Insolvency 2021

Last Updated November 23, 2021

Kenya

Law and Practice

Authors



Oraro & Company Advocates is a full-service, market-leading African law firm established in 1977 and a full Affiliate Member of AB & David Africa, located in Nairobi, Kenya. Working closely with the larger Disputes Practice, the firm’s Insolvency practice is comprised of three partners and a team of associates, with their experience encompassing the full spectrum of contentious and non-contentious matters. Notably, the team is acting in a case concerning the insolvency of a manufacturer of edible salts (directors/shareholders) versus a Kenyan commercial bank in liquidation and receivership. The case also involves a challenge to the receivership and recovery of monies valued at USD3.5 million. The non-contentious aspects involved employment law and advising the “receiver/administrative receiver” with regard to the discharge of their duties under the law, drafting agreements for them to bring about relief for the creditors and the company in receivership.

In Kenya, the Office of the Official Receiver publishes insolvency statistics annually. For instance, between July 2020 and June 2021, there were 40 Petitions for involuntary liquidation; five companies were placed under voluntary liquidation, and six companies were placed under administration.

With the onset of COVID-19, there are some businesses and sectors which have been more adversely affected than others, for instance – tourism, airline carriers, restaurants, and real estate.

There is expected to be an increase in insolvency activity in the coming financial year as companies begin to feel the impact of COVID-19 on their operations, leading to defaults in loan repayments and situations of financial distress, particularly because the Central Bank of Kenya has lifted the emergency measures effected in March 2020 to protect borrowers from COVID-19.

The Insolvency Act, No 18 of 2015 (the "IA 2015"), read in conjunction with the Insolvency Regulations 2016 (the "Regulations"), consolidates the law relating to bankruptcy of natural persons and insolvency of incorporated and unincorporated bodies. It provides for inter alia the liquidation of incorporated and unincorporated bodies, and alternatives to liquidation which allow insolvent entitles to be administered for the benefit of creditors.

The Kenya Deposit Insurance Act, No 10 of 2021 (the "KDI Act") governs receivership and liquidation of deposit-taking institutions (such as banks) and provides for a deposit insurance system. The KDI Act must be read in conjunction with the Banking Act, Cap. 488, the Central Bank of Kenya Act, Cap 491 (the "CBK Act") or the Capital Markets Act, Cap 458A (the "CMA Act"), depending on the subject financial institution.

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

Administration

Administration is aimed at achieving a better outcome for the company’s creditors than would be the case if the company were liquidated without first going into administration; to maintain the company as a going concern; and to realise the property of the company to make a distribution to one or more secured or preferential creditors (Section 522 of the IA 2015).

Administration commences with the appointment of an administrator (who must be a qualified insolvency practitioner) by either the company, its directors, the court, or the holder of a qualifying floating charge (Sections 523 and 521 of the IA 2015). Once appointed, the administrator is considered an agent of the company and officer of the court (Section 586 of the IA 2015). However, an administrator cannot be appointed over a company in liquidation by reason of a resolution for voluntary liquidation or a liquidation order (Section 528 of the IA 2015), a company already in administration (Section 527 of the IA 2015), and a bank or insurance company (Section 529 of the IA 2015). In addition, once an administration order is made, an application for liquidation of the company may not be made, and any subsisting application stands suspended (Section 558 of the IA 2015).

Once the administration procedure commences, a moratorium takes effect. As such, proceedings and execution against the company are stopped and creditors may only exercise their rights against the company with the consent of the court or administrator (Section 560 of the IA 2015).

The administrator is required to make a proposal to the company’s creditors and members on how they intend to achieve the purpose of the administration. The proposal may be in form of a voluntary arrangement or a compromise (Section 566 of the IA 2015) and should be accompanied by an invitation to a creditors’ meeting to consider and vote on the proposal (Section 568 of the IA 2015). However, the meeting need not be convened if the proposal states 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 IA 2015).

Advantages of administration include:

  • the administrator owes their duty to the creditors as a whole and not to a single creditor;
  • the statutory moratorium precludes the institution or continuation of claims against the company, therefore ensuring an efficient and value-laden process;
  • administration is less costly than liquidation; and
  • the possibility that the business may be saved, in whole or in part, by sale to a third party.

Conversely, administration often leads to the liquidation of the company, at which point it may not be possible to sell the business. In addition, administration has the potential to be lengthy and costly.

Administrative Receivership

This remedy is available to the holder of a debenture created before the coming into force of the IA 2015 (Section 690 of the IA 2015).

Holders of a qualifying floating charge are precluded from appointing an administrative receiver (Section 690(2) of the IA 2015).

Company Voluntary Arrangements

A Company Voluntary Arrangement (CVA) is a scheme where the directors of the company, or the dully appointed administrator or liquidator, propose a plan to settle the company’s debts. If approved, the company continues trading on a more flexible repayment schedule (see Re Uchumi Supermarkets PLC [2020] eKLR).

A CVA is usually supervised by an insolvency practitioner who is selected by the directors. (Section 625 of the IA 2015).

Liquidation

Liquidation entails collecting and realising a company’s assets to distribute the same to the creditors in order of priority ranking. In the event of any surplus, distribution is made to the company’s members.

Liquidation can be either compulsory, which is supervised by the High Court, or voluntary, which is instigated by the members or creditors of the company (Section 381 of the IA 2015).

Voluntary liquidation

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 of the IA 2015).

Before passing a resolution for voluntary liquidation, the company is required to give a notice of the resolution to the holder of any qualifying floating charge in respect of the company’s property.

Upon commencement of voluntary liquidation, the company ceases to carry on its business, except in so far as may be necessary for its beneficial liquidation. 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.

A liquidation which is accompanied by a directors’ statutory declaration is a "members voluntary liquidation", but in the absence of such a declaration, it is a "creditors voluntary liquidation".

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.

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, following an inspection into the affairs of the company.

