Restructuring and insolvency law in Kenya

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The primary legislation governing insolvency in Kenya is the Insolvency Act (No. 18 of 2015), which regulates insolvency proceedings with regard to both natural and legal persons as well as unincorporated bodies. The Insolvency Act consolidated the law relating to the insolvency of natural persons and incorporated and unincorporated bodies as some aspects were previously covered by the old and repealed Companies Act. The Insolvency Act is supplemented by the Insolvency Regulations of 2016 that give full effect to the Insolvency Act.

The Companies Act (No. 17 of 2015) is the primary statute guiding the restructuring of a company, dealing with the alteration and consolidation of a company’s share capital as well as regulating compromises, arrangements, reconstructions and amalgamations. Finally, mergers and divisions of public companies are also regulated under the Companies Act.  

2. How are insolvency proceedings or restructuring proceedings initiated?

The main insolvency proceeding in Kenya is liquidation, which may be initiated voluntarily or through the courts. During the liquidation process, all the assets and liabilities of the company are identified as are all the creditors of the company for the purpose of realising the assets of the company. Liquidation culminates in the winding up of the company.

The liquidation process as an insolvency proceeding may be initiated in the following ways:

  • Creditor’s voluntary liquidation:

This process is initiated through a special resolution by the company to liquidate the company voluntarily. It becomes a creditor’s voluntary liquidation if the directors of the company fail to file a declaration of solvency with the Registrar of Companies.

The members of the company must also convene a meeting of all the company’s creditors not more than 14 days after the date scheduled for the company meeting to propose a resolution to voluntarily liquidate the company. It is at this meeting that the directors provide the creditors with the statement of the company’s financial position. The effect of this provision is that the company intending to undergo a creditor’s voluntary liquidation must issue notices for its members’ meeting and its creditors’ meeting almost simultaneously.

  • Compulsory liquidation:

The Insolvency Act allows creditors and contributories of the company to petition the High Court for a liquidation order appointing a liquidator to liquidate the company. The Insolvency Act provides for eight circumstances when a company may be liquidated by the court, including a company being unable to pay its debts within 21 days of a statutory demand being issued. The petition may be made by any of the following persons: the company or its directors, a creditor, a contributor to the company, a provisional liquidator or administrator of the company, a duly appointed liquidator or the attorney general in certain circumstances.

It is vital to note that this process is not exclusive to a creditor’s voluntary liquidation. Other creditors or contributories may apply to court whilst such a voluntary liquidation is ongoing.

As an alternative to liquidation the following processes are available:

a. Administration:

Administration is intended to maintain the company as a going concern or achieve a better outcome for its creditors than would be achieved through liquidation or for the realisation of the company’s assets for the creditors. During administration, the company is protected from any adverse action by creditors seeking to liquidate the company.

Administration may be initiated:

  • By an administration order from the High Court

Through an application to the court and may only be done if the company is or is likely to become unable to pay its debts and the administration has real prospects of achieving its objectives.

  • By the holder of a floating charge

Holders of floating charges may appoint an administrator if such a charge empowers them to appoint an administrator of the company. To do so, they must first notify the High Court (by a notice of appointment, a statutory declaration and an affidavit of statement of facts), the Official Receiver, the company’s directors, contributories and creditors.

  • By the company or its directors

A company or its directors may initiate administration of a company out of court, through lodging with the High Court a notice of its intention to appoint an administrator, a statutory declaration and evidence of the administrator’s consent to act. The company or its directors must also notify the Official Receiver, any holder of a floating charge and the company’s directors, contributories and creditors.

b. Receivership:

Creditors may appoint an independent insolvency practitioner to act as a fiduciary for the company to realise the company’s assets and satisfy the outstanding debt of the creditor on whose behalf they have been appointed. The appointment of a receiver is either a contractual right enshrined in a contract empowering his/her appointment or statutory, where a statute provides for the appointment of a receiver. It is important to note that despite the receiver’s duty to their appointing creditor, they are still accountable to the company and its directors.

A receiver may be appointed:

  • By an application made to the court; and
  • Out of court under an appointing instrument that empowers a creditor to appoint a receiver

c. Company Voluntary Arrangement:

These are agreements entered into between creditors and a debtor company to settle the company’s debt in a specified period and a specified manner.

To initiate this, a director, liquidator or administrator may propose a Company Voluntary Arrangement to the company and its creditors. The proposal should make provision for an insolvency practitioner as a provisional supervisor to oversee implementation of the voluntary arrangement. If the proposal was made by the directors of the company, the provisional supervisor should report to the High Court on whether the proposal has reasonable prospects of being approved and implemented by the creditors. The proposal must then be approved by a majority of the members of the company and each class of creditors.

d. Schemes of Arrangement:

Schemes of Arrangement allow a company to enter into an agreement with its creditors or members to restructure the company or businesses. This may be a compromise or arrangement with creditors that results in a variation of rights of creditors and allows a company in financial distress to avoid formal insolvency proceedings. It may be initiated by directors or members of the company, creditors, a liquidator or an administrator. The Scheme of Arrangement must be sanctioned by the High Court as it binds all creditors or members. 

