Financial restructurings, reorganisations, liquidations and insolvencies of business entities and partnerships in Kenya are predominantly governed by the Insolvency Act 2015 (IA). Other specialised statutory regimes include:

• the Companies Act 2015 (CA), on compromises, arrangements, reconstructions and amalgamations of companies and directors’ duties during these financial processes;
• the Capital Markets Act, on the restructuring and reorganisation of publicly traded companies;
• the Kenya Deposit Insurance Act (Cap 487C);
• the Banking Act (Chapter 488); and
• the Central Bank of Kenya Act (Chapter 491), on the administration, receivership and liquidation of banking, finance and insurance companies.

Despite being repealed, laws such as the Bankruptcy Act, Section 89 of the Law of Succession and the Companies Act (repealed) continue to apply to any past event or steps that preceded the coming into effect of the relevant parts of the IA.

Restructuring, reorganisation and insolvency proceedings may be either voluntary (commenced by the company or directors) or involuntary (instigated by a regulator or creditors), depending on the company’s financial position, its objectives and applicable laws.

Administration

Administration is primarily a voluntary rescue mechanism initiated by the company or its directors, but may also be involuntary when initiated by a creditor holding a floating charge or by a court. The objectives of an administration include:

• maintaining an insolvent company as a going concern;
• achieving a better outcome for the company’s creditors; and
• realising the property of the company to make a distribution to secured or preferential creditors (Section 522 of the IA).

Administration commences with the appointment of an administrator (who must be a qualified insolvency practitioner – Section 526 of the IA) by either the company, its directors, the court or the holder of a qualifying floating charge.

As it is a rescue mechanism, the commencement of an administration imposes a moratorium such that neither a resolution for liquidation nor a court order for the liquidation may be issued (Section 559 of the IA). Furthermore, any proceedings or executions 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 of the IA).

The administrator is required to make a proposal setting out how they intend to achieve the purposes of the administration, and this proposal 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 (Sections 566 and 567 of the IA) and is subject to a vote during the creditors’ meeting (Section 568of the IA).

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
• the administration’s objectives cannot be achieved (Section 569 of the IA).

Company Voluntary Arrangements (CVAs)

A CVA is generally a voluntary scheme whereby the directors propose a plan to settle the company’s debts or arrange its financial affairs. It may also be proposed by an administrator/liquidator.

The process entails convening a meeting of the company and its creditors, to a vote on the CVA proposal (Sections 625–627 of the IA). A provisional supervisor is appointed to oversee the voting process and will first issue a report setting out the particulars of the debts owed to the creditors (Section 307 of the IA).

If the CVA is approved, the company continues trading on a more flexible repayment schedule. Once approved, the CVA becomes binding upon the creditors and the company (Section 630 of the IA). A CVA is ordinarily supervised by an insolvency practitioner selected by the directors (Section 625 of the IA). The Insolvency Act does not, however, provide for strict timelines within which a CVA should be concluded.

Administrative Receivership

This involuntary financial remedy is available to holders of a debenture predating the coming into force of the Insolvency Act (Section 690 of the IA), to cater for pre-2015 securities. It is the process by which secured creditors appoint a receiver over a company, to realise the secured assets and recover their debt. Having been appointed outside court, the receiver is an agent of the company and maintains a fiduciary relationship with all parties involved.

Once an administrative receiver is appointed, the directors’ powers are suspended save for the duty to prepare audited accounts, call statutory meetings, maintain the share register and lodge returns (see Macharia & another v Kenya Commercial Bank Limited & 2 others [2012] KESC 8 (KLR)).

Liquidation

This is the process by which the assets of a company are realised and distributed amongst its creditors in the order of priority. Any surplus is distributed to the shareholders. The Insolvency Act provides for two types of liquidation procedures:

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

Voluntary liquidation

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

A company may be voluntarily liquidated when:

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

Before passing a resolution for voluntary liquidation, the company must give notice 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 of the IA). The notice will then be published in the Kenya Gazette, a newspaper of nationwide circulation, and on the company’s website.

