By Our Law Team on July 15, 2025
A company is insolvent when it cannot pay its debts as they fall due. Options under the Insolvency Act include voluntary restructuring, administration, receivership and liquidation. Liquidation (winding up) ends the company: a liquidator takes control of assets, realises them and distributes proceeds to creditors before the company is dissolved.
Once directors know the company is (or is likely to become) insolvent, they must act in the interests of creditors, not just shareholders. Trading while insolvent for too long, allowing preference payments to selected creditors, or disposing of assets to defeat creditors can expose directors to personal liability for wrongful trading and clawback claims.
Before liquidation, consider a company voluntary arrangement or scheme of arrangement to restructure debts and keep the business trading. Our insolvency lawyers in Nairobi help directors choose the least destructive route and navigate the statutory processes correctly.
From the moment a liquidator takes office, control of the company passes out of the directors' hands. The liquidator secures the books and assets, may change the locks and bank mandates, and requires the directors to deliver a statement of the company's affairs - its assets, debts, creditors, employees and contracts. Most legal proceedings against the company are stayed, and no creditor may enforce security or seize assets without the liquidator's consent or the court's leave.
The liquidator then realises the assets, adjudicates the claims that were lodged, challenges transactions that can be clawed back, and distributes the proceeds in the order the Insolvency Act requires. Only at the end is the company dissolved. Directors remain obliged to cooperate - refusing to hand over records or to answer the liquidator's questions is an offence and is treated as an aggravating factor in any later personal liability claim.
Where the company will not or cannot act, a winding up petition can be presented to the court by a creditor, a member, the company itself or a regulator. The classic route for a trade creditor is an unpaid statutory demand that is not satisfied within the statutory period, followed by a petition on the ground that the company is unable to pay its debts. The court can appoint a provisional liquidator to protect assets while the petition is pending, and once a winding up order is made the process is supervised by the court and the Official Receiver.
For directors, a petition is a hard deadline. It invites scrutiny of every payment made in the months before it, and it removes the company's ability to negotiate a rescue quietly. This is why early advice - before a creditor files - so often decides whether a business can be restructured instead of closed.
Choosing between them is a commercial and legal judgment, not just a formal one. Administration preserves value, goodwill and jobs; liquidation produces a clean end but usually a poorer return for unsecured creditors and often triggers personal guarantees.
Liquidation does not pay everyone equally. The Insolvency Act sets a strict order of priority: the costs of the liquidation itself, then the claims of creditors with valid security over specific assets, then preferential debts, then unsecured creditors, and finally shareholders - who usually receive nothing. Preferential debts include employee remuneration and statutory deductions, which is why payroll arrears are scrutinised so closely in every liquidation.
One point directors frequently miss: a liquidation distributes the company's assets but does not extinguish personal guarantees, director's loans or personal securities. Banks and landlords typically enforce those separately.
Liquidation is a corporate process, but it can reach directors personally. The areas to watch are:
Unpaid taxes and statutory deductions can also follow directors in certain circumstances under tax law, so a company's tax position should never be left unaddressed until the liquidator discovers it.
The choice is rarely made once. Businesses commonly start with a negotiated restructuring, move to administration if that fails, and only then liquidate.
Employees are not passive bystanders in a liquidation. Their claims for unpaid wages and accrued benefits are treated as preferential debts, they may have separate statutory claims for notice and service pay, and they can lodge claims directly with the liquidator. Creditors, for their part, must prove their debts: statements, invoices, judgments and evidence of any security. Late claimants risk losing their share, and unsecured creditors should expect a partial recovery at best.
If your company is under financial pressure, act now - early advice protects you personally and preserves the best outcome for creditors and employees. Book a confidential consultation.
