[2022] KEHC 13753 (KLR)

In re Kenyon Limited (Under Liquidation) (Insolvency Cause 019 of 2020) [2022] KEHC 13753 (KLR) (Commercial and Tax) (14 October 2022) (Ruling)

Neutral citation: [2022] KEHC 13753 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Insolvency Cause 019 of 2020

A Mabeya, J

October 14, 2022

IN THE MATTER OF KENYON LIMITED (UNDER LIQUIDATION) IN THE MATTER OF MEMBERS VOLUNTARY LIQUIDATION (SECTION 399(1) OF THE INSOLVENCY ACT, 2015

Ruling

1. Before Court are two applications dated 4/11/2021 and November 11, 2021, respectively. The company under liquidation is Kenyon Limited (“the company”). Katko Investments Limited (“the landlord”) is the creditor while Peter Kahi is the liquidator.

2. The application dated 4/11/2021 is the first application for determination. It was brought vide section 462(3) (5), 463, Part 3 of the Third Schedule, and Rule 8, 9, 10 of the Insolvency Act, 2015.

3. The application sought orders to sanction the liquidator’s sale of the company assets either by public auction or by private treaty to offset outstanding debts of the company. The grounds of the application were set out in the supporting affidavit of Peter Kahi sworn on 4/11/2021.

4. The grounds were that the company was placed under voluntary liquidation on May 13, 2020 pursuant of section 399(1) of the Insolvency Act. Peter Kahi was appointed to liquidate the same due to its inability to pay its debts. That by dint of section 463 of the Insolvency Act, sanction of the court was required to enable sell by private treaty or public auction of the company assets to facilitate distribution to creditors.

5. As at September 2021, the rent arrears were at Kshs 19,858,629. 80 and continued to accrue. That despite the statutory declaration of solvency made by the former directors under section 398(1)(b), the company was still unable to pay its debts thus sale of its assets was inevitable.

6. The landlord opposed the application vide Grounds of Opposition dated November 18, 2021 and the replying affidavit sworn by Shamji Keshra Jesani on November 18, 2021. It was contended that upon the voluntary liquidation of the company on May 13, 2020, it remained in occupation of the Landlord’s premises being Go down No 27 & 28 erected on LR No 14977/Nairobi. That this court issued an injunction for a period of 12 months from May 13, 2020 being the period which the liquidation was to be finalized as per the statement of solvency issued under section 398 of the Insolvency Act.

7. It was also contended that upon appointment of the liquidator, the powers of the directors ceased and the liquidator ws the only officer of the company. That the 12 months period within which the company was to be liquidated lapsed on May 13, 2021 but the company continued to be in occupation of the landlord’s premises and was not paying rent which had accrued to Kshs 19,858,629. 80. It was thus contended that the liquidator had no locus to bring the application as he was improperly in office.

8. It was contended that the liquidator ought to have finalized the liquidation process, paid off debts and handed over vacant possession of the premises within the 12 months and his failure to do so was prejudicial to the creditors. That he was empowered to sell the company assets under section 462 and schedule 3 of the Act without any special resolution. He had similar powers under clause 4 of the special resolution dated May 13, 2020 that placed the company under liquidation.

9. It was further contended that, the liquidator ought to have convened a creditor’s meeting within 30 days of forming the opinion that the company was unable to pay its debts in terms of section 403 of the Act. Thereupon, the member’s voluntary liquidation would have been converted to creditors’ voluntary liquidation under section 404 of the Act.

10. The landlord took the view that It was further contended that the liquidator was empowered under section 420 of the Act to apply to court to determine any question arising in the liquidation of a company, but the liquidator had failed to do so for 18 months to ensure finalization of the liquidation process.

11. It was thus contended that the instant application was an attempt by the liquidator to regularize the foregoing acts and omissions by obtaining approval to sell and avoid being sanctioned. That it was also meant to avoid liability from the losses and damages incurred by the creditors due to his breaches.

