer
competent to perform the functions of that office or is
guilty of misconduct in performing those functions.
• The Official Receiver will be given an opportunity to
present his side of the case.
• Neither the Official Receiver nor the Deputy are liable in
civil proceedings for exercising in good faith any function
or power imposed or conferred on the office by any law.
 Insolvency Services Account

• Any money received or recovered by the Official Receiver

in the performance and exercise of the Official Receiver’s
functions and powers shall be paid into an account known
as the Insolvency Services Account which shall be
established and maintained at the Central Bank of Kenya.
• Creditors and contributories of the company will be paid
their dues from the account.
• However, any money held in the Insolvency Services
Account that is not immediately required for the purposes
of making the payments above may be invested in any
investments in which a trustee can invest money in
accordance with the Trustee Act