Compromises, Arrangements, Reconstructions and Amalgamations

Section 922 of the CA 2015 provides for rescue procedures which enable a company in financial distress to initiate negotiations with its creditors with a view to obtaining a favourable outcome for all concerned parties. This is often referred to as "corporate restructuring", and may be commenced by a company, its directors, members, creditors, or insolvency practitioners. However, it takes effect once approved by the court and/or stakeholders.

Corporate restructuring has no defined parameters; it may include reorganisation of a company’s shares, amalgamation of two or more companies, or general compromises with the creditors.

There is no express provision in the laws of Kenya which makes it mandatory for a company to commence formal insolvency proceedings. However, directors may be required to contribute to the assets of an insolvent company where they have engaged in wrongful trading (Section 506 of the IA 2015). This occurs when a company has gone into insolvent liquidation, and at some point prior to this, the director of the company knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.

However, this threshold is high, and 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 (Section 506(6) of the IA 2015). This was the holding of the High Court in Unispan Limited v African Gas & Oil Limited [2014] eKLR wherein it held that liability will only be imposed where the continued trading was not in the ordinary course of trade and negatively affected the company’s business.

Secured and unsecured creditors alike may commence involuntary insolvency proceedings where they are owed a debt. However, this is only after the company is served with a 21-day statutory demand which is not honoured, pursuant to Section 17(3)(a) of the IA 2015. More specifically:

  • a creditor can apply to Court for an administration order, which order will be granted if the company is, or is likely to become, unable to pay its debts, and if the administration order is reasonably likely to achieve the objectives of administration (Sections 531 and 532 of the IA 2015);
  • the holder of a qualifying floating charge may appoint an administrator in respect of the company’s property. The appointment takes effect when the relevant documentation is lodged with court, including the administrator’s deed of appointment (Sections 534 and 537 of the IA 2015); and
  • a creditor may petition the court for the liquidation of a company, and the court will grant the liquidation order if inter alia the company is unable to pay its debts, and the court thinks it is just and equitable to liquidate the company (Sections 424 and 425 of the IA 2015).

The term ‘insolvency’ is not defined under the IA 2015. However, a company is deemed to be unable to pay its debts when:

  • a creditor to whom the company is indebted for KES100,000 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 (Section 384 of the IA 2015).

In addition, a company’s members may also voluntarily liquidate a solvent company. In this case, a declaration of solvency must be filed with the Registrar of Companies which states that the directors have made an enquiry into the affairs of the company and are of the opinion that it will be able to pay its debts within a period not exceeding 12 months. If no declaration of solvency is made, the liquidation proceeds as a creditors' voluntary liquidation even if the company eventually pays its debts in full.

Banks and Financial Institutions

The insolvency regime for all banking and financial institutions which are regulated by the Central Bank of Kenya is the KDI Act.

The Act provides for the administration and liquidation of deposit-taking institutions, the factors which lead to the decision to place such institutions in administration or liquidation, as well as the duties of the administrator or liquidator of such institutions, which in this case is the Kenya Insurance Corporation.

Insurance Companies

Insolvency proceedings for insurance companies or undertakings are governed by the Insurance Act, read in conjunction with the IA 2015 and CA 2015. Voluntary liquidation is not an option for insurance companies, despite the provisions of Part VI of the IA 2015.

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 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 IA 2015, an insurance company is taken to be unable to pay its debt if at any time the insurer does not maintain the capital adequacy ratio of 100% and/or maintain separate capital adequacy ratios.

Entities Operating in the Financial Market

The insolvency of entities operating in the financial markets is primarily governed by the CMA Act and the relevant Regulations made thereunder. Section 33E of the CMA Act allows the Capital Markets Authority, if it appears to it that it is desirable for the protection of clients or investors, to present a petition for the licensed person to be wound up or institute winding up proceedings under the relevant instrument on the ground that it is just and equitable that the licensed person should be wound up.

However, not all companies regulated by the CMA Act are liquidated in a similar fashion. For instance, the process for liquidating central depositories is different, being governed by the Central Depositories Act. For these companies, the default process under the Central Depositories Act supersedes the Insolvency Act.

Preference for Consensual Restructuring

The choice to engage in a restructuring is largely case-specific and determined by a range of factors, including the number of secured creditors, the amount(s) that can reasonably be recovered by a forced sale of assets and the viability of keeping the business as a going concern.

Secured creditors who opt for consensual re-structuring tend to be guided by the fact that the process is both shorter and cheaper. For example, statutory power of sale by a secured creditor under a debenture is likely give rise to applications for injunctions (either from the debtor company or from secured creditors who fear that the sale will leave them with no recourse). Secured creditors are generally also apprehensive to appoint administrators due to the high costs associated with an administration, which will in turn reduce the amount recoverable.

Bank Support

Banks are generally supportive of large borrowers experiencing financial difficulties, particularly when dealing with "legacy borrowers" who are long-standing customers with no history of default. Borrowers who can demonstrate an ability and willingness to repay facilities will often be given time to re-structure their affairs through moratoriums, a freeze on interest repayments, and the bank not exercising its statutory power of sale unless as a last resort.

More recently, in March 2020, the Central Bank of Kenya also announced emergency measures for borrowers to mitigate against the adverse economic effects of COVID-19, including allowing banks to restructure loan facilities for up to one year for loans that were performing as of 2 March 2020.

Insolvency Regime vis-à-vis Consensual Restructuring

The IA 2015 brought with it a "borrower-sensitive" regime, making consensual restructuring a more attractive option than would have been the case under the repealed Companies Act.

For instance, the office of a receiver has been abolished and replaced with an administrator who, unlike a receiver, must cater for the interests of all the creditors of a company (both secured and unsecured). In addition, a secured creditor seeking to exercise its statutory power of sale may be constrained to issue a total of five statutory notices, totalling a minimum relief period for distressed borrowers of up to 280 days, rendering such a course of action tedious.

However, there is no requirement for parties to engage in re-structuring negotiations before commencing formal insolvency proceedings.

Standstill Agreements (SSAs)

While not provided for under the IA 2015, this has not stopped insolvent entities and secured lenders from using SSAs in a bid to keep the company operating as a going concern.

