GENERAL

Legislation

What main legislation is applicable to insolvencies and reorganisations?

In Kenya, the Insolvency Act No. 18 of 2015 (the Act) consolidated and amended the various laws relating to the insolvency of natural persons, incorporated and unincorporated bodies. Subsidiary legislation, the Insolvency Rules, 2016, the Insolvency (Amendment) Regulations, 2018 and the Insolvency (Amendment) (No. 2) Regulations, 2018 supplement the provisions of the Act.

Excluded entities and excluded assets

What entities are excluded from customary insolvency or reorganisation proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

The Act applies to natural persons, partnerships, limited liability partnerships, companies and other corporate bodies established by any written law. This application is inclusive and encompasses entities and bodies established under statute laws, incorporated and unincorporated entities.

Excluded assets for companies include assets where the company has no beneficial interest, assets held or obtained by way of bailment or hire purchase and assets held in trust for third parties. With regard to insolvency of natural persons, excluded assets include the bankrupt’s necessary tools of trade; necessary household furniture and personal effects (including clothing) for the bankrupt and the bankrupt’s relatives and dependants; and a motor vehicle valued at 1 million Kenya shillings.

Public enterprises

What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

There are no specific insolvency procedures for government-owned enterprises in Kenya. The customary insolvency procedures under the Act apply as it is expressly provided that the Act binds the government and that the Act applies ‘to corporate bodies established by any written law’. The creditors of government-owned enterprises have the same remedies as are available to creditors under the Act.

Protection for large financial institutions

Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

Notably, Kenya has no specific legislation to deal with institutions that are considered ‘too big to fail’. The government’s financial bailout of such institutions is often discretionary, pegged on political and economic factors and is never guaranteed. Kenyan industry legislation has gradually moved to remove factors that make certain entities large and powerful enough to hold the state economy at ransom. These subsidiary laws provide for uniform regulations and restrictions that ensure industry players operate in a level playing field, promoting fair competition.

Courts and appeals

What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

The High Court of Kenya (Commercial & Admiralty Division) handles bankruptcy and insolvency proceedings filed in Nairobi. Bankruptcy and Insolvency proceedings filed outside Nairobi are filed before the High Court of Kenya. Appeals from the High Court lie to the Court of Appeal, in some instances with leave of the court and in some instances without leave of the court, depending on the specific decision being challenged. The Court of Appeal requires that the appellant posts security of costs that are assessed based on the value of the appeal and the nature of the reliefs sought.

TYPES OF LIQUIDATION AND REORGANISATION PROCESSES

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

Voluntary liquidation procedures may be commenced by the company’s members, directors or creditors. When the majority of directors of the company make a statutory declaration under section 398 of the Act, it is deemed to be a members’ voluntary liquidation. Voluntary liquidation under the Act should be sought: when a period fixed by the articles for the company’s existence expires or when the articles prescribe that in the occurrence of a certain event the company is to be dissolved and such an event occurs, and the company in general meetings has passed a resolution providing for its voluntary liquidation; and if the company by way of special resolution resolves to be voluntary liquidated.

The requirement to pass the resolution is that the company must give notice to all members eligible to participate passing in the resolution and must notify any holder of any qualifying floating charge in respect of the company’s property. The meeting where this resolution is passed must fulfil certain conditions: a notice period of seven days must pass from the date the notice of the meeting is issued; the persons receiving the notice must give written consent to passing of the resolution; and the decision must be made by a special resolution constituting of a majority of not less than 75 per cent of the members (a class of members).

Voluntary reorganisations

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

The voluntary arrangement procedure for companies may be commenced by several persons (the proposers); the directors of the company, the administrator of a company under administration or the liquidator of a company under liquidation. The proposers when making such a proposal must propose a supervisor to oversee the voluntary arrangement. They must publish notice of the meeting where the proposal is to be presented to the creditors or members in a newspaper of wide circulation as well as notifying the proposed supervisor specified in the proposal. They must also provide the proposed supervisor with the document setting the terms of the proposal and the financial statement of the company.

