OVERVIEW AND EFFECTS OF THE REGISTRAR-INITIATED DISSOLUTION: KENYA
(Corporate Commercial Series: 4)
Registrar-initiated dissolution or deregistration is an administrative process where the Registrar of Companies removes a company’s name from the official Register of Companies on their own motion without an application from the directors. This happens when the Registrar has reasonable cause to believe that a company is dormant, defunct, or non-compliant with statutory obligations such as filing annual returns or financial statements. Unlike voluntary dissolution, which is led by shareholders, this is a “compulsory” administrative action by the State.
Legal Empowerment
The Registrar’s power to strike off a company is primarily derived from Section 894 of the Companies Act, 2015. It empowers the Registrar to send a letter of inquiry if they reasonably believe a company is not carrying on business or is not in operation. If the Registrar receives an answer to the effect that the company is not carrying on business or does not within one month after sending the second letter receive an answer to it, or if the company cannot prove it is operational, the Registrar publishes a notice of intended dissolution in the Kenya Gazette. If no “cause to the contrary” is shown within three months, the company is struck off the register and dissolved. Section 895 further empowers the Registrar to act/struck off a company where the company has been liquidated but no liquidator is acting, or the affairs are fully wound up.
Effects of Deregistration
When a company is dissolved, it loses its legal capacity, meaning it can no longer enter into contracts, trade, or operate bank accounts. According to Section 905, any property or rights that were vested in the company immediately before its dissolution, and which were not distributed, become bona vacantia, meaning ownerless property, and are transferred to the State. Importantly, the dissolution of a company does not absolve its directors or members from liability. They remain accountable for any acts committed before the company was deregistered, and such liability may be enforced as though the company had never been dissolved.
Upon a company’s dissolution, all employment contracts are automatically terminated because the employer, as a legal entity, ceases to exist. This frustrates the employment relationship, leaving employees without recourse through the company. In most cases, employees become unsecured creditors for any unpaid salaries, benefits, or severance. However, without a legal entity to take action against, recovering such dues is highly difficult unless the company is restored through a formal legal process.
When a company is dissolved, third parties such as the Kenya Revenue Authority (KRA) and suppliers are significantly affected. Tax obligations owed to KRA do not vanish with the company’s deregistration, but enforcement becomes impossible against a non-existent entity. This makes KRA one of the most common objectors to company dissolution notices in the Gazette. Similarly, suppliers and other creditors lose their legal debtor, and any ongoing litigation against the company is automatically stayed. To pursue unpaid debts or resume legal action, these third parties must apply to the court for the company’s restoration to the register.
The rule of thumb is that “Every contract has legal ramifications that must be addressed before a company’s formal closure can occur.”
Employment contracts are often the most directly impacted. Employees may face termination, and benefits such as severance packages or unpaid wages could be at stake. In many instances, employees may be entitled to compensation as per their contracts before the company is formally dissolved. On the other hand, supply agreements can lead to disputes if goods or services are undelivered at the time of dissolution. Suppliers often seek payment or may dispute pending orders. Additionally, customer contracts typically involve critical considerations of money owed and services rendered, which may lead to claims for refunds or unfinished services. It is therefore important for all the relevant parties to be alert in case of a notice for Registrar’s initiated deregistration.
Impact on the Kenyan Economy
The Registrar’s decision to strike off companies, has both positive and negative effects on the Kenyan economy. On the positive side, it enhances the integrity of the company register by eliminating inactive or fraudulent “ghost” companies often used for money laundering or irregular procurement. This cleanup promotes transparency, improves corporate governance, and ensures that economic data reflects only active businesses, aiding in better policy formulation. It also reinforces a compliance culture, pushing companies to take statutory obligations like filing annual returns more seriously. However, the move also brings negative consequences. Mass deregistration’s can lead to sudden job losses for employees in affected firms, contribute to an increase in bad debt for suppliers and financial institutions, and may trigger investor concerns by portraying the regulatory environment as harsh or reflective of deeper economic instability.
How to Apply for Restoration
If a company was struck off in error or the owners wish to resume business, the law provides two paths for restoration:
- Administrative Restoration (Section 912 – 915)
This is done directly through the Registrar and is available if the company was struck off under Section 894 (Registrar-initiated). The application may only be made by a former director or former member of the company; and not after the expiry of six years from the date on which the company was dissolved. To qualify for administrative restoration of a company under section 912, three key conditions must be met:
- The company was active (carrying on business or in operation) at the time it was struck off.
- If any of the company’s property had vested in the State, the Attorney-General must give written consent for restoration.
- All necessary documents must be submitted to the Registrar to update the company’s records.
Additionally, the applicant must obtain the Attorney-General’s consent (if required) and cover any related costs.
- Restoration by Court Order (Section 916 – 917)
If the Registrar refuses administrative restoration, or if a third party (like a creditor/supplier) wants the company back to sue it, they must approach the High Court by filing a petition showing it is “just and equitable” to restore the company. Once the court order is filed with the Registrar, the company is deemed to have continued in existence as if it had never been struck off.
At A.O. WANGA ADVOCATES we are happy to assist you with all company related issues. Please contact us at info@aowangaadvocates.com or +254794600191.
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