For instance, in Synergy Industrial Credit Limited v Multiple Hauliers (EA) Limited [2020] eKLR, the Company faced with a liquidation petition sought to have the same struck out on the basis of a SSA with its lenders, which was geared at restructuring its operations and managing cash flow, working capital and liquidity requirements. Agreeing with the company, the court adjourned the hearing of the liquidation petition for a period of 12 months to allow the SSA to take effect.

Obligations of Debtor Company

There are no formal obligations on debtor companies engaged in a re-structuring. That being said, the company is expected to ensure that no steps are taken which would place it in a less favourable trading position. For instance, if parties have opted for a pre-pack administration, the assets of the company are not to be dealt with and/or disposed of in a manner that would jeopardise a pre-negotiated sale.

Creditor Steering Committees

A creditors committee is formed during the creditors meeting called by the administrator for purposes of seeking approval of the statement of proposals. The creditors ordinarily use this opportunity to form a creditors committee to represent their interests, the principal of which is to ensure that the statement of proposals represents and caters for the interests of unsecured creditors (Regulation 113 of the Insolvency Regulations 2018 and Section 574 of the IA 2015).

A creditors committee can require the administrator to appear before them at a seven-day notice and provide the committee with such information about the performance of the administrator’s functions as the committee reasonably requires (Section 574(3) of the IA 2015).

See 6.10 Priority New Money.

In dealing with an insolvent company, secured creditors must factor in the interests of the company, other secured creditors and to an extent, third parties. A secured creditor exercising its statutory power of sale owes a duty of care to the borrower, any guarantor of the sums advanced, and any secured creditor under a subsequent charge or under a lien, to obtain the best price reasonable at the time of the sale. This involves undertaking a valuation to ensure that the charged property is not sold at a value which is 75% or below the market value at which comparable interests in land of the same character and quality are being sold in the open market (Section 97 of the Land Act).

However, while a secured creditor has an obligation towards other secured creditors, this obligation does not extend to unsecured creditors. To the contrary, courts have variously held that the rights of secured creditors take preference to, and cannot be hindered by, the rights of unsecured creditors.

A consensual restructuring is not binding on dissenting creditors. However, the Kenyan insolvency regime permits a cram-down of dissenting creditors provided the requisite votes in support of the restructuring arrangement are attained. In particular:

  • a company voluntary arrangement (CVA) binds every member or creditor of the company (including secured and preferential creditors) who would have been entitled to vote at the meeting of the company where the proposal was tabled; and
  • a scheme of arrangement (SOA) will be sanctioned by court and become binding on all creditors where a majority in number, representing 75% in value of the creditors voting, agree to the SOA.

In both these situations, therefore, dissenting creditors will be crammed down (and forced to accept the terms of the CVA or SOA) provided that there are enough creditors voting in support of the arrangement. (See 6.1 Statutory Process for a Financial Restructuring/Reorganisation and 6.4 Claims of Dissenting Creditors for further details on CVAs and SOAs).

The main types of security taken by secured creditors in Kenya are debentures, mortgages and the assignment of contract receivables.

Debentures

Debentures can be sub-categorised into the following.

  • Fixed debenture – the loan advanced to a creditor is secured with a legal and registrable charge over the borrower’s fixed (immovable) assets, or alternatively the assets of a third-party guarantor.
  • Floating debenture – in contrast to a fixed debenture, this is security over a defined class of the borrower’s assets. The borrower may freely deal with the secured assets, as the debenture does not crystalise until the occurrence of a defined trigger event, such as the appointment of a receiver.
  • Fixed and floating debenture – this is the most preferable form of security and involves a combination of the above two, namely, a legal charge over the borrower’s fixed assets, as well as a floating security over the borrower’s movable assets.

Mortgages

Like in most jurisdictions, this entails a loan being advanced to the borrower in exchange for the borrower transferring title to the property to the creditor, to hold as security in the event of default. Title is transferred back to the borrower when the loan (plus any interest thereon) is fully repaid.

Assignment of Contract Receivables

This is security in form of a contract and/or deed and entails the borrower assigning all or a portion of its receivables under a particular contract to the creditor, in exchange for a loan from the creditor.

Rights of Secured Creditors to Enforce Security outside the Insolvency Context

The rights of a secured creditor to enforce its security are not subject to insolvency proceedings commenced against the company by any other creditor. In addition, barring procedural non-compliance with mandatory statutory provisions or a challenge to the validity of the registered charge that confers priority rights, an unsecured creditor, administrator or liquidator cannot intervene in the exercise of a secured creditor’s rights against secured property (see East Africa Cables PLC v Ecobank Kenya Limited & Another [2020] eKLR and Re High Plast Limited [2019] eKLR).

Intercreditor Covenants

Though not statutory, it is common for creditors who hold securities over the same asset to enter into inter-creditor or inter-lender agreements. These agreements coordinate the recovery actions which can be taken by the lenders, and may determine how funds recovered from enforcement of a shared security are to be distributed.

However it must be noted that pursuant to Section 81 of the Land Act, 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 creditor’s charge will rank in priority in case of default and the second creditor will only be able to enforce their charge on the property after the first creditor has received all monies owing to them.

Power of a Secured Creditor to Block Insolvency Process

As stated above, secured creditors cannot block an insolvency process except where there is procedural non-compliance with mandatory statutory provisions. However, pursuant to Section 447 of the IA 2015, a creditor may make an application to the Court to stay ongoing liquidation proceedings. The court may grant this application upon satisfactory proof that the proceedings ought to be stayed, either permanently or for a specific period (see Dankar Rambhai Patel v United Engineering Supplies Ltd & Another [2020] eKLR).

Creditors also have the power to remove a liquidator under section 468 and 469, IA 2015, which would disrupt 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

As stated, the default position is that the rights of a secured creditor to enforce its security are not subject to insolvency proceedings commenced against the company by any other creditor.