12. The second application was dated November 11, 2021. It was by the landlord. It sought declaratory orders that the liquidator’s tenure beginning from May 13, 2020 statutorily lapsed on August 13, 2021; a declaration that all actions taken by the liquidator after August 14, 2021 were a nullity and in the alternative, an order removing Peter Kahi as the liquidator and appoint the official receiver as the company’s liquidator. Further, that the liquidator be sanctioned for his omissions under section 403 (8) of the Insolvency Act.

13. Contemporaneously, the landlord filed a notice to produce dated November 11, 2021. It sought the production of bank statements of all company accounts and its audited financial statements for the first 6 months after the resolution to liquidate the company was made. That despite court orders, the liquidator had only produced 2018 bank statements and an incomplete financial statement. That he had failed to produce any accounts for the period he had been in office.

14. The liquidator opposed the application vide grounds of opposition dated November 25, 2021. He claimed that the landlord had on two occasions attempted to distrain for rent but had been restrained by the court on both occasions.

15. That the application was an attempt by the landlord to accord itself preferential treatment and had failed to establish any basis to warrant production of the documents sought. That all the financial affairs of the company would be produced before all creditors as required by law.

16. It was also contended that liquidation could continue for more than 12 months. If it spilled over to a subsequent 12 months, then the liquidator was obliged to convene a meeting within 3 months of the expiry of the subsequent 12 months. In the premises, the application was premature, unwarranted, and brought in bad faith.

The Landlord’s Submissions in Support of the Application Dated November 11, 2021 and in Opposition of the Application Dated 4/11/2021. 17. The landlord’s submissions were dated December 18, 2021. It was submitted that, the liquidator had contravened section 401 of the Insolvency Act and was therefore unlawfully in office. This is because he had failed to convene a general meeting of the company at the end of the 12 months liquidation period wherein he was to produce an account of his dealings and conduct of liquidation.

18. It was also submitted that the landlord had contravened section 404 of the Act by failing to convene a creditors’ meeting within 30 days of realizing that the company was unable to pay its debts, and that this was to be done before expiry of the 12 months period as per section 403(1) of the Act.

19. That the liquidator did not require the sanction of this Court to sell the company’s assets as per section 462(3) of The Act and part 3 of the Third Schedule. That though section 420 of the Act allowed the liquidator to move court to determine any questions arising in the liquidation of a company, such application would only be allowed if the required exercise of power would be fair and beneficial. The case ofMeteor Controls (International) Ltd v Conway & Anor (2015) NIQB 69 was relied on in support of those submissions.

20. It was therefore submitted that the application for sanction should not be allowed as the liquidator was not acting in the best interest of the company and the creditors. That he had committed various breaches of the law such that the application was an attempt to rectify those breaches.

21. As regards its application for production of documents, the landlord relied on the case of Standard Bank vs The Master of the High Court (103/09) (2010) ZASCA 4 wherein the liquidators were removed due to their misconduct. The case of Bina Puri Sdn Bhd vs Jambulingam Sethuraman-Rki C/O Rimbun Corporate Advisory Sdn Bh (D7-28-895) was also cited. In that case, the court removed a liquidator for failing to take reasonable steps to bring a liquidation to an early conclusion.

22. It was further submitted that the liquidator ought to be sanctioned for his various breaches. That under sections 401 (3) and section 403(8) of the Act, it was an offence for the liquidator to have failed to convene a general meeting after the lapse of 12 months and failure to constitute a creditors’ meeting within 30 days. The fine for each offence is Kshs 500,000/-.

Liquidator’s submission in support of the application dated 4/11/2021 and in opposition to the application dated November 11, 2021. 23. The liquidator’s submissions were dated March 22, 2022. He submitted that according to section 401(a) and (b) of the Act, in the event the liquidation process could not be concluded within the first 12 months and spills over to a subsequent period of 12 months, a liquidator is obliged to convene a general meeting of the company within 3 months of the expiry of such subsequent 12 month period.