Upon the 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 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.

Involuntary liquidation

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

• it has resolved by special resolution that it be liquidated;
• it is unable to pay its debts;
• it 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 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 IA).

An application to court for an 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 (Sections 425 and 426 of the IA). The court will hear the application and make a determination to dismiss the application, appoint an interim liquidator, adjourn the hearing of the application 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 resolution was validly passed;
• a liquidation order is issued by the court; or
• an application for a liquidation order is passed (Section 431 of the IA).

Administrative Receiver

An administrative receiver/receiver and manager (“the Receiver”) is appointed by the holder of a debenture predating the Insolvency Act (Section 690) to realise the assets, in order to pay the monies owed to creditors. The Receiver generally remains the agent of the company, but with fiduciary duties on account to the debenture holder (see Surya Holdings Limited & 2 others v Cfc Stanbic Bank Limited [2015] KEHC 2209 (KLR)). Once an administrative receiver is appointed, the directors take a backseat in the management of the company (see Cyperr Enterprises Ltd v Metipso Services Ltd & 2 Others [2011] KEHC 2652 (KLR)).

Administrators

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

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

Once an administrator is appointed, directors cannot perform managerial functions without the consent of the administrator, and may be required to furnish the administrator with the 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 of the IA and Regulations 11 and 12 of the Insolvency Regulations).

Liquidators

Liquidators are appointed when a company is being placed under liquidation by its members, creditors or the court, upon an application by the official receiver, creditors, contributories, members or administrators/provisional liquidators (Sections 382, 408, 16, 425 and 439 of the IA). 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 of the IA).

During CVAs, the directors retain their managerial role but perform their duties under the supervisor’s supervision and can only dispose of the assets with the supervisor’s approval while considering the best interest of the company. The directors may obtain a moratorium on behalf of the company (Sections 643, 644, 656 and 657 of the IA).

Supervisors must be insolvency practitioners, so 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. The appointment takes effect upon acceptance or at the time stated in the deed of appointment (Section 59 of the IA).

A trustee may be removed by the court or a resolution passed at the creditors’ meeting. When the Official Receiver is the trustee, they may be removed by the court, on the request of a creditor supported a quarter of the creditors.

The Official Receiver

The Official Receiver is a statutory office mandated to:

• implement the Insolvency Act;
• license and supervise insolvency practitioners;
• oversee administration and liquidation;
• 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 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).

See 2.2 Priority Claims in Restructuring and Insolvency Proceedings.

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

• First priority – the expenses of administration or liquidation and new money claims for a creditor’s moneys and indemnities issued to protect or preserve the company’s assets.
• Second priority – wages and salaries payable to employees during the four months before the commencement of the liquidation, including:
1. any holiday pay payable to employees on the termination of their employment before, or because of, the commencement of the liquidation;
2. any compensation for redundancy owed to employees that accrues before, or because of, the commencement of the liquidation;
3. 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);
4. any reimbursement or payment provided for, or ordered by, the Employment and Labour Relations Court;
5. amounts that are preferential claims under Section 175(2) and (3) of the IA; and
6. all amounts that are by any other written law required to be paid together with all second priority claims.
• Third priority – tax obligations incurred by the company under the Income Tax Act and the Customs and Excise Act.

These claims are paid before the secured creditors are paid. Thereafter, any remaining amounts are paid out to the unsecured creditors or non-priority creditors, with the exception of the instance of administration, where 20% of the company’s net assets are set aside for the satisfaction of unsecured debts.

Debentures

Debentures are contractual instruments between a lender and borrower, acknowledging the existence of a debt. In Kenya, they may include debenture stock, bonds or any other securities of the company, whether or not constituting a charge on the company’s assets for the advanced facilities. Debentures are categorised into three types:

• floating debentures – these are securities over a group or all of the assets of the company, which crystallise and attach on the assets on the occurrence of a specific event, provided for within the debenture;
• 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, usually preferred by most creditors due to the adequacy of the securities.