However, there are situations where the exercise of these rights must be preceded by court approval. For instance, while a company is under administration, a person must seek the approval of the court before taking steps to enforce security over the company’s property (see Section 560 of the IA 2015 and Hoggers Limited (In Administration) v John Lee Halamandres & 11 Others [2021] eKLR).

Save that secured creditors rank in priority when there is a distribution in a liquidation, secured creditors are not offered any special protections in insolvency and restructuring proceedings.

However, 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 (see Section 560A of the IA 2015).

Secured creditors rank in priority over both preferential and unsecured creditors where there is a distribution of assets (see 5.3 Rights and Remedies for Unsecured Creditors). In addition, as stated above, secured creditors can exercise their recovery options independent of ongoing insolvency proceedings.

Where two or more secured creditors hold competing rights over the same security, Section 535 of the IA 2015 read with Section 38 of the Movable Property Security Rights Act dictates that the priority of the collateral will be determined by the time of registration. Therefore, barring an inter-lenders agreement, secured creditors will enforce their rights in accordance with priority of registration.

Therefore, the charge registered first ranks in priority in the event of default, and the charge registered second in time is only enforceable after the first creditor has received all monies owing to them (see I&M Bank Limited v ABC Bank Limited & Another [2021] eKLR).

The success of recovery by unsecured trade creditors is dependent on the insolvency proceedings opted for. For instance, unsecured trade creditors have largely had more success when a CVA is opted for, as opposed to administration or liquidation, where their debt will automatically be subordinate to a secured creditor.

However, it is mandatory for the liquidator, administrator, or provisional liquidator to make available 20% of the company’s net assets for the satisfaction of unsecured debts during a liquidation process (see Section 474 of the IA 2015 and Regulation 96(1) of the Insolvency Regulations 2016).

Save for the fact that the debts owed to secured creditors will rank in priority to those owed to unsecured creditors, secured and unsecured creditors 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), a right to vote on the administrator’s proposal, among others.

Unsecured creditors may also disrupt, stay or defer a liquidation process using the provisions of the Insolvency Act. In particular, the following.

  • Prior to the making of a liquidation order, an unsecured creditor may participate at the hearing of a liquidation petition. In the event that the said creditor successfully opposes the petition, then Section 427 of the IA 2015 allows the court to dismiss application for a liquidation order; adjourn the hearing of the petition either conditionally or unconditionally; or make other order that, in the court’s opinion, the circumstances of the case require.
  • After the making of a liquidation order, pursuant to Section 447 of the IA 2015, an unsecured creditor may move the court with an application to stay liquidation proceedings, even after an order for liquidation is made. If the unsecured creditor proves to the satisfaction of the court that the proceedings ought to be stayed, then the court may make an order staying the proceedings either permanently or for a specified period of time, on such terms as the court considers appropriate.

A creditor who is apprehensive that the company will be unable to satisfy a judgment or decree issued in its favour may apply to court for an injunction to stop the company from dealing with its assets pending the hearing and determination of the claim. However, 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 (see Section 430 of the IA 2015).

The Second Schedule to the Insolvency Act 2015 sets out the priority of claims in an insolvency as either first, second or third priority claims.

The claims which take first priority are the expenses of administration or liquidation.

The following debts have second priority to the extent that they remain unpaid:

  • wages and salaries payable to employees during the four months before the commencement of the liquidation;
  • any holiday pay payable to employees on the termination of their employment before, or because of, the commencement of the liquidation;
  • any compensation for redundancy owed to employees that accrues before, or because of, the commencement of the liquidation;
  • 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);
  • any reimbursement or payment provided for, or ordered by, the Employment and Labour Relations Court;
  • amounts that are preferential claims under Section 175(2) and (3) of the IA 2015; and
  • all amounts that are by any other written law required to be paid together with all second priority claims.

After the first and second priority claims are paid, the third priority claims relate to the tax obligations incurred by the company under the Income Tax Act as well as the Customs and Excise Act.

Company Voluntary Arrangement (CVA)

As stated in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, CVAs are a mechanism which allow the company to come to an arrangement with its creditors as regards payment of its debts. The directors of the company (or the company’s administrator or liquidator) make a proposal to the company and its creditors for an arrangement pursuant to which the company arranges its financial affairs, and the arrangement is supervised by an authorised insolvency practitioner (Section 625(1) of the IA 2015 and Section 625(3) of the IA 2015).

Upon receipt of the proposal from the directors of the company, the Supervisor convenes a meeting of the company and its creditors to decide whether to approve the proposal or modify it prior to approval (Section 627(2) and 628(1) of the IA 2015). When voting on the proposal, the creditors are divided into three separate groups, namely – secured, preferential and unsecured creditors (Section 628(3) of the IA 2015).

A CVA is deemed to have been approved if majority of the members and creditors of the company present at the meeting (either in person or by proxy) vote in its favour (Section 629(2) of the IA 2015), following which an application is made to Court for its approval. If approved by the Court (with or without modifications), the CVA takes effect on the day after the date on which it was so approved (Section 630(1) of the IA 2015). Once so approved, the Supervisor becomes responsible for implementing the CVA in the interests of the company and its creditors and monitoring compliance by the company with the terms of the arrangement (Section 633(1) of the IA 2015). 

A Scheme of Arrangement (SOA)

This re-structuring mechanism is available to companies under Part XXXIV, CA 2015. A SOA can be used to effect a variety of debt-reduction strategies or insolvent restructurings, such as debt for equity swaps. For instance, in Equity Bank Kenya Limited v Kenya Airways PLC & 11 others [2017] eKLR, the Court of Appeal was concerned with a SOA through which Kenya Airways PLC was seeking to secure additional capital that would allow it to continue operating as a going concern.

A company may present a SOA to the Court for sanction if a majority in number (representing 75% in value) 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 convened in accordance with Section 923 of the CA 2015, have agreed to the proposed SOA (Section 926 of the CA 2015). An application for such a meeting to be convened may be made by the company, a creditor, a member, or the liquidator or administrator of the company (as is appropriate in the circumstances) (Section 923 of the CA 2015).