The following processes exist under the Companies Act to initiate restructuring proceedings:

a. Reorganisation of share capital:

A company may opt to change its share capital structure for strategic reasons, including for raising funds or financing a project. The Companies Act provides for four ways for a company to reorganise its share capital:

  • Increasing its share capital: new shares are issued, increasing its share capital
  • Reducing its share capital: this may be achieved by reducing the number of shares or the nominal value of the shares
  • Share splits: this involves subdividing existing shares into two or more shares of smaller nominal amounts than the existing shares.
  • Consolidating existing shares into larger nominal amounts than the existing shares. 

Share reorganisations (with the exception of reduction of share capital) must be authorised through an ordinary resolution of the company’s members unless a higher threshold is required in the company’s articles. Following the passing of the resolution, the company must lodge the resolution with the Registrar of Companies within 14 days for registration.

For a reduction of share capital, a special resolution of the members is required. For public companies, such resolution must be passed at a meeting convened for this purpose. Private companies may opt to pass a written resolution. In both cases, the resolution is to be sent out to members 21 days prior to the meeting (for a public company, a 14-day prior notice suffices if the meeting at which the resolution is to be passed is not an annual general meeting). Before a share capital reduction is registered with the Registrar of Companies, the company must apply to court to confirm the proposed reduction by attaching the resolution and the proposed statement of capital. If the proposed share reduction has the effect of diminishing liability in respect of unpaid share capital or payment of any paid-up share capital to a shareholder, members or creditors are entitled to object to such reduction. Therefore, before the court makes an order, confirmation will be sought that the company’s creditors and members have consented to the reduction or that their debt or claim has been discharged or settled. 

The court has the discretion to order the company to disclose the share reduction as it may deem necessary. The company will then be required to file the court order and the court-approved statement of share capital with the Registrar of Companies for registration. The company may be required by the court to publish reasons for the reduction or such other information it considers necessary in this connection. The Registrar of Companies will then certify the registration of the order and statement of capital and authenticate the same with the official seal formalising completion of the process. 

Private companies may, as distinct from that stated above, opt to reduce share capital without involving the court in any way at all. This can be achieved by all the directors of the company making a statement confirming the solvency of the company not more than 14 days before the date that a special resolution on the reduction is passed (either at a duly convened meeting of the members or by way of written resolution both on 21 day prior notice). Within 14 days of the passing of such resolution, the Company must lodge with the Registrar of Companies a copy of the resolution, alongside a statement of its directors confirming the solvency statement was made within the stipulated time together with a statement of capital that (i) attaches a copy of the solvency statement; (ii) sets out the total number and the aggregate nominal value of shares of the company; in the case of classes of shares (iii) sets out their particular rights; their total number and aggregate nominal value; (iv) evidences delivery within the stipulated time of the solvency statement to the members and (v) sets out the amount paid up and the amount (if any) unpaid on the shares or in the form of a premium. The resolution takes effect upon registration of these documents by the Registrar of Companies.

b. Compromise or arrangement:

Where a compromise or arrangement has been arrived at between a company, its creditors (or class of creditors), or its members, an application must be made to court. This is made either by the company, any creditor or member of the company or, if in liquidation or under administration, by the liquidator or administrator. The court may then order the compromise to be effected in line with the proposal or make amendments as it deems fit. Upon issuance of the order, a copy must be lodged with the Registrar of Companies for due registration.  

c. Merger:

In the case of mergers, the directors of the two companies must prepare and adopt draft proposed terms of the merger. A special resolution must then be passed by both parties to commence the process. The Companies Act requires an expert to be appointed by the merging companies to prepare a written report on the terms. The proposal must then be lodged with the Registrar for registration with notification given to the Competition Authority of Kenya.

The Competition Act (No. 12 of 2010) requires notification to the Competition Authority of Kenya regarding a proposed merger. The Authority may accept, reject or require further information on the merger based on the documents supporting the application for approval.

d. Division of companies

Division of companies may be carried out where two or more companies wish to divide their assets and liabilities among themselves.

The division of a company is initiated by the directors of the company seeking division, who prepare a draft proposal of terms for the scheme. This is then approved by a special resolution prior to registration with the Registrar of Companies.
For public companies, a special resolution of the members is required before lodging the draft terms with the Registrar of Companies. To protect the holders of securities on the assets of the company and ensure their interests are protected under the division scheme, the directors also prepare an explanatory report on the division and procure an expert to review all the company’s documents and intended division for the preparation of an expert’s report. In the event that the division is likely to cause material changes to the assets of the company, the directors of the company will be required to report on the same. 

