With several high profile Kenyan companies, including ARM Cement, Deacons and Nakumatt, going into administration in Kenya in recent times, we examine some key features of the Kenyan Insolvency Act 2015 (the "Act") and the duties of administrators appointed under the Act.
Introduction of the Act in Kenya in 2015 marked a paradigm shift in Kenya, from the previous requirement of insolvent companies to be wound up for the benefit of creditors, to the current requirement that insolvent companies first be administered in a bid to steer them back to profitability and the handover of control back to the directors of such companies.
Only where an insolvent company is deemed irredeemable should the liquidation process be employed as a last resort.
The Act now introduces a qualification for liquidators, administrators and bankruptcy trustees who shall be collectively known as Insolvency Practitioners. Only a qualified insolvency practitioner may be appointed in any of the capacities mentioned above. This requirement however does not apply to Official Receivers. A qualified insolvency practitioner is one who:
1. satisfies the requirements of the insolvency regulations with respect to education, practical training and experience. These regulations are yet to be published;
2. is a member of a professional body to be declared by way of Gazette Notice by the Cabinet Secretary;
3. satisfies the requirements (if any) of the rules of the governing body; and
4. is a natural person.
A natural person who wishes to act as an insolvency practitioner may apply to the Official Receiver for an authorization in the manner that shall be set out in the Regulations to be published. The applicant must meet the requirements set out above before making such an application.
Under the Act, a company is deemed unable to pay its debts if it fails to pay a debt of Kenya Shillings 100,000 or more after 21 days of a written demand being served upon it.
The Act now proposes three (3) legal regimes for insolvency which include:
1. Administration of Insolvent Companies
2. Company Voluntary Arrangements
3. Liquidation of Companies
1. Administration of Insolvent Companies:
Previously, a company could be wound up immediately it became insolvent. The Act provides for procedures to ensure that the company is returned to profitable trading by way of appointment of administrators and not necessarily to engage in the sale and realization of its assets as a primary option.
Under the Act, an administrator is a person appointed to manage the company’s affairs and property in order to maintain the company as a going concern or to achieve a better outcome for the company’s creditors as a whole than would likely be the case if the company were liquidated.
An administrator may be appointed by any of the following persons:
2. the holder of a floating charge in respect of the whole or substantially the whole of a company’s property; and
3. by a company or by its directors.
Once appointed by way of an administrative order, the administrator shall assume control of all the property to which the administrator believes the company is entitled and no application to liquidate the company can be made. A person will require the consent of the administrator or the approval of Court to make any steps towards the enforcement of a security over the company’s property.
An administration order has a unique effect in imposing a total freeze on the levy of distress, the institution or continuance of legal proceedings and even the winding up of the company, during the currency of the administrative order, except with the leave of the Court.
During the period of administration, the administrator shall ensure that all business documents issued by or on behalf of the company or the administrator state the name of the administrator and that the affairs of the company are being managed by the administrator.
2. Company Voluntary Arrangements
A company unable to pay its debts as they fall due may be able to reach an agreement with its creditors for the satisfaction of their claims otherwise than by payment in full. The directors may make a proposal to the Company and its creditors to enter into a composition in satisfaction of the debts or a scheme for arranging the company’s financial affairs, both of these being brought under the single rubric “voluntary arrangement”.
The directors shall appoint an authorized insolvency practitioner to supervise the implementation of the voluntary arrangement. The insolvency practitioner shall be required to file a report to Court stating whether the proposal has a reasonable prospect of being approved and implemented, whether a meeting of the creditors should be convened to consider the proposal and the date, time and venue for such a meeting.
The Insolvency Practitioner shall, where he is of the view that the meetings should be convened and subject to the Court’s direction, convene the meetings of the creditors to decide whether to approve the proposal with or without modifications. This shall be done by way of voting where an appointed chairperson for the meeting shall divide the creditors in the meeting into three groups; i.e. secured creditors, preferential creditors and unsecured creditors; for voting purposes.
A modification of the proposal must be consented to by the company and it may provide for the replacement of the supervising Insolvency Practitioner.
An approved proposal shall be reported to Court as soon as practicable and shall take effect as a voluntary arrangement upon approval of the Court by way of any order and shall be binding upon the Company and its creditors. The Insolvency Practitioner appointed to supervise the voluntary arrangement shall be responsible for implementing the arrangement in the interests of the company and its creditors and monitoring compliance by the company with the terms of the arrangement.
3. Liquidation of the Company
Liquidation is a collective insolvency process leading to the end of the company’s existence (dissolution). In the previous legislation, this process was known as winding-up.
Liquidation may be done in any of the following two ways:
1. Voluntary liquidation
2. Liquidation by the Court
1. Voluntary liquidation
The members of a company may decide to voluntarily liquidate the company by way of a special resolution to that effect.
Before passing of such a resolution, any holder of a floating charge in respect of a substantial portion of the company’s property must be given notice of the intended resolution.
After seven (7) days of such notice or upon receiving written consent by the holder of the floating charge to pass the resolution, whichever is earlier, the resolution may be passed.
The Special resolution will have to be lodged with the Registrar of Companies for registration within fourteen (14) days of its passing and publish a notice setting out the resolution once in the Kenya Gazette and once in at least two (2) newspapers circulating in the area in which the company has its principal place of business in Kenya. If the company has a website, then the resolution must also be published there.
Once the resolution is passed, the company shall cease to carry on its business except in so far as necessary for its beneficial liquidation. Any transfer of the company’s shares or alteration of the status of the company’s members after the passing of the resolution shall be void.
There are two types of Voluntary liquidation:
a) Members’ voluntary liquidation;
This is the type of voluntary liquidation where members appoint one or more liquidators by way of a resolution at a general meeting of the members. The appointment of the liquidator has the effect of causing the directors’ powers to cease. The liquidator so appointed must be an authorized insolvency practitioner.
b) Creditor’s Voluntary liquidation
This type of voluntary liquidation involves convening a meeting of the company’s creditors within 14 days after the resolution for liquidation is proposed. The Company must send notices to all the creditors and publish such notice once in the Kenya Gazette, once in at least two (2) newspapers circulating in the area in which the company has its principal place of business in Kenya, and on the Company’s website if any.
The liquidator, who must be an authorised insolvency practitioner, shall be nominated by the creditors in their meeting. Where the creditors fail to nominate a liquidator, the company shall nominate one.
The directors of the company shall be required to prepare a statement of the company’s financial position and lay it before the creditors’ first meeting.
On the liquidation, by either method discussed above, the company’s property is to be applied in satisfaction of the company’s liabilities equally and without preference and to be distributed among the members according to their rights and interests in the company.
Liquidation by the Court
The High Court of Kenya maintains the jurisdiction for supervising liquidation of companies under the new law. Liquidation by the Court is done by way of an application to the Court made by any of the following people:
1. The Company or its directors;
2. A creditor or creditors including any contingent or prospective creditor
• A contributory of the company
1. A provisional liquidator or administrator
2. The Attorney General
The process of liquidation by the Court has, to a large extent, remained unchanged from the old law. The only point of deviation is the change in name from Winding-Up to Liquidation. What used to be the winding-up order is now to be known as a Liquidation Order.
This is a very general overview of certain provisions of the Kenyan Insolvency Act 2015 and does not constitute legal advice. Please contact one of our Partners if you wish to discuss any aspect of Kenyan insolvency legislation.