24. That the liquidation was not completed by May 13, 2021 and thus spilled over to another 12 months ending on May 13, 2022. That he was therefore obliged to convene a general meeting of the company within three months ending August 13, 2022. In the premises, the Landlord’s application was premature.

25. It was also submitted that section 463(1) of the Act provided that in the case of a creditor’s voluntary liquidation and the liquidator is nominated by the company, the powers under section 462 of the Act cannot be exercised except with the sanction of court.

26. It was further submitted that the liquidator was not in breach of sections 403 and 404 of the Act because there was no proof that he had formed an opinion that the company was unable to pay its debts.

27. Finally, it was submitted that in compliance with the Notice to produce, the liquidator had supplied KCB Bank statements from November 2018 to date, KCB Bank statement from January 2020-April 2020, Management Accounts as at 6/04/2020, Audited accounts for the year 2018, and letter of representation to the auditors.

Determination 28. The Court has considered the parties’ respective documents and submissions on record. The issues that arise for determination from both applications are: -a.Whether the liquidator is in breach of the Act and consequently whether he is unlawfully in office and liable to pay the applicable fines;b.Whether the liquidator requires the sanction of court to sell the company’s assets either by private treaty or public office;c.Whether the liquidator ought to be removed and replaced with an official receiver in the interim.

1. Whether the liquidator is in breach of the Act, and consequently whether he is unlawfully in office and liable to pay the applicable fines 29. Part VI of the Insolvency Act, 2015 provides for liquidation of companies and section 381 (2) provides that a liquidation may either be voluntary or by court. It is not in dispute that the company herein was put into voluntary member liquidation vide the special resolution passed on May 13, 2021 under section 393 (1) (b).

30. Vide section 395 of the Act, voluntary liquidation of a company commences when the resolution for voluntary liquidation is passed. It is therefore not in doubt that the liquidation herein began on May 13, 2021. The company also appointed the liquidator, Mr Peter Kahi by virtue of section 399 of the Act.

31. The landlord claimed that the liquidator’s 12 months term had expired and thus he was not lawfully in office. It further claimed that upon expiry of the 12 months liquidation period, the liquidator failed to convene the company’s general meeting within 3 months of expiry wherein he was to produce an account of his acts and dealings. That upon the liquidator forming an opinion that the company was unable to pay its debts, he should have called for a creditors’ meeting within 30. For failure to take these actions, the landlord challenged the legality of the liquidators continued mandate as the company’s liquidator and also alleged that he was liable to pay the applicable fines.

32. Section 401 of the Act provides: -“General company meeting at each years end(1)If the liquidation of a company continues for a period of twelve months or more, the liquidator shall convene a general meeting of the company—(a)within three months after the end of that period of twelve months; and(b)within three months after the end of each subsequent period of twelve months.(2)The liquidator shall lay before the meeting an account of the liquidator's acts and dealings, and of the conduct of the liquidation, during the preceding year.(3)A liquidator who fails to comply with this section commits an offence and on conviction is liable to a fine not exceeding five hundred thousand shillings.(4)The Cabinet Secretary may extend the period of three months referred to in subsection (1)(a) or (b) if satisfied that there are extenuating circumstances for doing so, and if the Cabinet Secretary grants such an extension, that subsection is to be interpreted accordingly.(5)This section is subject to sections 404 and 410. ”

33. From the foregoing, it is clear that the Legislature foresaw a possibility of a liquidation not being completed within the first year and spills over to another year. In such a situation, the liquidator is under a duty to convene a general meeting of the company after the end of the first and provide an account of his acts and dealings, and of the conduct of the liquidation during the one year he has been in office.

34. The provision is geared towards ensuring that the liquidator remains accountable to the company and its stakeholders. This creates a fiduciary relationship between the company and its liquidator.

35. If the liquidation is incomplete and spills into another one year period, then once again, the liquidator is under a duty to convene the general meeting within three months of the end of the second period and give similar accounts.