The Insolvency Act defines when a company may be said to be unable to pay its debts as:

  • If a company is unable to pay a debt of more than KES 100,000 (approx. USD 1,000) within 21 days after being served with a statutory demand.
  • If execution issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part.
  • If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
  • If it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities (including its contingent and prospective liabilities).

While the insolvency of a company is not prohibited, a number of actions under the Insolvency Act may be initiated by a number of parties should a company fall within these categories.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

For the different types of insolvency and restructuring processes, see section 3 above.

5. Are there several types of creditors and what is the effect of a difference?

Creditors under Kenyan law are primarily divided into:

  • Secured creditors, being creditors with a secured interest in property owned by the company
  • Unsecured creditors, being creditors without any such secured interest in the property
  • Preferential creditors, being creditors with preferential debts.

During insolvency proceedings, the type of creditor plays a key role in the ranking for payment of debts out of the realised company assets. Generally, secured creditors holding floating charges and preferential creditors will be paid ahead of ordinary unsecured creditors.

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

While the Insolvency Act does not expressly prescribe any obligation on a party to initiate insolvency proceedings, it should be noted that under certain circumstances it may be an offence for a director of a company not to liquidate the company.

Directors of a company are obligated to minimise potential loss to the company’s creditors. The offences of wrongful trading and fraudulent trading under sections 505 and 506 of the Insolvency Act stems from the above duty owed to the creditors. 
A director who knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation but fails to take reasonable steps to avoid it commits an offence under the Insolvency Act. It is also an offence for a person to participate (directly or indirectly) in the business of a company knowing that its business was intentionally undertaken to defraud the company’s creditors or creditors of another person, or for any fraudulent purpose.

In the course of liquidation, if the liquidator concludes that wrongful or fraudulent trading has been committed, he may apply to the High Court for appropriate sanctions. The Court, on application, may make orders declaring the respondent liable to make such contribution (if any) to the company’s assets as the Court considers appropriate. The Court may also disqualify the respondent from acting as director, liquidator, supervisor of a voluntary arrangement or participating in the formation or management of a company for a period not exceeding 15 years.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

Kenyan law does not place any duties on representative bodies during insolvency proceedings.

If the restructuring company wishes to make unionised employees redundant, the Employment Act requires it to notify the union of its intention at least one month prior to doing so.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

For a creditor’s voluntary liquidation, the Insolvency Act places the duty of commencing liquidation on the members of the company. It is only upon the passing of a special resolution to liquidate the company that the same would proceed as a voluntary liquidation.

The Companies Act is mostly silent on the duties of shareholders outside of their participation in the approval of the restructuring proposals through their vote in company meetings. Members of a company are however required to review the proposals made by directors in relation to any attempt to restructure the company in line with the Companies Act. While there is no standard of due diligence required of the shareholders, directors must fully disclose all the pertinent documents related to the proposed transaction.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

Yes. In a voluntary liquidation, the members of a company must pass a special resolution in order for the liquidation to proceed as a voluntary liquidation. Members may also participate in various insolvency proceedings by initiating proceedings such as administration (see question 2) should they wish to. Should a scheme of arrangement include an agreement of the members of a company, it is for the members of the company to agree or disagree to its terms.

The Companies Act requires members of a company to participate in any proposal to restructure the share capital of the company through their voting rights. There are differing requirements pertaining to the approval required in the restructuring of a company’s share capital; in some instances, an ordinary resolution will suffice, in others, a special resolution is required.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

No. The Insolvency Act distinguishes solvent liquidation from insolvent liquidation by requiring a declaration of solvency by the directors of a company stating that they have made a full inquiry into the company’s affairs and are of opinion that the company will be able to pay its debts in full inclusive of interest at the official rate within 12 months of commencement of liquidation. This requirement makes it impossible for an insolvent company to undergo solvent liquidation.

The Companies Act and the Insolvency Act provide for various restructuring procedures for a company to maintain it as a going concern. These include Schemes of Arrangement or Company Voluntary Arrangements (seesection2 above). During these processes, the company may enjoy a number of protections subject to agreement of the parties, including debt moratoriums. 

13. What is the average success rate after completed restructuring / insolvency proceedings?

As per the Companies Registry, in 2019 there were eight voluntary liquidation proceedings initiated; 34 liquidation petitions filed against companies; four applications for administration; five for administration receivership; two cases where a no assets procedure was initiated. 

The High Court Registry for the Commercial and Tax Division at Milimani Law Courts had eight insolvency petitions before it and one winding-up proceeding initiated. There were also 90 insolvency proceedings filed online in 2019. It is however not possible to ascertain the success rate of these cases on account of the proceedings still being ongoing at this point. 

Samir Inamdar
Samir Inamdar
Senior Partner
Mombasa
Julius Wako
Julius Wako
Partner
Nairobi
Brian Gatuguti
Brian Gatuguti
Associate
Nairobi
Ben Mugi