Charges

These are instruments pursuant to which a lender is granted a right of sale over an immoveable asset upon a borrower’s default. The title to the asset remains with the borrower, but they cannot deal with the asset without the lender’s consent.

Assignment

Companies may assign rights over immovable property as security for facilities, including but not limited to the assignment of rent.

In addition, companies may use their movable property as security through the Movable Property Security Rights Act, 2017 (MPSR Act), which 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). Under Part II of the MPSR Act, a security right needs to be created and registered with the registrar of companies.

Pre-Judgment Attachments

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

Retention of Title

An unpaid seller in possession of goods sold to an insolvent company may retain possession of such goods until payment or tender of the price (Section 41 of the Sale of Goods Act). Furthermore, an unsecured creditor may exercise lien and ownership over the hire purchase goods until payment of the hire purchase price in full, by way of a hire-purchase agreement (Section 8(1)(e) of the Hire Purchase Act).

Set-Off

See 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation.

Requirement for 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 engage in restructuring negotiations before commencing insolvency proceedings. The borrowers’ and lenders’ rights are ordinarily crystallised in statute and contracts/facility letters. Therefore, any party aggrieved by a breach of the terms of the facilities may seek legal recourse thereunder.

Consensual Restructuring v Insolvency Proceedings

Banks tend to use insolvency proceedings to recover debts, largely due to their financial capability to defend a debtor’s objection to such insolvency proceedings in court. This is not always the case for impecunious creditors, who usually prefer consensual restructuring agreements.

Consensual Restructuring

Creditors prefer this avenue over insolvency proceedings in the belief that it is inexpensive, informal, fast, flexible, less confrontational and confidential.

In Kenya, consensual restructurings include standstill agreements (SSAs). For instance, in Synergy Industrial Credit Limited v Multiple Hauliers (EA) Limited [2020] KEHC 3103 (KLR), the company faced with a liquidation petition sought to have the petition struck out on the basis of an SSA with its lenders, which was geared towards restructuring its operations and managing cash flow, working capital and liquidity requirements. The court adjourned the hearing of the liquidation petition for a period of 12 months to allow the SSA to take effect.

Creditor Steering Committees

The creditors committee is formed for the purpose of ensuring that the creditors’ interests are protected, since all of the creditors cannot personally monitor the process by which the administrator’s proposal is implemented, once the proposal is approved (Regulations 113 and 114 of the Insolvency Regulations and Section 574 of the IA).

Bank and Lender Support

Banks provide a conducive and accommodating environment to borrowers, with opportunities to restructure the facilities. Lenders are known to issue moratoriums, freeze interest on repayments, and restrain enforcement measures.

Out-of-court restructurings in Kenya are contractual in nature and are, therefore, binding only upon the debtor-company and creditors expressly consenting to the restructuring, whether through SSAs, moratoria or negotiated variations of facility terms.

Company Voluntary Arrangement

Please see 1.2 Types of Insolvency for the definition and objectives of CVAs (Section 625 of the IA).

Upon receiving a copy of the proposal, the supervisor must convene a meeting of the company and its creditors, for the creditors to 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 vote in its favour, following which an application is made to court for its approval. If approved by a court, 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 of the IA).

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 creditors; 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 ranking lower in priority (Section 628(6) of the IA).

However, this procedure may be challenged, as set out in 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure and 4.3 The End of the Restructuring, Rehabilitation and Reorganisation Procedure.

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 of the CA).

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) of the CA).

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 liquidation or convening meetings without consent of provisional supervisors. A moratorium lasts for 30 days and may be extended in accordance with Sections 645(3) and 669 of the IA.

Determining the Value of Claims and Creditors

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

Non-Debtor Parties

Neither the IA nor the CA prohibits the release of non-debtor parties from their liabilities, provided that such a release forms part of the proposed CVA or SOA and is voted upon. This approval is ordinarily provided by secured creditors holding third-party charges or guarantees.

