Insolvency 2023 Comparisons

In Kenya, the Office of the Official Receiver publishes insolvency statistics annually. Between July 2022 and June 2023, 38 petitions for involuntary liquidation were filed, eight companies were placed under voluntary liquidation, and 12 companies were placed under administration.

COVID-19 prompted a rise in the number of insolvencies, with businesses in sectors such as tourism, airline carriers, restaurants, and real estate being more adversely affected.

The Central Bank of Kenya has lifted the emergency measures effected in March 2020 to protect borrowers from the adverse economic effects of COVID-19. As such, more businesses are expected to become insolvent since it is anticipated that they will be unable to service their debts.

In addition, some businesses that had not ceased operations during the pandemic and that were slowly recovering from its effects are expected to become insolvent due to rising fuel prices, interest rates and taxes, combined with a fall in the value of the Kenyan shilling.

Insolvency proceedings in Kenya are governed by the Insolvency Act 2015 (the “Insolvency Act”) and the Insolvency Regulations 2016 (the “Regulations”).

The Insolvency Act provides for bankruptcy of natural persons and insolvency of artificial persons, through processes such as liquidation, administration, company voluntary arrangements and administrative receiverships. It should, however, be noted that receiverships arising from debentures executed and registered before the Insolvency Act came into force are governed by the provisions of the Repealed Companies Act, Chapter 486.

When deposit-taking institutions (such as banks) are deemed insolvent, the Central Bank of Kenya may appoint the Kenya Deposit Insurance Corporation as either the administrator, receiver, or liquidator of the said institution. In these cases, the Kenya Deposit Insurance Corporation Act 2012 (the “KDIC Act”), the Banking Act, Chapter 488, the Central Bank of Kenya Act, Chapter 491 (the “CBK Act”) and/or the Capital Markets Act, Chapter 458A (the “CMA Act”) govern the insolvency proceedings.

The Companies Act, No 17 of 2015 (CA 2015) governs financial restructurings and reorganisations of private entities, while the CMA Act, read together with the Capital Markets (Takeover and Mergers) Regulations 2002, governs restructurings of public entities.

Administration

Administration is aimed at maintaining an insolvent company as a going concern; achieving a better outcome for the company’s creditors than if the company were liquidated; and realising the property of the company to make a distribution to secured or preferential creditor(s) (Section 522, Insolvency Act).

Administration commences with the appointment of an administrator (who must be a qualified insolvency practitioner – Section 526, Insolvency Act) by either the company, its directors, the court, or the holder of a qualifying floating charge. The administrator is considered an agent of the company and an officer of the court (Section 586, Insolvency Act).

A moratorium takes effect once the administration procedure commences. Therefore, neither a resolution for liquidation nor a court order for the liquidation of such a company may be issued (Section 589, Insolvency Act). Any proceedings or execution against the company are stopped, and any creditors may exercise their rights against the company only with the consent of the court or administrator (Section 560, Insolvency Act).

The administrator is required to make a proposal setting out how they intend to achieve the purposes of the administration, and the same is presented to the company’s creditors and members during the creditors’ meeting. The proposal may take the form of a voluntary arrangement or compromise (Section 566 and 567, Insolvency Act) and is subject to a vote during the creditors’ meeting (Section 568, Insolvency Act).

However, the creditors’ meeting will not be convened if the proposal states that the administrator believes that:

• the company has sufficient property to enable each creditor to be paid in full;
• the company has insufficient property to enable a distribution to be made to unsecured creditors; or
• that the administration’s objectives cannot be achieved (Section 569 of the Insolvency Act).

Company Voluntary Arrangements

A company voluntary arrangement (CVA) is a scheme where the directors of the company, or the duly appointed administrator or liquidator, propose a plan to settle the company’s debts to its creditors.

A meeting of the company and its creditors is convened, where the proposed voluntary arrangement is put to a vote (Section 625–627, Insolvency Act). A provisional supervisor is appointed to oversee the voting process and will first issue a report which sets out the particulars of the debts owed to the creditors by the company (Section 307, Insolvency Act).

If the voluntary arrangement is approved, the company continues trading on a more flexible repayment schedule (see Re Uchumi Supermarkets PLC [2020] eKLR). Once approved, the voluntary arrangement also becomes binding upon the creditors and the company (Section 630, Insolvency Act). A CVA is ordinarily supervised by an insolvency practitioner selected by the directors (Section 625, Insolvency Act). The Insolvency Act does not, however, provide for strict timelines within which a CVA should be concluded.

Administrative Receivership

This remedy is available to holders of a debenture created before the coming into force of the Insolvency Act (Section 690, Insolvency Act) and has been designed to cater for pre-2015 securities. It is the process by which secured creditors appoint a receiver over a company, to collect and/or sell the secured assets, with a view to collecting their outstanding debts. The receiver is not an officer of the court, but is an agent of both the debenture holder and the company (See Surya Holdings Limited & 2 others v CFC Stanbic Bank Limited [2015] eKLR).

Once an administrative receiver or a receiver and manager is appointed, the directors’ powers are suspended. Furthermore, administrative receiverships are governed by the provisions of Chapter 486 of the Repealed Companies Act. (See Insolvency Cause No. E017 of 2020 – Credit Guarantee Insurance Corporation of Africa v Ponangipalli Venkata Ramana Rao & another).

Liquidation

This is the process by which the assets of a company are collected and/or realised and distributed amongst the creditors of the insolvent company in the order of priority. If there is a surplus after the company’s assets are distributed to the company’s creditors, the same is distributed to the company’s shareholders.

The Insolvency Act provides for two types of liquidation procedures, namely:

• voluntary liquidation; and
• liquidation ordered by the court.

Voluntary liquidation

Voluntary liquidations are instituted by shareholders/members or creditors of a company. Shareholders/members’ voluntary liquidation must be accompanied by a directors’ statutory declaration that sets out that the company is still solvent (Section 382, Insolvency Act).