36. In view of the foregoing, the liquidator was wrong in submitting that it is only after the second year period that he was required to convene the general meeting. The landlord was also not correct in submitting that the liquidator’s mandate expired after the first one year period running from May 13, 2021 to May 13, 2022.

37. The provisions of section 401 of the Act is subject to sections 404 and 410 of the Act. If a liquidator is of the opinion that the company will be unable to pay its debts in full within the 12 months, he must call for a creditor’s meeting within 30 days of forming that opinion. Once that meeting is convened, according to section 404 of the Act.

38. In the present case, the landlord contended that the liquidator should have called the creditors meeting upon realizing that the company would not be able to pay its debts within the liquidation period. On the other hand, the liquidator contended that he had not yet formed the opinion that the company would be unable to pay its debts.

39. Section 384 of the Act provides for circumstances in which a company is unable to pay its debts and states: -“(1)For the purposes of this Part, a company is unable to pay its debts—a.if a creditor (by assignment or otherwise) to whom the company is indebted for hundred thousand shillings or more has served on the company, by leaving it at the company's registered office, a written demand requiring the company to pay the debt and the company has for twenty—one days afterwards failed to pay the debt or to secure or compound for it to the reasonable satisfaction of the creditor;b.if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; orc.if it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due.(2)A company is also unable to pay its debts for the purposes of this Part if it is proved to the satisfaction of the Court that the value of the company's assets is less than the amount of its liabilities (including its contingent and prospective liabilities).”

40. In paragraph 6 of the supporting affidavit to the liquidator’s application dated 4/11/2021, he stated: -“That notwithstanding the statutory declaration of solvency made by the former directors of the company under the provisions of section 398(1)(b) of the Insolvency Act, the company has been unable to pay its debts and therefore making the sale of its assets inevitable.”And in paragraph 43, he stated: -“That the said debts of the company continue to accrue with the landlord’s rent arrears now at Kshs 19,858,629. 80/= as at September 2021. ”

41. In as much as the liquidator attempted to run away from the admission, he was bound by his pleadings. It is quite clear that the liquidator had formed an opinion that the company was unable to pay its debts, despite its directors’ declaration that the company would repay its debts within the 12 month period of voluntary liquidation.

42. In view of the foregoing, the liquidator ought to have called a creditor’s meeting under section 403 of the Act. This is clear from the fact that when the liquidation commenced in May 2020, the rent arrears were Kshs 4,633,112. 00. By the time the liquidator brought the application in November 2021, the arrears had skyrocketed to Kshs 19,958,629. 00. That was not an indication of a company which was able to clear its debts within the 6 months remaining before the second term of the liquidation expired.

43. As regards the fine of Kshs 500,000/-, the Act denotes the commission of an offence. That being the case, before the fine can be imposed, the liquidator must be subjected to a criminal proceeding. This being an Insolvency Court, there is no jurisdiction to impose the said fine.

44. From the foregoing, the Court makes a finding that the liquidator is lawfully in office as the second 12 month period had not yet lapsed at the time the two applications were being made. The Court also makes a finding that the liquidator was in breach of section 401 of the Act first, for failing to convene a general meeting of the Company three months after the expiry of the first 12 months period, and secondly, for failure to call for a creditor’s meeting upon forming the opinion that the company was unable to pay its debt within the 12 months liquidation period.

Issue 2: Whether the liquidator requires the sanction of court to sell the company’s assets either by private treaty or public office. 45. In his application dated 4/11/2021, the liquidator moved this Court under inter alia sections 462 and 463 of the Act. He asked the Court to sanction the sale of the company’s assets either by public auction or by private treaty. On its part, the landlord contended that the liquidator already had statutory powers as well as powers in the special resolution placing the company under liquidation to do so.