A Pre-insolvency Moratorium

While neither a COA nor a SOA are accompanied by an automatic moratorium, the company may apply for the same to facilitate an organised re-structuring. To obtain a moratorium, the directors of the company shall lodge with the Court the documents prescribed under Section 644 of the IA 2015.

A moratorium is important as it provides the company with certain protections as per Section 649 of the IA 2015, including protection from:

  • applications for liquidation of the company;
  • meetings being convened without the consent of the provisional supervisor or the approval of the court;
  • resolutions and/or
  • court orders for the liquidation of the company taking effect and applications for appointment of an administrator. 

The moratorium period typically lasts 30 days (Section 645(3) of the IA 2015), unless it is extended in accordance with Section 669 of the IA 2015.

As stated in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, there is no automatic moratorium or stay of claims for a company opting for either a CVA or SOA. However, the company may apply for a moratorium to facilitate the re-structuring process and avoid litigation in the process of re-organising its financial affairs.

When engaged in a CVA or SOA the company will continue trading and should maintain normal operations. However, while the Directors normally retain their role of managing the company, they are likely to work alongside an authorised insolvency practitioner (the supervisor) who will ensure compliance with the CVA or SOA.

In addition, the ability of a company to obtain credit facilities is likely to be determined by the terms of the CVA or SOA itself. In situations where a company opts for a complementary moratorium, however, the company may not obtain credit facilities exceeding KES25,000 without informing the lending institution and/or person that a moratorium has effect in respect of the company (Section 654 of the IA 2015).

Both CVAs and SOAs are largely "creditor-driven" processes as the proposals are voted on by creditors prior to being lodged with the court. In these situations, creditors are classified into three groups according to the preference of their debt, namely – secured, preferential, and unsecured creditors (Section 628(3) of the IA 2015).

The proposed CVA or SOA is made available to all creditors and members of the company alike before it is put to a vote, and so the creditors will have access to all pertinent information prior to making a decision on the company’s restructuring/reorganisation plan. In addition, while the Insolvency Act does not envisage a creditor committee being formed during a restructuring, it is possible that the same is incorporated into the CVA or SOA as part of the restructuring plan.

A CVA binds every member or creditor of the company (including secured and preferential creditors) who would have been entitled to vote at the meeting of the company where the proposal was tabled, or who would have been so entitled had they received notice of the meeting (Section 630(2) of the IA 2015). However, a secured creditor must approve a CVA if it affects it’s to enforce its security (Section 628(6) of the IA 2015).

Similarly, a SOA will be sanctioned by the court, and hence become binding, where a majority in number representing 75% in value of the creditors or class of creditors, or members or class of members, present and voting either in person or through a proxy agree to the SOA (Section 926 of the CA 2015).

Neither the Insolvency Act nor the Companies Act deals with the trading of claims against a company undergoing a restructuring. However, subject to obtaining the requisite approval from the supervisor of the CVA (if such a "trade" occurs after the CVA has been adopted by the court), it is likely that a creditor may be able to assign or 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 therefore its debt is separate and distinct from any other another company within the corporate group. By analogy, therefore, a "blanket restructuring" technique cannot be employed. There is, however, no statutory bar to preparing a CVA or SOA in a manner that has an impact on the larger corporate group and not just a singular entity.

The restrictions placed on a company’s dealings with its assets will be determined by the terms of the CVA or SOA.

However, a company in respect of which a complementary moratorium has been applied for in aid of the CVA or SOA may only dispose of its property if there are reasonable grounds for believing that the disposal will benefit the company, and the disposal is approved by the moratorium committee or the provisional supervisor, whichever is applicable (Section 655(1) of the IA 2015). This restriction does not apply to a disposal made in the ordinary course of the company’s business, or in accordance with an order of the court (Section 655(2) of the IA 2015).

Where there is a moratorium in effect, a company may dispose of goods which are subject to a security as if they were not subject to the said security, provided that the holder of the security consents or the court gives its approval (Section 657(2) of the IA 2015).

Execution of the Sale of Assets or the Business

The directors of the company retain managerial control during the pendency of a CVA or SOA, and they would therefore oversee the execution of any sale of assets or the business during such a restructuring process.

However, where a company has opted for a complementary moratorium to accompany its CVA or SOA, then the company in respect of which the moratorium has effect may only dispose of its property if it believes that the disposal will benefit the company, or if the disposal is approved by the moratorium committee or provisional supervisor (Section 655(1) of the IA 2015).

Purchaser Acquiring Good Title

A purchaser of property under a restructuring process will acquire good title to the same provided that the property being sold is not charged to a secured creditor, or if so charged, the secured creditor has executed a discharge of charge over the same pursuant to the terms of the CVA or SOA (Section 628(6) of the IA 2015).

Creditors Bidding for Assets 

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

Implementing a Pre-negotiated Transaction

It is possible to give effect to a pre-negotiated transaction over the assets or business of the company through a re-structuring process. For instance, creditors in a CVA may vote in favour of a pre-pack administration process, 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.

Unless the secured creditor consents, a CVA will not be approved if it affects the rights of a secured creditor to enforce its security, see 6.4 Claims of Dissenting Creditors.

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

  • is in no worse a position than if the company was in liquidation;
  • 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
  • would be paid in full from those assets before any payment from them or their proceeds is made to any other creditor whose security interest in them is ranked below that of the creditor, or who has no security interest in them (see Section 628(6) of the IA 2015).

Under an SOA, the rights of a secured creditor will be catered for by the terms of the proposal submitted to the court for approval. However, where the SOA affects the rights of a secured creditor, then the company shall ensure that the proposal includes an explanation for how those rights are going to be accounted for (Section 924(3) of the CA 2015).

It is not uncommon for a financially distressed entity to seek an injection of new money, especially where the business structure and operations are viable but are suffering from poor trading conditions. This money can be made available through either new or existing shareholders purchasing additional shares in the company (an equity injection), or alternatively, new or existing lenders lending further sums to the company (a debt injection) among other means.

