The number of applications for insolvency and restructuring of companies has reduced in the first half of the year, pointing to reduced financial hardship by firms in an improved economy.
Kenya’s economy in the three months to March reversed seven straight back-to-back quarterly growth declines to post a 5.3 per cent gross domestic product growth after pulling out of a prolonged electioneering period and a tough season of high inflation.
Data by the Official Receiver’s Office showed that the court filed five petitions for liquidation of firms in April—nearly half the record eight filings registered in February alone.
The eight liquidation filings in February were the highest in a month since the Official Receiver’s Office started publishing the records in 2015, except for October 2022 and February 2020, when we had nine filings each. There were three liquidation filings in March and two and three in May and June, respectively—firm, a trend of lower number of filings.
Liquidation is the process by which the management of the company’s affairs and control of its assets are taken out of its directors’ hands and vested in a liquidator. The property and assets are then converted to cash or cash equivalents by selling them on the open market by the liquidator and debts are paid out of the proceeds of sale in order of priority. Once the assets are sold and creditors paid, the liquidator closes the company.
Liquidation of assets may be either voluntary or forced. Voluntary liquidation may be affected to raise the cash needed for new investments or purchases or to close out old positions. A forced liquidation may be used in bankruptcy procedures, in which an entity chooses or is forced by a legal judgment or contract to turn assets into a liquid form. In Kenya, the law provides three modes of liquidation, including members’ voluntary liquidation, creditors’ voluntary liquidation, and liquidation by court.
Liquidity by the court is compulsory and is often initiated by a creditor when the insolvent company fails to pay off liabilities owed to such a creditor. The court has the power to wind up a firm in certain circumstances such as when shareholders resolve by a special resolution to have the court liquidate the company or if the firm has not commenced active business for a year after it is incorporated or it has suspended active business for a year.
The court may also liquidate a firm if the firm is unable to pay its debts or the court considers that justice will be rendered by liquidating a company.
Invesco Assurance Company, which insured public service vehicles, is among those that the court placed under liquidation in February after it defaulted on paying claims running into millions of shillings.