A company may be voluntarily liquidated when:

• the period (if any) fixed for the duration of the company by the articles expires;
• an event occurs which requires the company to be dissolved, and a general meeting has passed a resolution providing for its voluntary liquidation; or
• if the company resolves by special resolution that it be liquidated voluntarily (Section 393, Insolvency Act).

Before passing a resolution for voluntary liquidation, the company must give notice of such resolution to the holder of any qualifying floating charge in respect of the company’s property. Liquidation commences once the resolution to voluntarily liquidate the company is passed (Section 395, Insolvency Act). A notice of the resolution to liquidate the company will then be published in the Kenya Gazette, a newspaper of nationwide circulation, and on the company’s website.

Upon commencement of voluntary liquidation, the company ceases to trade, except as may be necessary for its beneficial liquidation, and any attempts to transfer the shares of the company or to change the status of the company’s shareholders are void. However, the corporate status and powers of the company continue to have effect until the company is dissolved, notwithstanding provisions of the company’s articles of association.

Involuntary liquidation

A company may be liquidated involuntarily (by the court) when:

• the company has resolved by special resolution that it be liquidated;
• the company is unable to pay its debts;
• the company does not commence its business within 12 months of incorporation or suspends its business for one year;
• the number of members is reduced below two (save for a private companies limited by shares or by guarantee); or
• there is no voluntary arrangement at the end of a pre-insolvency moratorium, or the court is of the opinion that it is just and equitable that the company be liquidated (Section 424 of the Insolvency Act).

An application to court for involuntary liquidation may be made by the company, its directors, a creditor, a contributory of the company, a (provisional) liquidator or administrator, or the Attorney General on the grounds that it is in the public interest, following an inspection into the affairs of the company (Section 425 and 426, Insolvency Act). The court will hear the application and make a determination to dismiss the application, appoint an interim liquidator, adjourn the hearing of the application (either conditionally or unconditionally), or make any other order.

For involuntary liquidations, liquidation commences when:

• a resolution to liquidate the company voluntarily has been passed and the court determines that the resolutions were validly passed;
• when a liquidation order is issued by the court; or
• an application for a liquidation order is passed.

Compromises, Arrangements, Reconstructions and Amalgamations

Section 922 of the CA 2015 provides for rescue procedures that enable a company to initiate negotiations with its creditors. This is referred to as “corporate restructuring”, and may be commenced by a company; its directors, members or creditors; or insolvency practitioners. However, it takes effect once approved by the court and/or stakeholders. Corporate restructuring may include the reorganisation of a company’s shares, the amalgamation of two or more companies, or general compromises with the creditors.

In all insolvency proceedings, the relevant insolvency practitioner is under a duty to adduce any information sought by a creditor, as long as an appropriate request (with a turnaround time of five or more days) is made (see under Section 734A of the Insolvency Act and Insolvency Cause No. E017 of 2020 – Credit Guarantee Insurance Corporation of Africa v Ponangipalli Venkata Ramana Rao & another).

Kenya does not have any law that makes it mandatory for a company to commence formal insolvency proceedings within any specific timelines. However, directors of a company may be required to contribute to the assets of an insolvent company where they have engaged in wrongful trading (Section 506, Insolvency Act). This occurs when a company continues to trade whilst it is insolvent and the directors of the company, being aware of this or having come to the conclusion that there was no reasonable prospect that the company would avoid going into insolvent liquidation, still continue trading.

However, liability will not be imposed if, after the director realised that there was no reasonable prospect of avoiding insolvent liquidation, the director took every step that they ought to have taken to minimise the potential loss to the company’s creditors (see Section 506(6), Insolvency Act and Unispan Limited v African Gas & Oil Limited [2014] eKLR).

Both secured and unsecured creditors can commence involuntary insolvency proceedings against a company by serving the company with a 21-day statutory demand. Should the company not honour the demand, the creditor may appoint a receiver, apply to liquidate the company, or appoint an administrator in instances where the creditor is the holder of a floating charge.

There is no express definition of “insolvency”, either in the Insolvency Act or otherwise. However, the Insolvency Act at Section 384 sets out that a company is deemed to be unable to pay its debts (what is referred to as being insolvent) when:

• a creditor to whom the company is indebted for KES100,000 (approximately USD650) or more has served on the company a statutory demand and the same has not been honoured;
• if execution proceedings against the company are returned unsatisfied in whole or in part; or
• if it is proved to the court’s satisfaction that the company is unable to service its debts or that its assets are less than its liabilities.

Banking and Other Financial Institutions

As stated in 2.1 Overview of Laws and Statutory Regimes, the statutory restructuring and insolvency regime applicable to deposit-taking institutions (such as banks and other financial institutions) is contained within the KDIC Act, the CBK Act and/or the CMA Act.

Insurance Companies or Undertakings

Insolvency proceedings for insurance companies or undertakings are governed by the Insurance Act, read in conjunction with the Insolvency Act and the CA 2015.

Insolvency proceedings against insurance companies are involuntary in nature, since the Insurance Act provides that an application for liquidation of an insurance company shall be made to the court by a person, or the Commissioner of Insurance (doubling as the CEO of Kenya’s Insurance Regulatory Authority).

Where the application has been made by a person other than the Commissioner, the applicant shall serve a copy of the application on the Commissioner. For the purposes of the Insolvency Act, an insurance company is taken to be unable to pay its debts if at any time the insurer does not maintain a capital adequacy ratio of 100% and/or maintain separate capital adequacy ratios.

Entities Operating in the Financial Market

The CMA Act and its regulations govern the insolvency of entities operating in the financial markets. Section 33E of the CMA Act allows the Capital Markets Authority, if it appears desirable for the protection of clients or investors, to present a petition for the winding up of a licensed person or to institute winding up proceedings on just and equitable grounds.

This process, however, differs depending on the licensed entity as not all companies regulated by the CMA Act are liquidated in a similar fashion. For instance, the liquidation process for central depositories is governed by the Central Depositories Act, and hence differs from the process set out under the CMA Act.

Consensual Restructuring

Consensual restructuring is case-specific, and creditors who choose this avenue do so in the belief that the same is inexpensive, informal, fast, flexible and confidential. It is preferred over insolvency proceedings, since directors will often oppose insolvency proceedings, hence engaging the parties in court while the assets of the company waste away.