Roles of Creditors

Creditors’ main role during CVAs and SOAs is to vote on the various restructuring proposals. While there is no checklist provided under the IA, the creditors have a duty to assess all the relevant and necessary information to make an informed choice.

Claims of Dissenting Creditors

As stated in 4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation, a CVA is binding on all the creditors of a company. Similarly, once an SOA is approved by creditors, an application is made to court to approve it before it can bind all the creditors and the company.

Priority New Money

Companies commonly seek cash injections when their business structure is viable but they are suffering from poor trading conditions. New or existing lenders may inject funds into such companies, secured against its assets by way of further charges, subject to consent from existing chargees. Under Section 535 of the IA and Section 38 of the MPSR Act, priority amongst the chargees shall be determined based on the time of registration.

Timelines and Milestones

The IA and CA do not set out timelines or milestones for concluding CVAs and SOAs, as these agreements are contractually agreed upon by the parties involved.

On the other hand, pre-insolvency moratoriums only lasts for 30 days, although they may be extended in accordance with Sections 645(3) and 669 of the IA.

Arbitration

As set out in 5.2 Course of the Liquidation Procedure, disputes touching on the aspect of insolvency are non-arbitrable in Kenya.

Involvement of Judicial Authorities

A CVA must be approved by a court for it to be binding on the company and its creditors (Sections 629 and 630 of the IA).

Termination of Restructuring Process

A CVA may be terminated through a revocation or suspension order of the court upon a successful application by the creditor, member, provisional supervisor, administrator or liquidator that the CVA detrimentally affects their interests or that a material irregularity occurred at or in relation to either of the meetings held to discuss the proposal (Section 631(2) of the IA).

The CA does not explicitly provide for factors that could result in the challenge or revocation of a proposed SOA. However, the court’s decision approving the arrangement has no effect until the decision is lodged with the Registrar (Section 926(4) of the CA).

Failure to Observe the Terms of the Agreements

As stated in 4.1 Opening of Statutory Restructuring, Rehabilitation and 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 the court and file a Certificate of Failure, at which point the CVA ends prematurely and ceases to have an effect (Section 635 of the IA).

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.

Position of the Debtor and Borrowing/Funding

As stated in 4.1 Opening of Statutory Restructuring, Rehabilitation and 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 restructuring 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 of the IA).

Asset Disposition Process by Companies Under CVAs and SOAs

Directors retain managerial control during the pendency of a CVA or SOA, and therefore oversee the sale of assets or the business. However, where a company is under administration/liquidation, such roles are undertaken by the administrator or liquidator. Good title passes to the purchaser of the company’s assets, provided that the assets are not charged or, if charged, provided that the sale was pre-approved by the secured creditor or court.

Any restrictions on a company’s dealings with its assets are determined by the terms of the CVA. 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 if doing so has been approved by the moratorium committee or the provisional supervisor (Section 655(1) of the IA). In addition, 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.

Task and Powers

Please see 4.1 Opening of Statutory Restructuring, Rehabilitation and Reorganisation regarding the tasks and powers of various parties during CVAs.

Scheme of Arrangement

Restructuring mechanisms are available to companies under Part XXXIV of the CA. 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 of the CA).

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 and protect the company from liquidation, resolutions being made or meetings being convened without the consent of provisional supervisors. Once a moratorium is issued, it lasts for 30 days, and may be extended in accordance with Sections 645(3) and 669 of the IA.

Roles Played by Shareholders in Restructuring and Reorganisation

From the onset, shareholders have a right to information regarding the effect of an arrangement or compromise under Sections 924 and 925 of the CA. They consider and approve proposals for voluntary arrangements or schemes of arrangement during a company meeting. Under Section 629 of the IA, the proposal is deemed approved if it is passed by a majority of shareholders present at the meeting. Similarly, under Section 926 of the CA, the court would sanction a compromise or arrangement if it was voted for by 75% of shareholders or class or shareholders.