Where the money is in form of an injection of debt by new or existing lenders, the same may be secured against assets which are already held as security, for instance through a second or third legal charge executed over the same. However, any new lenders will need to obtain the consent of existing chargee’s prior to registration of a subsequent security. In addition, as stated in 5.1 Differing Rights and Priorities, where there are two or more secured creditors who hold competing rights over the same security, Section 535 of the IA 2015 read in conjunction with Section 38 of the Movable Property Security Rights Act dictates that the priority of the collateral will be deemed according to the time of registration.

To successfully participate in a financial restructuring, a creditor must first establish the debt due and owing to them to the reasonable satisfaction of the company or the supervisor, whichever is appropriate. This is done by submitting a proof of debt in the prescribed form, provided for under the Insolvency Regulations, within the time prescribed by either the company or the supervisor.

CVAs and SOAs are subject to court approval and only become binding when the proposed arrangement or scheme of proposal is lodged with the court (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation).

A CVA may be challenged on the basis that it detrimentally affects the interests of a creditor, member or contributory of the company, or where a meeting irregularity has occurred at or in relation to either of the meetings held to discuss the proposal (Section 631(2), IA 2015). If the court is satisfied that any of these conditions is met, 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) of the IA 2015).

On the other hand, while the Companies Act does not explicitly provide for factors which could result in challenge to a proposed SOA, it must be noted that the decision to approve a SOA is a largely discretionary power provided to the court pursuant to Section 926(1) of the CA 2015.

No provision in the Insolvency Act or the Companies Act prohibits 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 Companies Act nor the Insolvency Act makes reference 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 supervisor of a CVA is responsible for its implementation and is also tasked with monitoring compliance by the company with its terms. Where the company concerned does not comply with the terms of a CVA, the supervisor will report this fact back to the court and file a Certificate of Failure.

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

There is no provision for this in the Insolvency Act or Companies Act. However, a change in equity ownership of a company may be directly affected by the terms of the particular CVA or SOA 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.

Administrators and liquidators have the power to sell or otherwise dispose of the property of the company by public auction or private treaty (Clause 8, 3rd Schedule and Clause 2, 4th Schedule of the IA 2015). In the case of public auction, the sale is governed by the provisions of the Auctioneers Act, 1996 and the Land Act, 2012 in the case of real property.

An administrator’s power of sale includes property subject to a floating charge (Section 587 of the IA 2015). However, where the security over the property is not in the nature of a floating charge, the property may only be sold pursuant to a court order, based on evidence that the sale would promote the purpose of the administration. In addition, 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 of the IA 2015). The court may also permit the administrator to dispose of goods in possession of the company pursuant to a credit purchase transaction.

Whilst the Insolvency Act does not provide for stalking horse bids, the administrator is bound to act in the interest of the creditors as a whole (Section 522 of the IA 2015). Therefore, preference afforded to a specific creditor may be challenged. However, the administrator may take any action that contributes to, or is likely to contribute to, the effective and efficient management of the affairs and property of the company, including effecting pre-negotiated sale (Section 580(1) of the IA 2015).

Creditor committees may be established by the general meeting of creditors in the following instances:

  • bankruptcies – except where the official receiver is the bankruptcy trustee (Section 102 of the IA 2015);
  • liquidations (liquidation committees) – except in instances where the official receiver is the liquidator; and
  • administrations (Section 574 of the IA 2015).

In bankruptcies, the creditors may appoint a committee of persons to assist the bankruptcy trustee in the administration of the bankrupt's estate. The members of this committee are entitled to receive remuneration from the bankrupt's estate only if it the remuneration is approved by the court (Section 100 of the IA 2015). This committee has the power to approve certain acts of the bankruptcy trustee, such as appointing the bankrupt person to superintend the management of the estate and carry on the bankrupt’s business (Section 63 of the IA 2015), and ratify the bankruptcy trustee’s acts to enable them meet the bankruptcy trustee’s expenses.

As stated in 3.2 Consensual Restructuring and Workout Processes, a creditors committee formed in an administration can require the administrator to appear before them at a seven-day notice and provide the committee with such information about the performance of the administrator’s functions as the committee reasonably requires (Section 574(3) of the IA 2015). The committee may also make an application to court for replacement of the administrator.

Kenya recognises foreign insolvency proceedings pursuant to Section 720 of the IA 2015, which section of the law recognises the United Nations Commission on International Trade Law (Model Law on Cross – Border Insolvency) as having the force of law in Kenya in the form set out in the 5th Schedule, IA 2015. The 5th Schedule generally 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, IA 2015 and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] eKLR).

These provisions apply to assistance sought in Kenya by a foreign court or representative in connection with foreign proceedings; assistance sought in a foreign state in connection with insolvency proceedings in Kenya;  a foreign proceeding and Kenyan proceeding in respect of the same debtor taking place concurrently; or in instances where creditors or interested persons in a foreign state have an interest in requesting participation or commencement of a Kenyan insolvency proceeding (Clause 3, 5th Schedule of the IA 2015).

The above notwithstanding, Kenyan courts may decline to take action that is manifestly contrary to Kenyan public policy. Before declining to take action, however, the courts may consider whether to hear the Attorney General on the question of public policy (Clause 8, 5th Schedule of the IA 2015).

One of the primary objectives of Kenya’s law on cross-border insolvency is promotion of co-operation between the courts and other competent authorities of Kenya and foreign states (Clause 2(a) & 27(1), 5th Schedule of the IA 2015 and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] eKLR).

The IA 2015 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.

To this end, both the court and an insolvency practitioner are entitled to communicate with, or to request information or assistance from, foreign courts or representatives.

Where the provisions of the 5th Schedule of the Insolvency Act conflict with Kenya’s obligation under any treaty or other form of agreement to which it is a party with one or more other States, the provisions of the treaty or agreement would prevail (Clause 5, 5th Schedule of the IA 2015).

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

The rights of foreign creditors are comparable to those of creditors in Kenya as regards the commencement of and participation in Kenyan insolvency proceedings. However, 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 of the IA 2015).