46. Section 462 of the Act provides for the liquidator’s functions in the case of member’s voluntary liquidation. It provides that: -“Liquidator's functions: voluntary liquidation1. This section has effect if a company is in voluntary liquidation, but subject to section 463 (liquidator's functions—creditors' voluntary liquidation) in the case of a creditor's voluntary liquidation.(2)The liquidator may—(a)in the case of a members' voluntary liquidation—with the approval of a special resolution of the company; and(b)in the case of a creditors' voluntary liquidation—with the sanction of the Court or the liquidation committee (or, if there is no such committee, a meeting of the company's creditors),exercise any of the powers specified in Part 1 of the Third Schedule (payment of debts, compromise of claims, etc.).2. The liquidator may, without approval, exercise either of the powers specified in Part 2 of the Third Schedule (institution and defence of proceedings; carrying on the business of the company) and any of the general powers specified in Part 3 of that Schedule.”

47. It is clear that in the member’s voluntary liquidation, the liquidator can exercise powers in Part 1 of the Third Schedule with the approval of a special resolution of the company. It is only where there is a creditor’s voluntary liquidation that the liquidator seeks sanction of the court or the liquidation committee before exercising such powers.

48. In the present case, apart from the statutory powers in section 462(2), the liquidator was authorized vide clause 4 of the special resolution dated May 13, 2020 to make distribution in specie, and when determined by him, of the assets of the company during the administration of the winding up.

49. The upshot is that the liquidator did not require the sanction of this court to sell the company assets either by public auction or by private treaty.

Issue 3: Whether the liquidator ought to be removed and replaced with an official receiver in the interim. 50. In its application dated November 11, 2021, the landlord sought, inter alia, orders that the liquidator be removed and replaced with an official receiver in the interim. The basis was that the liquidator was in breach of law. That as a result of the liquidator’s inaction the rent had accrued to Kshs 19,958,629. 80.

51. Section 467 of the Act provides for circumstances in which a liquidator may be removed from office in the case of a voluntary liquidation. It provides: -“2. Subject to subsection (2), a liquidator may be removed from office only by an order of the Court or—

a.in the case of a members' voluntary liquidation—by a general meeting of the company convened specially for that purpose; or(b)in the case of a creditors' voluntary liquidation—by a general meeting of the company's creditors convened specially for that purpose.”

52. It therefore follows that a liquidator can be removed from office either by an order of the court, or by a general meeting of the company, or by a creditor’s meeting.

53. Section 465(5) and (6) of the Act provides that: -“5)A person who is dissatisfied with an act or decision of the liquidator may apply to the Court for an order under subsection (6).6)On the hearing of an application made under subsection (5), the Court may—a)make an order confirming, reversing or modifying the act or decision complained of; andb)make such other order in the case as it considers appropriate.”

54. In the Malysian case of Bina Puri Sdn Bhd vs. Jambulingam Sethuraman-Raki C/0 Rimbun Corporate Advisory Sdn Bh (D7-28-895), the court found that where the liquidator failed to take reasonable steps to bring liquidation to an early conclusion entitled the creditors to bring an action against a liquidator.

55. There exists a fiduciary relationship between the company, its members, the creditors and the liquidator. That is why there is a requirement of the liquidator to be transparent and accountable by way of meetings with specific timelines.

56. In the South African case of Standard Bank vs The Master of the High Court (103/09) (2010) ZASCA 4, the court stated: -“In my view, like Caesar’s wife, liquidators should be beyond reproach. In this case their counsel conceded before us that their conduct was not. It ought to have been, given the fiduciary position occupied by them. What remains therefore is to determine whether they have conducted themselves such as to warrant their removal from office…they failed in the discharge of a most rudimentary function for liquidators, namely the keeping of proper books of account. Given the obligation imposed upon them to do so, that dereliction should not be countenanced…”

57. The purpose of liquidation is to ensure that all the company’s affairs are dealt with and all its assets realized. Liquidation leads to the slow but organized death of a company. It thus ensures that a company is wound-up equally and fairly and its debts paid when due. In the case of voluntary liquidation, the directors acknowledge that the company is no longer solvent and cannot continue trading and is unable to pay its debts.