Creditors’ Roles in Restructuring and Reorganisation

The main role of creditors is to vote for or against a proposal on how the debts of the insolvent company will be restructured and paid. In doing so, the creditors must assess all the relevant and necessary information with regard to the proposal, to enable them to make an informed choice.

A CVA is binding on all of the creditors of a company just as an SOA, which cannot be disrupted by dissenting creditors once it has been approved by the court.

Trading of Claims Against a Company

Neither the IA nor the CA contains provisions to guide the trading of claims. However, subject to a supervisor’s approval it is likely that a creditor may sell its claim to a third party in a CVA. As for an SOA, approval has to come from the company.

Rights of Set-Off

Neither the CA nor the IA refers to a statutory right of set-off in a consensual restructuring. That being said, there is nothing to preclude 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.

Existing Equity Owners

Neither the IA nor the CA addresses the receipt or retention of an ownership interest by equity owners, presumably because their interests become subordinate to the debt during restructuring. However, the 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 1.2 Types of Insolvency.

Consequences of Voluntary Liquidation

Once a resolution to liquidate a company is passed, liquidation commences and the following consequences follow:

• the company ceases to trade, unless trading will be beneficial for liquidation;
• the company retains its corporate status and powers until dissolved (Section 396 of the IA);
• any alteration of the shares of the company and its membership or shareholding is void (Section 397 of the IA); and
• powers of the directors of the company cease, except for their roles in relation to convening a general meeting or with the sanction of the liquidator (Section 399(2) of the IA).

Consequences of Involuntary Liquidation

Once a liquidation order has been made, the following applies:

• disposition of the assets, the transfer of shares and alteration of the company’s membership are void;
• the execution, distress, attachment or sequestration of the company’s assets is void (Section 430 of the IA);
• legal proceedings against the company can only be commenced and continued with the approval of the court (Section 432(2) of the IA); and
• an automatic moratorium exists.

Roles of Different Office Holders/Actors

The liquidator has the duty of realising all the assets of the company and distributing the proceeds thereof amongst the creditors, with the surplus being distributed to the shareholders. Accordingly, the liquidator will hold a meeting of the creditors of the company, who shall appoint a liquidation committee to represent the creditors’ interests, except where the liquidator is the Official Receiver.

The liquidation committee will oversee the liquidation process, ensuring the creditors’ interests are protected. The committee has power to approve the liquidator’s exercise of powers set out under Parts I and II of the Third Schedule of the IA.

Referral of Insolvency Disputes to Arbitration

In Kenya, matters on insolvency cannot be referred to arbitration (see Big Cold Kenya Limited v Afro-American Food Company Limited [2022] KEHC 9930 (KLR)). Only the Commercial Division of the High Court of Kenya handles insolvency matters (Section 2 of the IA).

Effect of Liquidation on Pre-Insolvency Contracts

The IA does not provide for the effect of liquidation procedures on existing contracts. Arguably, such contracts remain valid unless they expressly provide that they stand terminated by virtue of liquidation. However, parties to such contracts are precluded from enforcing them without the leave of the court or liquidator due to the imposed moratorium.

Once all the assets of the company have been collected and realised, they are distributed as per the Second Schedule of the IA. Thereafter, the liquidator must convene a final general meeting of the creditors, after sending relevant notices. At the final meeting, the liquidator must present their report, showing the manner of distribution to the creditors.

The creditors will consider the accounts and the liquidator’s explanation and resolve on the company’s dissolution. Within seven days after the final general meeting, the liquidator must lodge a copy of the accounts and returns with the Registrar of Companies, together with a return giving details of the creditors’ holding at the meeting.

Creditors’ Powers to Disrupt, Block or Frustrate the Liquidation Process

Secured creditors (especially those predating the IA) may frustrate insolvency proceedings by enforcing against the secured assets without necessarily submitting to the insolvency proceedings.