Kenyan courts recognise foreign judgements and rulings made against a debtor upon an application to the court by a foreign representative, being a body or person authorised in a foreign proceeding to administer the re-organisation 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 of the IA 2015).

The application for recognition must 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 of the appointment of the foreign representative (Clause 17(2), 5th Schedule of the IA 2015).

The court may reject an application for recognition if it is not accompanied by the required documents and by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative (Clause 17(3), 5th Schedule of the IA 2015 and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] eKLR). The Court may also decline to recognise foreign proceedings if they are manifestly contrary to public policy of Kenya (see Re HP Gauff Ingeniure GMBH & Company KG–JBG [2021] eKLR).

Recognition of foreign proceedings stays or suspends the commencement or continuation of individual actions or proceedings concerning the debtor’s assets, rights, or liabilities; execution against the debtor’s assets; and the right to transfer, encumber or otherwise dispose of any assets of the debtor (Clause 22, 5th Schedule of the IA 2015). In addition, if necessary to protect the assets of the debtor or the interest of the creditors, the court may even entrust the administration or realisation of all or part of the debtor’s assets located in Kenya to the foreign representative or other person designated by the court (Clause 23, 5th Schedule of the IA 2015).

The foreign representative must notify the debtor that the application has been recognised as soon as practicable following the recognition (Clause 19(4), 5th Schedule of the IA 2015). Upon recognition, the foreign representative has standing to initiate any action that may be taken in respect of a Kenyan insolvency proceeding relating to a transaction, security, or voidable charge (Clause 23, 5th Schedule of the IA 2015).

The Office of the Official Receiver (the "official receiver") is a statutory office and department under the Office of the Attorney General & Department of Justice that deals with licensing and supervision of insolvency practitioners, the administration and supervision of the bankruptcy of natural persons, and the administration and liquidation of companies.

Statutory officers authorised by the official receiver are referred to as authorised Insolvency Practitioners (Section 9 of the IA 2015). In relation to natural persons, authorised insolvency practitioners include:

  • bankruptcy trustees or interim trustees, in respect of the person’s property or as permanent or interim trustee in the sequestration of the person's estate;
  • trustees under a deed, in respect of a deed of composition made for the benefit of the person's creditors, or a trust deed for the creditors of the person; or
  • supervisors, in respect of an ordinary procedure voluntary arrangement (the court may also appoint a Provisional Supervisor) (Section 306(6) of the IA 2015).

In relation to a company, authorised Insolvency Practitioners include:

  • liquidators, provisional liquidators, or administrators;
  • supervisors of voluntary arrangements approved under administration or under a CVA (prior to the company’s proposal taking effect as a voluntary arrangement, the supervisor is referred to as a "provisional supervisor") (Section 624(4) and 630(3) of the IA 2015).

The Insolvency Act has also created the office of an administrative receiver, who is 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 of the IA 2015).

The Official Receiver

The mandate of the official receiver includes licensing and supervision of insolvency practitioners, administration and supervision of bankruptcy of natural persons and administration and liquidation of companies.

Specific duties of the official receiver include:

  • making applications to court for liquidation in respect of a company that is in voluntary liquidation;
  • investigating the reasons for the failure of a company;
  • looking at the company’s affairs;
  • requesting for public examination of officers of a company;
  • 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 (Sections 426(7), 434, 437, 438 and 439 of the IA 2015).

Administrator

The duties of an administrator are read from the objectives of administration, 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 (Section 522 of the IA 2015 and Re Arvind Engineering Limited [2019] eKLR).

In performing these duties, the administrator is an agent of the company and therefore owes a fiduciary duty to the company (Section 586 of the IA 2015).

The powers of an administrator are set out in the 4th Schedule of the Insolvency Act, and include:

  • the power to take possession of, sell or otherwise dispose of the company’s property;
  • borrow money and offer security for the beneficial realisation of the company’s property;
  • carry on the business of the company;
  • appoint a professional to assist in the administration; bring/defend legal proceedings on behalf of the company; 
  • make payments incidental to or necessary for the administration;
  • rank and claim in insolvency of any person indebted to the company; and
  • establish/transfer subsidiaries of the company (see Mark Properties Limited v Coulson Harney LLP Advocates; Le Mac Management Company Limited & Another (Applicants) [2021] eKLR).

CVA Supervisor/Provisional CVA Supervisor

The provisional CVA supervisor has the duty to prepare a report to the court on the feasibility of the proposal for a voluntary arrangement, convene creditors’ meetings; and make applications challenging decisions related to approved CVAs where the CVA detrimentally affects the interests of a creditor, member or contributory or where a material irregularity occurred at/in relation to the creditors meeting (Sections 626, 627 and 631 of the IA 2015).

When the proposal takes effect as a voluntary arrangement, the provisional supervisor becomes the supervisor of the CVA, unless he/she is replaced (Section 630(3) of the IA 2015).

The CVA supervisor has the duty to:

  • implement the CVA;
  • make 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;
  • apply to court for directions relating to the CVA; and
  • report the conduct of delinquent directors to the relevant authorities (Sections 633, 631, 633(4), 633(5), 634, IA 2015).

Liquidator/Provisional Liquidator 

The duties of a liquidator under the Insolvency Act may be divided into:

  • general powers exercisable without approval, including power to sell the company’s property by public auction or private treaty; do all acts and execute in the company’s name; prove, and claim in an insolvency on behalf of the company and appoint an agent;
  • powers exercisable without approval in voluntary liquidation or with approval of the court, including power to bring/defend any action on behalf of the company and carry on the business of the company;
  • powers exercisable with approval, including power to pay any class of creditors in full, make any compromise/arrangement with creditors and borrow money for the beneficial realisation of the company’s assets;
  • power to convene creditors’ meetings; and
  • if the company is in voluntary liquidation, the power to settle a list of contributories, making calls, convening general meetings of the company, paying the company’s debts (see the 3rd Schedule and Sections 402, 413, 414 & 465(1) of the IA 2015).