Bank and Lender Support

Banking institutions in Kenya provide a conducive and accommodating environment to borrowers, with reasonable opportunities extended to restructure the facilities advanced to them. Lenders are known to issue moratoriums, freeze interest on repayments, and hold off from exercising their rights to realise their securities.

Consensual Restructuring vis-à-vis insolvency proceedings

Banks tend to use insolvency proceedings to recover debts, largely because they have the financial muscle to defend court challenges to the insolvency proceedings and to see the insolvency process through. This is not always the case for individual creditors who lack the same financial resources, which results in them gravitating towards the use of consensual restructuring agreements.

Requirement of a mandatory consensual restructuring negotiations

While Article 159 of the Constitution of Kenya encourages the use of alternative dispute resolution, there is no law requiring lenders to go engage in consensual restructuring negotiations before commencing formal insolvency proceedings. The rights of both the borrowers and lenders are ordinarily crystalised within statute and in the contracts/facility letters. Therefore, any party aggrieved by a breach of the terms of the facilities may seek legal recourse thereunder.

Standstill Agreements (SSAs)

While SSAs are not provided for under Kenyan law, this has not stopped insolvent entities and secured creditors from using SSAs in a bid to keep companies operating as going concerns. In Synergy Industrial Credit Limited v Multiple Hauliers (EA) Limited [2020] eKLR, the court adjourned the hearing of a liquidation petition to allow an SSA between the company and its lenders, which was geared at restructuring its operations and managing cash flow, working capital and liquidity requirements, to take effect.

Obligations of a Debtor Company

Debtor companies are not obliged to restructure their debts. This is optional and ordinarily guided by the relationship between the debtor company and its lender.

Creditors’ Steering Committees

A creditors’ committee is formed during the formative creditors’ meeting called by an administrator to seek approval of the statement of proposals. The committee ensures that the creditors’ interests are represented and protected since all creditors cannot personally monitor the implementation of the administrator’s proposal once the same is approved (Regulation 113 and 114, Insolvency Regulations and Section 574, Insolvency Act).

As per Regulation 114 of the Insolvency Regulations, the administrator sends out a notice together with the proposal to the creditors. The said notice asks the creditors to nominate the members of the creditors’ committee, informing the creditors that the nominations are to be delivered to the administrator by a date specified on the notice, and that the nomination shall be accepted only if the criteria in the third schedule of the Insolvency Regulations are met.

The creditors’ committee has the power to have the administrator appear before it and provide it with information on how the administrator is performing their functions, as long as a seven-day notice of such appearance is issued (Section 574(3), Insolvency Act).

See 6.10. Priority New Money.

Secured creditors must factor in the interests of the company, other secured creditors, and (to an extent) third parties, when exercising their rights over the securities they hold, as they must account for the surplus of the realisation or sale of a secured property.

For instance, a secured creditor exercising its statutory power of sale over land under a charge is obliged to ensure that the asset in question is sold at a forced sale value which is not below 75% of the market value of the said land (Section 97(3), Land Act, 2012).

Out–of-court financial restructuring or consensual agreements are equivalent to contacts in Kenyan law. However, for these contracts to be effected, some standards need to be adhered to.

Debentures

Debentures are contractual instruments between a lender and borrower, pursuant to which a borrower offers its moveable and/or immoveable assets to the lender as security for the facilities advanced. Debentures are categorised into three types, namely:

• floating debentures – these are securities over a group or all the assets of the company, which crystallise and attach on the assets of the company on the occurrence of a specific event, which event(s) are provided for within the debenture itself;
• fixed debentures – this is a security issued to a lender over the company’s identified and specified movable property or the assets of a third-party guarantor; and
• fixed and floating debentures – this is a security over both the fixed and movable assets of a company and is preferred by most lenders as it ensures that there are adequate securities to resort to.

Charges

These are instruments pursuant to which a lender is granted a right of sale over an immoveable asset upon default by a borrower of its contractual repayment obligations. The title to the asset remains with the borrower, but they are not allowed to dispense of the same without the lender’s consent.

Mortgage

This is an agreement by which a bank advances a facility to a borrower in exchange for the title to the borrower’s property, with the condition that the conveyance of title becomes void upon the payment of the facility. Default in honouring the terms of the mortgage allows the lender to sell the said property.

Assignment of Contractual Rights/Receivables

Companies may assign their rights over immovable property as security for the advancement of facilities in their favour. For example, the assignment of rent, where a company grants rights to the lender to collect rent from its premises.

Additionally, companies may use their movable property to acquire funding through the Movable Property Security Rights Act, 2017 (MPSR Act). The MPSR Act allows for the use of movable assets such as a chattel mortgage, credit purchase transaction, credit sale agreement, floating and fixed charge, pledge, trust indenture, trust receipt, financial lease, receivables, and any other transaction that secures payment or performance of an obligation (Section 4, MPSR Act). As per Part II of the MPSR Act, a security right needs to be created and registered with the registrar of companies.

If statutory requirements are followed and the validity of a charge is not challenged, a secured creditor may exercise its rights over the property, and this right is not affected by the subsistence of insolvency proceedings (see East Africa Cables PLC vs. Ecobank Kenya Ltd & Others Misc. Civil Application No. E043 of 2020).

Intercreditor Covenants

Creditors who hold securities over the same asset commonly enter into inter-lender agreements which co-ordinate the lenders’ recovery actions and may determine how funds recovered from enforcement of a shared security are distributed. Pursuant to Section 81 of the Land Act, however, before a charge can be registered over a property which already serves as security, a creditor must obtain the consent of the first creditor who registered a charge.

In addition, the first charge will rank in priority, and the second creditor will only be able to enforce their charge after the first creditor has received all monies owing to them.