Creditors can disrupt the liquidation process by removing a liquidator under Sections 468 and 469 of the IA (see Prideinn Hotels & Investments Limited v Tropicana Hotels Limited [2018] KECA 651 (KLR)).

Furthermore, creditors may disrupt the liquidation process by opposing a liquidation petition, resulting in its dismissal or adjournment on grounds of non-compliance with mandatory statutory provisions, or by filing an application to stay liquidation proceedings (Sections 427 and 447 of the IA) (see Dankar Rambhai Patel v United Engineering Supplies Ltd & another [2020] KEHC 9365 (KLR)).

Stay or Deferral of Enforcement

There is an automatic stay during liquidation, restraining any further court proceedings or enforcement, to protect the company’s assets. However, the rights of a secured creditor to enforce its security are not subject to liquidation proceedings and can be exercised with court approval (see Sections 560 and 560A of the IA). The court may lift the moratorium if it is established that a secured creditor is not protected from the diminution in value of the encumbered asset (Section 560A).

Permissibility of Non-Debtor Releases

See 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure.

Kenya recognises foreign insolvency proceedings pursuant to the provisions of Section 720 of the IA, which recognises the United Nations Commission on International Trade Law’s Model Law on Cross–Border Insolvency (the UNCITRAL Model Law) as having the force of law in Kenya in the corresponding form set out in the Fifth Schedule of the IA (see Clause 1, Fifth Schedule of the IA and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] KEHC 1610 (KLR)).

Under Clause 18(3) of the Fifth Schedule of the IA, the debtor’s centre of main interest is presumed to be their registered office in the instance of a corporate body or their usual residence in the case of a natural person, unless otherwise proven.

Kenya follows the universalist approach, which provides for a stay of all insolvency proceedings in Kenya, to allow the foreign representative to collect and realise the assets of the insolvent company. Laws of the company’s centre of main interest are used, but these laws may be rejected if they are contrary to public policy in Kenya.

Kenyan courts recognise foreign judgments and rulings made against a debtor upon an application by a foreign representative who is 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 (Clauses 13 and 17(1), Fifth Schedule of the IA).

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 of the existence of the foreign proceeding and of the appointment of the foreign representative that is acceptable to the court (Clause 17(2), Fifth Schedule of the IA).

Kenyan courts may reject an application for recognition if it is not accompanied by the required documents ( see Clause 17(3), Fifth Schedule of the IA and Re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] KEHC 1610 (KLR)).

One of the primary objectives of Kenya’s insolvency framework is to promote co-operation between courts and other competent authorities with foreign states (Clauses 2(a) and 27(1), Fifth Schedule of the IA).

The IA defines “co-operation” as the “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”.

The rights of foreign creditors are comparable to those of creditors in Kenya as regards the commencement of and participation in Kenyan 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, Fifth Schedule of the IA).

Directors have a general duty to act in the best interest of creditors once a company is insolvent (see Re Ukwala Supermarket Limited [2019] KEHC 7877 (KLR) and In the matter of Midas Oil Limited [2020] KEHC 585 (KLR)).

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, to be handed over to the receiver. The directors also retain the duty to:

• prepare the company’s audited accounts;
• audit those accounts;
• call the statutory meetings of shareholders;
• maintain the share register; and
• lodge returns with the receiver (see Macharia & another v Kenya Commercial Bank Limited & 2 others [2012] KESC 8 (KLR)).

When a company goes into insolvent liquidation, a liquidator may apply to the 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 (Sections 506(3) and 506(5) of the IA).

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;
• order the director to contribute such amount to the company’s assets as compensation for the misfeasance or breach of fiduciary or other duty as the court considers fair and reasonable; or
• even disqualify the individual from holding a managerial or directorship position for up to 15 years.

Upon satisfying itself of a director’s delinquency, the court can 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).

