20 April 2022 by and Business Rescue, Restructuring & Insolvency Newsletter

To liquidate or not to liquidate: Kenyan and South African courts’ views on liquidation applications (Part 1)

In addition to the Indian Ocean coastline, Kenya and South Africa also share similar insolvency law principles in relation to the liquidation of companies. In a two-part series of articles, we consider the two countries’ courts’ views in liquidation applications or, as Kenyan lawyers refer to them, “liquidation petitions”. In short, there is evidence that Kenyan and South African courts are not so quick to grant liquidation petitions. This first article looks at the Kenyan position.

Kenyan courts have on numerous occasions held that liquidation amounts to a “death warrant” for a company. The Kenyan Insolvency Act of 2015 imposes an obligation on courts to keep in mind the objectives of the act when dealing with companies whose financial position is redeemable. The courts are obligated to supervise insolvency proceedings to enable a company to continue as a going concern so that it can ultimately meet its financial obligations to its creditors in full or, at least, to the satisfaction of those creditors.

This was the position taken by the Kenyan High Court in Synergy Industrial Credit Limited v Multiple Hauliers (EA) Limited [2020] eKLR. The court postponed the hearing of a liquidation petition for a period of 12 months on the grounds that even where the debt was admitted by the insolvent company, the court had to consider the views of all the insolvent company’s creditors and the company’s business prospects. The court did not limit itself to the arguments of the petitioning creditor and the insolvent company. The court did not grant or dismiss the liquidation petition – it postponed the liquidation petition so that other creditors could be heard.

While declining to dismiss the liquidation petition, the court held that it was in the best interests of the whole body of creditors for the hearing of the liquidation petition to be postponed. The court stressed the importance of considering the best interests of the insolvent company and the whole body of creditors. It held that this would give creditors time to consider restructuring proposals and explore the possibility of reviving the insolvent company.

The court noted that the insolvent company was a large employer performing large contracts within East Africa and its collapse would affect more than just the creditors. On this basis, the court postponed the hearing of the liquidation petition for 12 months to allow for the formulation of a comprehensive restructuring plan for the turnaround of the insolvent company’s business and payment of its secured and unsecured creditors.

This judgment clearly demonstrates that Kenyan courts are cognisant of the importance of protecting insolvent companies attempting to recover and make a complete financial turnaround. Kenyan courts will not be quick to grant a liquidation petition where there is a chance that an insolvent company can recover. This does not, at all, mean that the tide of the Indian Ocean will always turn in favour of insolvent companies in liquidation applications – a court will consider each case on its own merits.

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