Power of a Secured Creditor to Block Insolvency Process

Secured creditors cannot block an insolvency process except where there is non-compliance with mandatory statutory provisions. However, pursuant to Section 447 of the Insolvency Act, a creditor may make an application to the Court to stay ongoing liquidation proceedings, which application may be granted upon satisfactory proof that the proceedings ought to be stayed permanently or for a specific period (see Dinkar Rambhai Patel v United Engineering Supplies Ltd & Another [2020] eKLR).

Creditors can further remove a liquidator under Sections 468 and 469 of the Insolvency Act, which disrupts the insolvency process until another liquidator is appointed. This power may be exercised if there are alternative methods of pursing a debt owed (see Prideinn Hotels & Investments Limited v Tropicana Hotels Limited [2018] eKLR).

Automatic or Discretionary Stays or Deferrals of Enforcement

The rights of a secured creditor to enforce its security are not subject to insolvency proceedings. However, there exist situations where the exercise of these rights must be preceded by court approval. For instance, one must seek approval of a court before taking steps to enforce security over the company’s property if the company is under administration (see Section 560, Insolvency Act and Hoggers Limited (In Administration) v John Lee Halamandres & 11 Others [2021] eKLR).

There are no special procedural protections for creditors during insolvency proceedings. However, during the subsistence of insolvency proceedings, a moratorium comes into force which bars any further court proceedings or enforcement in order to protect the company’s assets.

The court may lift a moratorium that came into force as a result of administration proceedings if it is established that a secured creditor is not receiving protection for the diminution in the value of the encumbered asset (Section 560A, Insolvency Act).

Secured creditors rank in priority over unsecured creditors in so far as distribution of the assets of a company is concerned. In addition, the rights of secured creditors under their securities are independent of ongoing insolvency proceedings.

Where there is a conflict between two or more secured creditors, the order of registration is used to determine the rank of secured creditors (Section 535, Insolvency Act and Section 38, MPSRA). In the event of default, the creditor whose security was registered first will be paid before other secured creditors (see I&M Bank Limited v ABC Bank Limited & Another [2021] eKLR).

Creditors whose securities were registered later in time may rank in priority through the execution of inter creditor covenants, which are to be approved and executed by the previous creditors.

During receivership, unsecured creditors will only recover their debt if there is surplus left over from the payment of the first priority claims and the secured creditors. However, if there is a floating charge over the assets of a company that is placed under administration or liquidation, the administrator or liquidator is required to preserve 20% of the company’s net assets for the satisfaction of unsecured debts (Section 474, Insolvency Act and Regulation 96(1) of the Insolvency Regulations 2016).

Save that secured creditors rank in priority to unsecured creditors, both classes have the same rights once an administrator or liquidator is appointed. For instance, unsecured creditors have a right to information, a right to call for a meeting (provided they meet the requisite thresholds), and a right to vote on the administrator’s proposal, among others. With regard to CVAs, the rights of a secured creditor are inviolable, and should the CVA proposal prejudice a secured creditor, the said proposal may not be approved by the court.

Unsecured creditors may disrupt liquidation proceedings in two ways:

• by opposing a liquidation petition, resulting in its dismissal or adjournment; or
• by filing an application to stay liquidation proceedings (even after an order for liquidation is made) (Sections 427 and 447, Insolvency Act).

If a creditor is apprehensive that an insolvent company is in the process of disposing of its assets with the aim of obstructing any judgment or moving the assets out of the court’s jurisdiction, the creditor may apply for an injunction to stop the company from dealing with its assets or to attach the property of the said company (Order 39 Rule 5 and Order 40, Civil Procedure Rules).

However, where insolvency proceedings have been instituted, a moratorium will take effect and prevent any enforcement proceedings against the company. Furthermore, if a company is being liquidated by the court, any attachment against the assets of the company after the commencement of the liquidation is void (Section 430, Insolvency Act).

The Second Schedule of the Insolvency Act sets out the order of priority of claims for companies under liquidation, administration and administrative receiverships as follows:

• First priority claims – the expenses of administration or liquidation.
• Second priority claims (to the extent that they are unpaid), which are:
1. wages and salaries payable to employees during the four months before the commencement of the liquidation;
2. any holiday pay payable to employees on the termination of their employment before, or because of, the commencement of the liquidation;
3. any compensation for redundancy owed to employees that accrues before, or because of, the commencement of the liquidation;
4. amounts deducted by the company from the wages or salaries of employees in order to satisfy other debts (including amounts payable to the Kenya Revenue Authority);
5. any reimbursement or payment provided for, or ordered by, the Employment and Labour Relations Court;
6. amounts that are preferential claims under Section 175(2) and (3) of the Insolvency Act; and
7. all amounts that are by any other written law required to be paid together with all second priority claims.
• Third priority claims – tax obligations incurred by the company under the Income Tax Act and the Customs and Excise Act.

Company Voluntary Arrangement (CVA)

CVAs are an arrangement between insolvent companies and their creditors for the payment of debts. The company’s directors, administrator, or liquidator make a proposal to the company and its creditors for an arrangement of its financial affairs, and the arrangement is supervised by an authorised insolvency practitioner (Section 625, Insolvency Act).

The supervisor, once they have received a copy of the proposal, is required to convene a meeting of the company and its creditors, for the creditors’ vote on the proposal.

The CVA is deemed to have been approved if a majority of the members and creditors of the company present at the meeting (either in person or by proxy) vote in its favour, following which an application is made to court for its approval. If approved by a court (with or without modifications), the CVA takes effect on the day after the date on which it was approved and becomes binding upon all the creditors and the company. The supervisor will then monitor the implementation of the approved CVA (Section 633(1), Insolvency Act).

The same may however be challenged as set out at 6.9. Secured Creditor Liens and Security Arrangements and 6.12. Restructuring or Reorganisation Agreement.

A Scheme of Arrangement (SOA)

An SOA can be used to effect a variety of debt-reduction strategies or insolvent restructurings, such as debt for equity swaps. When a majority (ie, 75%) of the creditors or class of creditors, or members or class of members, present and voting either in person or by proxy at the meeting have agreed to a proposed SOA, then the company may present the SOA to the court (Section 926, CA 2015).