In such instances, the corporate veil will be lifted. Any director found to be liable for such delinquency shall be personally liable and may be imprisoned for a term not exceeding ten years or pay a fine not exceeding KES10 million (Section 1002 of the CA).

Official Receiver

The mandate of the Official Receiver (see 1.3 Statutory Officers) includes:

• the licensing and supervision of insolvency practitioners;
• the administration and supervision of the bankruptcy of natural persons and the administration and liquidation of companies;
• the implementation of the provisions of the IA and Regulations; and
• the investigation of offences under the IA.

Other duties of the Official Receiver include:

• investigating the conduct of any person or company subject to the IA;
• 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 creditors’ meetings and appointing other persons to act as liquidator.

Section 705 of the IA excludes the Official Receiver from any liability arising out of civil proceedings in the exercise of their powers and functions, if done in good faith and in accordance with the law.

Administrator

The duties of an administrator follows from the objectives of the administration (see 1.2 Types of Insolvency).

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). Furthermore, administrators are officers of the court as they perform their duties under its supervision, unlike receivers who are not officers of the court as they are appointed under debentures and are rarely supervised by courts (see I & M Bank Limited v ABC Bank Limited & another [2021] KEHC 12977 (KLR)).

The Fourth Schedule of the Insolvency Act sets out the powers of an administrator, which include:

• taking possession of, selling or otherwise disposing of the company’s property;
• borrowing money and offering security for the beneficial realisation of the company’s property;
• carrying on the business of the company;
• appointing a professional to assist in the administration;
• bringing/defending legal proceedings on behalf of the company;
• making payments incidental to or necessary for the administration;
• ranking and claiming in insolvency of any person indebted to the company; and
• establishing/transferring subsidiaries of the company (see Mark Properties Limited v Coulson Harney LLP Advocates; Le Mac Management Company Limited & another (Applicants) [2021] KEHC 13272 (KLR)).

An administrator may be personally and criminally liable if the following occurs, without reasonable justification:

• they fail to send a notice of their appointment to the company, publish a notice of this appointment, request the company’s statement of affairs, or register their notice of appointment at the Registrar of Companies within seven days of such appointment (Section 563 of the IA);
• they fail to prepare a statement setting out the proposal to achieve the aims of the administration within 60 days of the company being placed under administration (Section 566 of the IA);
• they fail to convene the initial or subsequent creditors’ meeting, even when requested to do so by the creditors or the court, when exceptions for convening the meeting have not been met (Sections 569, 571 and 573 of the IA);
• they fail to report the outcome of the initial creditors’ meeting to the court and lodge a copy of the report with the Registrar of Companies (Section 570(3), (4) and (5) of the IA);
• they distribute the assets of the company to an unsecured creditor, without the approval of the court (Section 582(4) of the IA);
• they fail to lodge a copy of a court order allowing them to sell charged assets or credits subject to a credit purchase agreement, with the Registrar of Companies, within 14 days of such order being made (Sections 588(6) and 589(5) of the IA);
• they fail to lodge a notice of the extension of their term as administrator with the Registrar of Companies within reasonable time (Section 594(9) and (10) of the IA); or
• upon lodging a notice of the termination of the administration with the court, they fail to lodge said notice with the Registrar of Companies within seven days (Section 596(6) of the IA).

CVA Supervisor/Provisional CVA Supervisor

The provisional CVA supervisor oversees the procedure by which a CVA proposal is created and voted upon. The supervisor must prepare a report to the court on the feasibility of the proposed CVA, then convene a creditors’ meeting, where a vote shall be made on whether the CVA should be accepted. The supervisor may challenge approved CVAs by making an application to the court if 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. Once a CVA proposal is voted for by a majority of the creditors, it is approved by the court and takes effect. The provisional CVA supervisor becomes the CVA supervisor, with 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 631, 633, 633(4), 633(5) and 634 of the IA).

Supervisors also aid in implementing voluntary arrangements entered into in relation to bankruptcy proceedings (Part IV, Division 1 of the IA).