Bankruptcy Trustee

The general powers of a bankruptcy trustee include the power to sell any property comprising the bankrupt’s estate, give receipts for money received effectually discharging the bankrupt, and prove/rank/claim in respect of debts owing to the bankrupt.

With approval, the bankruptcy trustee may carry on the business of the bankrupt, bring/defend legal proceedings related to the bankrupt’s property, and accept consideration for the sale of property in the bankrupt’s estate.

In addition, the foregoing officers have an obligation to inform creditors of steps take in the insolvency process (Section 723 of the IA 2015).

Administrators

An administrator may be appointed by the court, holder of a floating charge, the company or the directors. Upon hearing an application for administration, the court shall issue the orders for administration if satisfied that the same are warranted. The appointment takes effect on the specified date, in the absence of which, at the time when the order is issued. An administrator may be removed from office by the court (Sections 523, 533 and 604 of the IA 2015).

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. Administrators may remove a director from office and appoint another person in their place (Sections 577 and 581 of the IA 2015).

Supervisors

When proposing a CVA, the company’s directors shall appoint an insolvency practitioner to be a supervisor. Thereafter, the appointed person shall formulate a report to be filed in court on the proposed scheme and give an opinion on the viability of the plan.

Where a meeting is convened, the creditors shall either approve the appointment of the supervisor or propose his/her replacement with another authorised insolvency practitioner (Sections 625, 626 and 628 of the IA 2015).

Supervisors, in contrast with administrators, confer with the directors on the preparation of documents necessary to obtain a moratorium, and request and obtain information from the directors to enable them to ascertain the financial prospects of the company (Section 643 and 658 of the IA 2015).

Liquidator

A liquidator may be appointed by the members, creditors, court, official receiver, or directors - with the approval of the court. Once appointed, all powers of the directors’ cease (Section 411 of the IA 2015).

A liquidator may be removed from office by an order of the court, or alternatively by the members or creditors where they are the appointing body (Sections 399, 408, 416, 439, 421(1) and 467 of the IA 2015).

It must be noted that a person may only act as a Insolvency Practitioner if authorised by the official receiver, and if the requirements under Section 5 of the IA 2015 are met, including – holding a degree from a university recognised in Kenya; having a minimum of five years' experience as a member of a professional body recognised under Section 7 of the IA 2015; a minimum of two years' experience in insolvency practice before commencement of the Insolvency Act; and working under the apprenticeship of an Insolvency Practitioner for at least four years.

The two professional bodies currently recognised under the Insolvency Act are accountants (members of ICPAK) and advocates (members of Law Society of Kenya).

When a company goes into insolvent liquidation, Section 506(3) as read together with Section 506(5) of the IA 2015 provide that a liquidator may apply to the court for an order that a director/officer be held liable as a contributory if it appears to the liquidator 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 2.5 Requirement for Insolvency for when a company is deemed insolvent and/or unable to pay its debts).

In addition, 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 went further to state 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 responsible director should take steps to protect creditors, and if a solution cannot be found, the company may enter formal insolvency proceedings (see also In the Matter of Midas Oil Limited [2020] eKLR).

Once a company becomes insolvent, the directors owe no continuing duty to the owners. However, 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 any documents that the supervisor may require to enable the easy implementation of the plan as the successful implementation of the programme is to 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.

The court can, upon satisfying itself of a director’s delinquency, on the application of an interested party or on its own motion, direct the liquidator to report the matter to the official receiver. Investigations shall then be commenced against the delinquent officers, and thereafter, upon sufficient proof and satisfaction of criminal liability, may be reported to the Director of Public Prosecution to commence official criminal proceedings (Sections 504, 505, 510 and 511 of the IA 2015). 

The relevant insolvency practitioner has locus standi to make an application to court with regard to breach of fiduciary duty claims against directors. However, for criminal offences, any interested person and the relevant office holder can make an application for the matter to be referred for prosecution (Section 510 and 634 of the IA 2015).

The court may set aside historical transactions which:

  • are at an undervalue;
  • give preference to a person such as the company’s creditors or a guarantor;
  • are extortionate transactions for provision of credit to the 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 (Sections 682, 634, 684, 686 and 687 of the IA 2015).

The look-back period depends on "relevant time" specific to each transaction as defined by the Insolvency Act.

For instance, for transactions at an undervalue, the relevant time is defined to mean:

  • 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 relevant time for extortionate credit transactions is defined to mean three years immediately preceding the date on which the company entered administration or on which a liquidator was appointed in respect of the company (Sections 684 and 686 of the IA 2015).

The Insolvency Act only recognises the relevant officer holder (ie, the administrator, liquidator/provisional liquidator and official receiver) as having authority to make applications to court to set aside/annul historical transactions (Sections 677 and 680 of the IA 2015). The definition of relevant office holder presumes that the application would be within an insolvency. The Insolvency Act is, however, silent on whether creditors may fund the relevant office holder to make the said application.

Oraro & Company Advocates

ACK Garden Annex, 6th floor
1st Ngong Avenue
P.O. Box 51236-00200
Nairobi
Kenya

+254 709 250 000/735

legal@oraro.co.ke www.oraro.co.ke
Author Business Card

Law and Practice

Authors



Oraro & Company Advocates is a full-service, market-leading African law firm established in 1977 and a full Affiliate Member of AB & David Africa, located in Nairobi, Kenya. Working closely with the larger Disputes Practice, the firm’s Insolvency practice is comprised of three partners and a team of associates, with their experience encompassing the full spectrum of contentious and non-contentious matters. Notably, the team is acting in a case concerning the insolvency of a manufacturer of edible salts (directors/shareholders) versus a Kenyan commercial bank in liquidation and receivership. The case also involves a challenge to the receivership and recovery of monies valued at USD3.5 million. The non-contentious aspects involved employment law and advising the “receiver/administrative receiver” with regard to the discharge of their duties under the law, drafting agreements for them to bring about relief for the creditors and the company in receivership.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.