A Pre-insolvency Moratorium

CVAs and SOAs are not accompanied by an automatic moratorium. A company may thus apply to court for a moratorium to facilitate an organised restructuring by protecting the company from being liquidated, resolutions being passed, or meetings being convened without consent of provisional supervisors. A moratorium lasts for a period of 30 days and may be extended in accordance with Sections 645 (3) and 669 of the Insolvency Act.

As stated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, a company that has opted for a CVA or SOA does not benefit from an automatic moratorium. However, it may apply for a moratorium to facilitate the re-structuring process.

While a company under a CVA or SOA continues trading as normal, a supervisor works with the directors to manage the company and ensure compliance with the CVA or SOA.

The terms of the CVA or SOA determine the ability of a company to obtain credit facilities. However, the company may not obtain credit facilities exceeding KES25,000 (approximately USD165), without informing the lending institution and/or person of the existence of the moratorium or its effect (Section 654, Insolvency Act).

The main role of creditors regarding CVAs and SOAs is to vote on the various proposals for restructuring the debts of the insolvent company. While there is no check-list provided under the Insolvency Act, the creditors have a duty to assess all the relevant and necessary information with regard to the CVA or SOA to enable them to make an informed choice.

As stated at 6.1 Statutory Process for a Financial Restructuring/Reorganisation, a CVA is binding on all the creditors of a company. In equal measure, once an SOA is approved by majority of the creditors, an application is made to court to approve it. Once so approved, it becomes binding on all the creditors and the company.

Neither the Insolvency Act nor the CA 2015 contain provisions to guide the trading of claims. However, subject to approval from the supervisor of the CVA (if such a trade occurs after the CVA has been adopted), it is likely that a creditor may be able to sell its claim to a third party. In the case of an SOA, it is likely that this approval will have to come directly from the company, as the SOA envisages a contractual re-structuring between a company and its creditors.

In Kenya, every company in a corporate group is recognised as a separate legal entity, and its debt is separate and distinct from other group companies. By parity of reasoning, a “blanket restructuring” technique cannot be employed. There is, however, nothing which prevents a party from structuring a CVA or SOA in a manner that impacts the larger corporate group.

Any restrictions on a company’s dealings with its assets are determined by the terms of the CVA or SOA.

However, where a moratorium is in place, a company can only dispose of assets if there are reasonable grounds to believe that the disposal will benefit the company, and doing so has been approved by the moratorium committee or the provisional supervisor (Section 655(1), Insolvency Act).

Additionally, a company may dispose of assets notwithstanding a moratorium if the disposal is within the ordinary course of business or pursuant to a court order. If the assets are secured, the consent of the secured creditor or the court is required prior to any disposal.

Execution of the Sale of Assets or the Business

Directors of the company retain managerial control during the pendency of a CVA or SOA, and therefore oversee the sale of assets or the business during a restructuring process. Where a company is under administration or liquidation, however, the process of sale is driven by the administrator or liquidator.

Good Title

Good title passes to the purchaser of the assets of a company that is undergoing a restructuring process provided that the assets sold are not charged, and if charged, providing the sale was pre-approved by the secured creditor or the court.

Creditors Bids

Barring any restrictions within the specific restructuring plan being implemented by the company, neither the Insolvency Act nor the Companies Act prevent creditors from bidding on assets being sold under a CVA or SOA. However, the company (or supervisor of the restructuring arrangement) should ensure that a report is obtained from an independent valuer, confirming that the assets are being sold at a fair market value.

Pre-negotiation Agreements

It is possible to give effect to a pre-negotiated transaction through a re-structuring process. For instance, creditors in a CVA may vote in favour of a pre-pack administration, whereby the company formalises a sale of its assets to a buyer before appointing an administrator over the affairs of the company to facilitate the sale.

A CVA will not be approved if it affects a secured creditor’s rights to enforce its security, unless the secured creditor consents to it.

Where a secured creditor does not consent, the CVA should ensure that the secured creditor:

• will not be in a worse a position than if the company was liquidated;
• receives no less from the assets to which the creditor’s security relates than any other secured creditor having a security interest in those assets that has the same priority as the subject creditor’s; and
• will be paid in full from the assets secured, before any payment from the assets or the proceeds from their sale is made to any other creditor whose security interest in them is ranked below that of the secured creditor, or who has no security interest in them (Section 628(6), Insolvency Act).

Under an SOA, the rights of a secured creditor to enforce its security are guided by the terms of the proposal submitted to court for approval. Where the SOA affects the rights of a secured creditor, the proposal must explain how these rights shall be protected (Section 924(3), CA 2015).

Financially distressed entities commonly seek cash injections, especially where their business structure is viable but suffering from poor trading conditions.

Where the money is in form of an injection of debt by new or existing lenders, it may be secured against assets which are already held as security, for instance through a further charge executed over the same assets. However, new lenders must obtain consent from existing chargees prior to registration of a subsequent security.

Where two or more secured creditors hold competing rights over the same security, Section 535 of the Insolvency Act, read in conjunction with Section 38 of the MPSRA, dictates that priority is determined as per the time of registration.

To participate in a restructuring process, a creditor must submit a proof of debt in the prescribed form and within the time prescribed by either the company or the supervisor.

A CVA must be approved by a court for it to be binding on the company and its creditors (Section 629 and 630, Insolvency Act).

However, a creditor, member, provisional supervisor, administrator, or liquidator may challenge a CVA on the basis that it detrimentally affects the interests of a creditor, member or contributory, or where a meeting irregularity has occurred at or in relation to either of the meetings held to discuss the proposal (Section 631(2), Insolvency Act).

Once the court is satisfied that the CVA has met any of the grounds for the institution of such an application, it may:

• revoke or suspend any decision approving the CVA, or revoke or suspend any decision taken at the meeting being challenged; or
• direct the supervisor to convene a further meeting to consider a revised proposal or may direct the company or creditors to convene to reconsider the original proposal (Section 631(5), Insolvency Act).

The CA 2015 does not explicitly provide for factors which could result in a challenge to a proposed SOA; however, the court’s decision to approve an SOA is discretionary (Section 926(1), CA 2015).