58. The choice to opt for liquidation eases off the pressure from creditors, as the liquidation is supposed to be undertaken in a timely and efficient manner. This is supposed to ensure that the company pays off its debts and its assets realized.

59. Inaction on the part of the liquidator jeopardizes the position of the company and the creditors. The law does not envisage a situation where a liquidator assumes office and secretly deals with the company without any accountability. Liquidation does not confer ownership rights to the liquidator to deal with the company as he so wishes. The liquidator is conferred powers to ensure that the company pays its debts and ceases to exist. Anything to the contrary justifies removal from office.

60. In the present case, the landlord had served the liquidator with a notice to produce documents and the Court gave those orders. However, the landlord complained that the documents provided by the liquidator were not for the relevant period requested for, being accounts for the first 6 months after the liquidation commenced. Though the liquidator maintained that he had produced all relevant documents, it was not clear why the liquidator had declined to pay the company’s rent and allowed it to grow from Kshs 4,647,077/= as at the time he took up office, to Kshs 19, 958,629. 80.

61. In Bina Puri Sdn Bhd vs Jambulingam Sethuraman-Raki C/0 Rimbun Corporate Advisory Sdn Bh (D7-28-895), the court observed: -“In the instant case the liquidator has voluntarily accepted to take conduct of the liquidation process for remuneration and in consequence he is expected to act professionally for just, expeditious and economical disposal of the liquidation process…I am satisfied that the liquidator has not kept up in the professional standard which is expected for just expeditious and economical conclusion of the liquidation. It will be in the interest of the liquidation process itself that he be immediately removed with directions before another private liquidator is appointed. In this respect the complaint of the applicant as well as the supporting creditor has merits.”

62. This Court reiterates the foregoing here. Removal from office is a draconian step, and the court ought to exercise its discretion judiciously before granting such orders.

63. In the view of this Court, inordinate delay or inaction to start and finalize the liquidation process to such an extent that the company is prejudiced, is a substantial ground that justifies removal from office. Further, prove of breaches of the law is also a ground for removal.

64. In the present case, the liquidator not only breached the law, but is obviously guilty of inaction which has prejudiced both the company and the creditors, more-so the landlord.,

65. Nothing could have been easier than to sell the company’s assets within the guidelines of the Act and using those proceeds to pay the outstanding debts inclusive of the rent, wind-up the company, and therefore avoid any future liabilities. The liquidator also had the option of calling for a creditor’s meeting and agreeing on the way forward that could have led to a quicker and more cost-effective liquidation process.

66. From the foregoing, the court finds merit in the application dated November 11, 2021. Under different circumstances, this Court would have removed the liquidator from office. However, considering the special circumstances of this case, the Court declines to do so.

67. This is so because, as at the time of writing this ruling, the second one-year period of liquidation has already lapsed. It would be more practical for the Court to issue directions that would bring an end to the liquidation rather than order for a fresh liquidation as the rent continues to increase. Undoubtedly, this would not be in the best interest of the company, its members and the creditors.

68. In view of the foregoing, the Court determines the applications dated 4/11/2021 and November 11, 2021 as follows: -a.The application by the liquidator is hereby dismissed with costs.b.The application by the landlord is partly successful and costs are awarded to the landlord.c.The liquidator is hereby ordered to convene a creditors meeting within 30 days of this order, and produce updated accounts of his acts and dealings with the company and full financial accounts from the date of liquidation to-date.d.The liquidator and creditors to agree on the best mode of disposal of the company’s assets either by private treaty or public auction, and agree on the priority of payments as per the Second Schedule of The Act.e.The sale of the company’s assets to be conducted within 21 days of the creditor’s meeting, and the proceeds therein be used to settle the company’s debts in accordance to the agreement in order number d) above.f.For avoidance of doubt, if the liquidator fails to comply with any of the orders herein, his liquidation mandate shall automatically be removed within 14 days from the date of his non-compliance, and the creditor/landlord will be at liberty to distress for rent without further recourse to court.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF OCTOBER, 2022. A. MABEYA, FCIArbJUDGE