The effect of the voluntary arrangement is that it binds every creditor or member of the company who is entitled to vote at the meeting of creditors or members including persons who would have voted had they received the notice of the meeting of the proposed arrangement.

Successful reorganisations

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?

There is no provision for distinct classification of creditors in a successful reorganisation. However, the secured and preferential creditors must give their written consent. The approval of the proposal for reorganisation as aforementioned is subject to the court’s approval as per section 630 of the Act. Reorganisations depend on the terms specified in the proposal. Arrangements such as compromise may release non- debtor parties from liability. A compromise agreement in this context referring to where the creditors agree to terms that have the effect of fully and absolutely extinguishing the debt owed in its entirety, irrespective of whether the actual amount set in the terms is less than the actual debt owed.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

A creditor must prove to the court that the company owes them at least 400,000 Kenya shillings and that they have served a statutory demand that has not been satisfied. If the creditor is a holder of an execution or other process in respect of debt on a judgment or order of court, that execution or process must have been returned wholly or partly unsatisfied. The material difference between the involuntary liquidations and voluntary liquidations is that the creditor institutes the involuntary proceedings and these proceedings must be based on the inability of the company to pay debt owed to which a statutory demand has been issued.

Involuntary reorganisations

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Involuntary reorganisation of companies by creditors is not provided for under the Act.

Expedited reorganisations

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

Expedited reorganisations are only available to natural persons under Part IV, division 1, subdivision 2 of the Act. The procedure is available when the debtor is an undischarged bankrupt; the official receiver is specified in the proposal as the provisional supervisor in relation to the proposal; and no application for an interim order for voluntary arrangement has been made as per section 304 of the Act.

Unsuccessful reorganisations

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

A proposed reorganisation can be defeated by a dissenting creditor to the proposed organisation through a challenge in court under section 629(4) of the Act. The application should be lodged within 30 days of the day of the meeting of the company and the creditors. What the court considers is whether the proposal was approved by a majority of the secured creditors’ group; whether the proposal discriminates among the members of the dissenting group or groups of creditors to an extent that they will be no worse off than they would have been if the company had been liquidated; and whether the proposal respects the priorities of preferential creditors over unsecured creditors. The effect of the re-organisation not being approved is that the company either proceeds to liquidation or administration. In the event a debtor fails to perform the plan as per the terms of the proposed reorganization, the option remains of commencing either a liquidation or an administration process.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

The Act outlines corporate procedures for the dissolution of corporations and this procedure differs from bankruptcy proceedings in several ways. Dissolution of corporations must be supervised by an appointed liquidator. Decision-making process during dissolution must be by way of resolution, which must be lodged for registration at the companies’ registry. The registrar of companies must also be served with all court orders relating to the bankruptcy of the corporations for registration. Bankruptcy proceedings on the other hand are conducted by the bankruptcy trustee and decision-making majority vote.

Conclusion of case

How are liquidation and reorganisation cases formally concluded?

In liquidation, after hearing a petition and finding merit in the petition, the court issues a liquidation order against the company. The liquidator of the company then liquidates the assets of the company and pays off creditors and shareholders in a predetermined manner as per the provisions of the Act. The liquidator then registers a final account and return with the official receiver and three months from that date, the company will stand dissolved. Re-organisations are formally concluded on full implementation of the voluntary arrangement by the appointed supervisor or on the termination of the arrangement by order of the court.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

What is the test to determine if a debtor is insolvent?

A debtor is deemed to be insolvent when they are ‘unable to pay’ their debts, meaning: (i) if a creditor to whom the company is indebted in the sum of 100,000 Kenya shillings or more issues a written demand requiring payment within 21 days and the company has not complied; (ii) if execution or other process issued on a judgment decree or order is returned unsatisfied as against the company; or (iii) if proved to the court that the company is unable to pay its debts as and when they fall due.