Neither the Insolvency Act nor the CA 2015 prohibit the release of non-debtor parties from their liabilities, provided that such a release of liability forms part of the proposed CVA or SOA and is voted upon. This approval is ordinarily provided by secured creditors who hold third-party charges or guarantees.

Neither the CA 2015 nor the Insolvency Act refers to a statutory right of set-off in a consensual restructuring. That being said, there is nothing which precludes parties from incorporating such a right within the terms of the CVA or SOA, provided that the requisite number of creditors agree to include such a provision.

As stated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, the implementation of a CVA is overseen by a supervisor who is tasked with monitoring compliance by the company with the CVA’s terms.

When the terms of the CVA are not complied with, the supervisor must report back to court and file a Certificate of Failure, at which point the CVA ends prematurely and ceases to have an effect (Section 635, Insolvency Act).

In contrast, a failure by the company to comply with the terms of an SOA amounts to a breach of contract, and the affected creditors may pursue the company for a claim in breach of contract.

No provision in the Insolvency Act or Companies Act addresses whether existing equity owners may receive or retain their ownership interest. However, the terms of a CVA or SOA may affect a change in equity ownership of a company, in which case the rights and obligations of existing equity owners will also be subject to the terms of the restructuring.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations Insolvencies and Receivership, 5.5 Priority Claims in Restructuring and Insolvency Proceedings, 9.1 Statutory Roles, Rights and Responsibilities of Officers and 10.1 Duties of Directors.

Receivers, administrators, and liquidators have the power to sell or otherwise dispose of the assets and the business of a company through either a public auction or private treaty (Clause 8, 3rd Schedule and Clause 2, 4th Schedule, Insolvency Act).

Where real property is sold by public auction, it is governed by the provisions of the Auctioneers Act, 1996 and the Land Act, 2012.

An administrator’s power of sale includes property subject to a floating charge (Section 587, Insolvency Act). However, where the security is not in the form of a floating charge, the property may only be sold pursuant to a court order, based on evidence that the sale promotes the purpose of the administration. The court will determine the net amount that would be realised from sale of the property at market value, and the net proceeds of the disposal together with any additional money required to be added to the net proceeds must be used to discharge the amounts secured by the security (Section 588, Insolvency Act). The court may also permit the administrator to dispose of goods in possession of the company pursuant to a credit purchase transaction. Provided that the requisite statutory or contractual procedure was followed, the purchaser of these assets acquires good title.

The Insolvency Act does not provide for stalking horse bids. However, the administrator must act in the interest of the creditors as a whole and a preference afforded to a creditor may therefore be challenged (Section 522, Insolvency Act). However, the administrator may take any action that contributes to the effective and efficient management of the affairs and property of the company, including effecting pre-negotiated sale (Section 580(1), Insolvency Act).

Creditors’ committees are normally established during the creditors’ meeting during administration, liquidation, and bankruptcies.

In administrations, the creditors’ committee monitors the implementation of the administrator’s proposal and protects the interests of the creditors (Section 574, Insolvency Act).

During liquidation, the liquidation committee protects the interests of the creditors, save when the official receiver is appointed as the liquidator.

For bankruptcies, a committee may assist the bankruptcy trustee to manage the bankrupt’s property and shall have the power to approve and/or ratify the actions of the bankruptcy trustee, thus justifying the trustee’s expenses. The committee is entitled to renumeration as approved by court.

When restructuring, a creditors’ committee may summon an administrator to justify the performance of their functions and the administration process, provided a seven-day notice for the same is issued (Regulation 114, Insolvency Regulation).

Kenya recognises foreign insolvency proceedings pursuant to Section 720 of the Insolvency Act, which recognises the United Nations Commission on International Trade Law (the “Model Law on Cross–Border Insolvency”) as having the force of law in Kenya in the form set out in the 5th Schedule of the insolvency Act. The 5th Schedule corresponds to the Model Law on Cross-Border Insolvency. However, certain modifications have been made to the Model Law in its application to Kenya (see Clause 1, 5th Schedule, Insolvency Act and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] eKLR).

Clause 3 of the Fifth Schedule of the Insolvency Act states that Kenya may assist in relation to foreign insolvency proceedings when:

• assistance is sought in Kenya by a foreign court or representative in connection with foreign proceedings;
• assistance is sought in a foreign state in connection with insolvency proceedings in Kenya;
• a foreign proceeding and Kenyan proceeding in respect of the same debtor are taking place concurrently; or
• creditors or interested persons in a foreign state request participation or commencement of a Kenyan insolvency proceeding.

However, Kenyan courts may decline to take action that is manifestly contrary to Kenyan public policy (Clause 8, 5th Schedule, Insolvency Act).

One of the primary objectives of Kenya’s insolvency framework is promotion of co-operation between courts and other competent authorities with foreign states (Clause 2(a) & 27(1), 5th Schedule, Insolvency Act and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] eKLR).

The Insolvency Act defines “co-operation” as “appointment of a person or body to act at the direction of the Court, communication of information by any means considered appropriate by the court, co-ordination of the administration and supervision of the debtor’s assets and financial affairs, approval or implementation by courts of agreements concerning the co-ordination of proceedings, and co-ordination of concurrent proceedings regarding the same debtor”.

Therefore, courts and insolvency practitioners are entitled to communicate and/or liaise with foreign courts or representatives.

Where the 5th Schedule of the Insolvency Act conflicts with Kenya’s obligation under any treaty or other agreement to which it is a party with one or more other states, the provisions of the treaty or agreement prevail (Clause 5, 5th Schedule, Insolvency Act).

In addition, as mentioned in 8.1 Recognition or Relief in Connection with Overseas Proceedings, Kenyan courts may decline to take action that is contrary to public policy.

Like creditors based in Kenya, foreign creditors may commence and participate in Kenyan insolvency proceedings. This does not affect the ranking of claims or the exclusion of foreign tax and social security claims from the distribution (Clause 15, 5th Schedule, Insolvency Act).