A supervisor may be held liable if they:

• fail to appear before the Official Receiver within seven days of receiving a notice from the Official Receiver, requesting certain information and documents of a bankrupt’s estate (Section 330(2) of the IA); or
• fail to send a notice of summary instalment order to the creditors of a bankrupt entity (Section 336(2) of the IA).

Liquidator/Provisional Liquidator

The general duties and powers of a liquidator under the Insolvency Act include the 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.

Once an agent is appointed, the directors of a company cease to perform their duties and manage the company.

However, a liquidator also has other 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, which is exercisable without approval in voluntary liquidation or with the approval of the court; and
• settle a list of contributories, make calls, convene general meetings of the company and pay the company’s debts, especially in instances where a company is under voluntary liquidation.

A liquidator may be held personally and criminally liable if the following occurs, without reasonable justification:

• they fail to publish a notice of the liquidation of the company in the Kenya Gazette and two newspapers, and on the company’s website (Sections 394 and 417 of the IA);
• they fail to convene a general meeting of the company, should the liquidation period exceed 12 months (Sections 401, 413 and 489 of the IA);
• they fail to convene the final general meeting once the liquidation of the company’s affairs is complete, or lodge a copy of the returns and accounts with the Registrar of Companies within seven days of the final general meeting (Sections 402 and 414 of the IA);
• they form the opinion that a company that has been voluntarily liquidated is unable to repay its debts and fail to convene a meeting of the creditors, or to send out to the creditors and publish notices of said meeting, or to prepare a statement of the company’s affairs (Section 404 of the IA);
• they fail to give prior notice to the liquidation committee prior to selling the company’s assets to a person connected to the company (Section 462(6) and (7) of the IA); or
• they fail to lodge a copy of the notice with the Registrar of Companies within seven days of giving notice to the court that they have vacated the office (Section 468(10) of the IA).

Bankruptcy Trustee

A bankruptcy trustee has the powers to:

• sell the property of the bankrupt;
• discharge the bankrupt’s debts and give receipts therefor;
• inform creditors of the steps that have been taken in the bankruptcy process; and
• prove and claim any debts owed to the bankrupt.

Furthermore, 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.

A bankruptcy trustee may be held personally and criminally liable if, without reasonable justification, they

fail to lodge an order allowing them to dispose of assets that are the subject of a security with the Official Registrar, within 14 days (Section 227(6) of the IA).

See 7.2 Personal Liability of Directors.

Transactions That Can Be Set Aside

Under Sections 682, 683, 686 and 687 of the IA, an administrator or a liquidator may apply to the court to set aside certain transactions if they:

• are at an undervalue;
• give preference to the company’s creditors or a guarantor;
• are extortionate credit transactions; or
• 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.

However, preference does not apply for transactions done in relation to the employees of the company (Section 684(2)(a) of the IA).

Look-Back Period

A transaction performed at an undervalue will have a look-back period depending on the “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 and the making of an administration order on the application; or
• the time between lodging a copy of the notice of intention to appoint an administrator by the holder of a floating charge with the court and the making of the appointment (Section 684 of the IA).

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 (Section 686(2)(b)).

The look-back period for floating charges on the company’s undertaking or property is:

• two years immediately preceding insolvency when such a charge is issued to a person related to the insolvent company;
• 12 months preceding insolvency if the charge was created in favour of any other person;
• 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 lodging a copy of the notice of intention to appoint an administrator by the holder of a floating charge with the court and the making of the appointment.

Under the Insolvency Act, only the relevant officer holder (ie, the administrator, liquidator/provisional liquidator and Official Receiver) has the authority to apply to set aside/annul historical transactions (Sections 677 and 680 of the IA). The presumption is that the application would be made within an insolvency. However, the IA is silent on whether creditors may fund the relevant office holder to make said application.

Once the application to annul a transaction or act is allowed by the court, the transaction is voided and the parties are restored back to the positions they would have been in had the act or transaction not been done.