Kenyan courts recognise foreign judgements/rulings upon an application to court by a foreign representative, being a body or person authorised in a foreign proceeding to administer the reorganisation or liquidation of the debtor’s assets or financial affairs or to act as a representative in the foreign proceeding (Clause 17(1), 5th Schedule, Insolvency Act).

The application for recognition shall be accompanied by:

• a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative;
• a certificate from the foreign court affirming the existence of the foreign proceeding and the appointment of the foreign representative; or
• in the absence of evidence of the decision and the certificate from the foreign court, any other evidence acceptable to the court of the existence of the foreign proceeding and the appointment of the foreign representative (Clause 17(2), Fifth Schedule, Insolvency Act).

Kenyan courts may reject an application for recognition if it is not accompanied by the required documents and a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative (Clause 17(3), Fifth Schedule, Insolvency Act and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] eKLR). Kenyan courts may also decline recognition if the foreign proceedings are contrary to Kenyan public policy (see Re HP Gauff Ingeniure GMBH & Company KG–JBG [2021] eKLR).

Recognition of foreign proceedings by Kenyan courts has the effect of staying or suspending the commencement or continuation of individual actions or proceedings on the debtor’s assets, rights, or liabilities; staying execution against the debtor’s assets; and stopping a debtor’s right to transfer, encumber or otherwise dispose of any of its assets.

Administrative Receiver

An administrative receiver/receiver and manager (“the Receiver”) is appointed by the holder of a debenture created before the promulgation of the Insolvency Act (Section 690, Insolvency Act). The Receiver is appointed by a secured creditor (debenture holder) to collect and/or sell the assets secured with the aim of paying up the monies the creditor is owed. The Receiver is not an officer of the court but is an agent of both the debenture holder and the company. As such, the Receiver operates without court supervision (see Surya Holdings Limited & 2 others v CFC Stanbic Bank Limited [2015] eKLR). Administrative receiverships are governed by the provisions of the Repealed Companies Act Cap 486.

Administrators

Administrators are appointed by either by the directors, the company itself, the court, or the holder of a floating charge.

On an application by either the company, its directors or its creditors, the court may issue an administration order if satisfied that the objectives of administration may be achieved. Such an application may also be made by the liquidator of a company, and if allowed, the administrator’s appointment is rendered effective, while the liquidation order is discharged (Section 557, Insolvency Act). In the case of the holder of a floating charge, an administrator’s appointment will take effect upon notification of the appointment of the administrator to the court.

Upon being appointed, directors cannot perform managerial functions without the consent of the administrator and may be required to furnish the administrator with the company’s statement of affairs.

The Insolvency Act requires all administrators to be insolvency practitioners. Therefore, administrators must be natural persons who meet the necessary academic qualifications and have been licensed by the Office of the Official Receiver (Section 6, Insolvency Act and Regulations 11 and 12, Insolvency Regulations).

Liquidators

Liquidators are appointed when a company is being placed under liquidation by the members, the creditors, or the court, upon an application by either the official receiver, creditors, contributories, members, or by the administrators or provisional liquidators of the company (Sections 382, 408, 16, 425 and 439, Insolvency Act). As with an administrator, a liquidator must be an insolvency practitioner, who is a natural person with a licence and the requisite academic qualifications.

Supervisors

Supervisors are appointed by the directors to oversee the implementation of CVAs. Once a proposed CVA is approved, the provisional supervisor who had been appointed by the directors of the company becomes the supervisor on approval by the creditors or members, or the CVA proposal may be modified such that the creditors propose the replacement of the provisional supervisor with another insolvency practitioner (Section 628, Insolvency Act).

During CVA’s, the directors retain their managerial role but perform their duties under the supervision of the supervisor and can only dispose of the assets of the company with the approval of the supervisor and when the disposal is in the best interest of the company. The directors may obtain a moratorium on behalf of the company (Sections 643, 644, 656 and 657, Insolvency Act).

Supervisors must be insolvency practitioners, hence can only be natural persons who have the requisite academic qualifications and have been licensed by the Office of the Official Receiver.

Bankruptcy Trustee

A bankruptcy trustee is appointed during bankruptcy proceedings by creditors, the court, or the official receiver, and the appointment takes effect either upon acceptance or at the time stated in the deed of appointment (Section 59, Insolvency Act).

A bankruptcy trustee may be removed either by the court or by the resolution passed at the creditors’ meeting. When the Official Receiver is the bankruptcy trustee, they may be removed by the court, on the request of a creditor and the support of a quarter of the creditors of the bankrupt. One of the grounds for the removal of a bankruptcy trustee is if they cease to be insolvency practitioners (Section 75, Insolvency Act).

The Office of the Official Receiver

The Official Receiver is a statutory office established under the Insolvency Act and the Insolvency Regulations. The office has the mandate to ensure that the Insolvency Act and Regulations are implemented; license and supervise insolvency practitioners; oversee administration and liquidation of insolvent companies; manage the affairs of a bankrupt’s estate through a bankruptcy trustee; and investigate the conduct of any offences under the Insolvency Act.

The Insolvency Act has also created the office of an administrative receiver (see above), who is also an insolvency practitioner, and whose mandate is to act as a receiver or manager of the whole (or substantially the whole) of the company’s property, appointed by or on behalf of the holders of any debentures created before the coming into force of the Insolvency Act (Section 690, Insolvency Act).

The Official Receiver

As set out in 9.1 Types of Statutory Officers, the mandate of the Official Receiver includes the licensing and supervision of insolvency practitioners, administration and supervision of bankruptcy of natural persons, administration and liquidation of companies, the implementation of the provisions of the Insolvency Act and Regulations, and the investigation of offences under the Insolvency Act.

Other duties of the Official Receiver include:

• investigating the conduct of any person or company subject to the Insolvency Act;
• making applications to court for liquidation in respect of a company that is in voluntary liquidation;
• acting as a provisional liquidator in respect of a company upon appointment by the court; and
• acting as a liquidator, and in this capacity convening creditor’s meetings and appointing other persons to act as liquidator.

Administrator

The duties of an administrator are read from the objectives of administration set out in Section 522 of the Insolvency Act and include:

• maintaining the company as a going concern;
• achieving a better outcome for the company’s creditors; and
• realising the property of the company in order to make a distribution to one or more secured or preferential creditors.

In performing these duties, the administrator is an agent of the company and therefore owes a fiduciary duty to the company (Section 586, Insolvency Act). Administrators are officers of the court and perform their duties under court supervision, unlike receivers who are not officers of the court as they are appointed under debentures (See I & M Bank Limited v ABC Bank Limited & another [2021] eKLR).

A CVA Supervisor/Provisional CVA Supervisor

The provisional CVA supervisor has the duty to oversee the procedure by which a CVA proposal is created and voted upon. The provisional supervisor prepares a report to the court on the feasibility of the proposed CVA, then convenes a creditors’ meeting where a vote is taken on whether the CVA should be accepted.

The provisional supervisor may challenge approved an CVA on the basis that it detrimentally affects the interests of a creditor, member or contributory, or where a material irregularity occurred at/in relation to the creditors meeting occurred.

Once a CVA proposal is voted upon by majority of the creditors and approved by court, the provisional supervisor becomes the CVA supervisor, who then:

• implements the CVA;
• makes applications challenging decisions related to the CVA where it detrimentally affects the interests of a creditor, member or contributory, or where a meeting irregularity occurred at/in relation to the creditors meeting;
• applies to court for directions relating to the CVA; and
• reports the conduct of delinquent directors to the relevant authorities (Sections 633, 631, 633(4), 633(5), 634, Insolvency Act).

Liquidator/Provisional Liquidator

The general duties and powers of a liquidator under the Insolvency Act include the power (i) to sell the company’s property by public auction or private treaty; (ii) to do all acts and execute these in the company’s name; and (iii) to prove and claim in an insolvency on behalf of the company. Once appointed, the directors of a company cease to perform their duties and manage the company, with these functions being done by the liquidator.

A liquidator has additional powers, including the power to:

• convene a creditors’ meeting;
• bring/defend any action on behalf of the company and carry on the business of the company;
• bring/defend any action on behalf of the company and carry on the business of the company; and
• settle a list of contributories, making calls, convening general meetings of the company, paying the company’s debts, especially in instances where a company is under voluntary liquidation.

Bankruptcy Trustee

A bankruptcy trustee has the power to sell the property of the bankrupt, discharge the bankrupt’s debts and give receipts for the same, inform creditors on the steps that have been taken in the bankruptcy process, as well as proving and claiming any debts owed to the bankrupt. A bankruptcy trustee may carry on the business of the bankrupt and bring/defend legal proceedings related to the bankrupt’s property, once the requisite approvals have been given.

See 9.1 Statutory Roles, Rights and Responsibilities of Officers.

Directors have a general duty to act in the best interest of creditors once a company is insolvent. In Re Ukwala Supermarket Limited [2019] eKLR the court held that directors must act in the best interests of the company, but once the company approaches insolvency, their first duty must be to the creditors. If it is established that the company cannot pay its debts when they fall due, a director should take steps to protect creditors, and in the absence of a viable solution, the company may initiate insolvency proceedings (see also In the Matter of Midas Oil Limited [2020] eKLR).

When a company goes into insolvent liquidation, Sections 506(3) and Section 506(5) of the Insolvency Act provide that a liquidator may apply to court for an order that a director/officer be held liable as a contributory if it appears that the director/officer knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation (see 2.3 Obligation to Commence Formal Insolvency Proceedings).

Once a company becomes insolvent, the directors owe no continuing duty to the members. How-ever, where a company enters into a CVA, the directors are under an obligation to come up with a proposal, appoint a supervisor, and maintain oversight over the process. The directors should also provide the supervisor with any information necessary to enable the easy implementation of the CVA for the benefit the company.

Where directors of a company have committed an offence under the Insolvency Act, the court may order the director to repay, restore, or account for the money or property or any part of it, with interest at such rate as the court considers appropriate; contribute such amount to the company’s assets as compensation for the misfeasance, breach of fiduciary or other duty as the court considers fair and reasonable; or may even disqualify the individual from holding a managerial or directorship position for up to 15 years.

When a company is under receivership, the directors take a backseat with regard to their managerial duties but will still have the obligation to prepare a statement of the affairs of the company which be handed over to the receiver. The directors also retain their duty to prepare the company’s audited accounts, together with the receiver.

A liquidator may file an application in court against the directors of a company for false trading, asking that the directors of a company contribute to the assets of an insolvent company, when a company continues to trade whilst it is insolvent and the directors of the company being aware of this or having expected to have come to the conclusion that there was no reasonable prospect that the company would avoid going into insolvent liquidation, still continue trading (section 505 and 506 of the Insolvency Act). By allowing for the fraudulent trading of a company, the directors breach their fiduciary duties to the members and creditors of a company.

The court may set aside historical transactions that:

• are at an undervalue;
• gave preference to the company’s creditors or a guarantor;
• involved the insolvent company being a party to provision of a credit facility by another company; and
• relate to floating charges created during the relevant time/look-back period in favour of a person connected with the company or entered into in favour of other persons 12 months after the onset of insolvency or two years immediately preceding the insolvency (Section 687 of the Insolvency Act).

As set out in Section 682 to 686 of the Insolvency Act, the look-back period depends on “relevant time” specific to each transaction which means:

• two years immediately preceding the onset of insolvency;
• the time between the making of an administration application in respect of the company and the making of an administration order on the application; or
• the time between lodgement with the court of a copy of notice of intention to appoint an administrator by the holder of a floating charge and the making of the appointment.

In contrast, the look-back period for extortionate credit transactions for companies in administration or under liquidation is three years before the insolvency proceedings commenced.

Under the Insolvency Act, only the relevant officer holder (ie, the administrator, liquidator/ provisional liquidator and official receiver) has the authority to make applications to court to set aside/annul historical transactions (Sections 677 and 680 of the Insolvency Act). The definition of relevant office holder presumes that the application would be made within an insolvency. The Insolvency Act is however silent on whether creditors may fund the relevant office holder to make the said application.