Mandatory filing

Must companies commence insolvency proceedings in particular circumstances?

There are no mandatory requirements in law to commence insolvency proceedings in specific circumstances, although the Companies Act imposes a personal fiduciary responsibility on directors who continue to operate an entity in the full knowledge that it is insolvent.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Under the Act, directors can be held culpable for ‘wrongful trading’ (ie, that a director knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation but nonetheless continued to trade). The court may make an order declaring the director to be liable to make such contribution (if any) to the company’s assets as the court considers appropriate, but only if it is satisfied that, at the relevant time, the director knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation. The court may also disqualify the person from:

  • being or acting as a director of a company or limited liability partnership;
  • being or acting as a liquidator, provisional liquidator or administrator of a company or limited liability partnership;
  • being or acting as a supervisor of a voluntary arrangement approved by the company or limited liability partnership; or
  • in any way, whether directly or indirectly, being concerned in the promotion, formation or management of a company or limited liability partnership, for such period, not exceeding fifteen years, as may be specified in the order.
Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

The Act outlines offences relating to conduct before and during liquidation and criminal proceedings relating to those offences. These offences include, but are not limited to, concealing property of the company; concealing and falsifying any company document; fraudulent removal of any part of the company’s property; disposing, pledging or pawning property of the company. Civil suits to recover company property or assets can also be instituted against the directors and officers of a company.

Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

The Act outlines that, where a director or officer or former director or officer of a company is charged with offences involving transactions to defraud creditors of a company in liquidation, they shall not be liable if the conduct alleged to constitute the offence occurred more than five years before the commencement of the liquidation and if they prove that at the time of the alleged offence, they did not have any intent to defraud the company’s creditors. Under all other scenarios, the director shall have a defence if they prove that they had no intention to conceal the state of affairs of the company or to defeat the law. An additional defence is that the director took such steps to avoid potential loss to the company’s creditors as he or she ought reasonably to have taken, in a claim for wrongful trading.

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

Not in all circumstances. On the appointment of a liquidator, all the powers of the directors cease (and are transferred to a liquidator), except so far as the liquidation committee, or if there is no such committee, the creditors, sanction their continuance.

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

The powers of the directors vest in the liquidator or provisional liquidator (or supervisor) when a liquidator is appointed. They do, however, retain a residual right to challenge the liquidation process.

MATTERS ARISING IN A LIQUIDATION OR REORGANISATION

Stays of proceedings and moratoria

What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?

Pursuant to section 428 of the Act, at any time after the making of a liquidation application, and before a liquidation order has been made, any creditor may, if legal proceedings against the company are pending in the court, apply to the court for the proceedings to be stayed; and if proceedings relating to a matter are pending against the company in another court, apply to the court to restrain further proceedings in respect of that matter in the other court. After commencement of the liquidation, any disposition of the company’s property, transfer of shares or alteration in the company’s members is void unless otherwise ordered.

A moratorium on the other hand can be obtained by a debtor on debt payments when a company’s directors propose voluntary arrangement. Notably, a company that is in liquidation is ineligible to obtain a moratorium.

Doing business

When can the debtor carry on business during a liquidation or reorganisation? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

The debtor, through the liquidator, can carry on business post commencement of the liquidation process, based on an independent assessment made by the liquidator as to the resultant benefits to all classes of creditors. Creditors who supply goods or services after the filing have priority over other creditors as this expense is considered a liquidation expense. The court and the creditors have supervisory powers to query the business activities of a liquidator, through motions filed in court or through creditors meetings.

Post-filing credit

May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Under the Act, the liquidator, with the creditor’s approval, has power to borrow money for the beneficial realisation of the objects of the liquidation. Such a loan or credit shall be prioritised under the preferential creditors group. As for re-organisations, a supervisor can obtain secured or unsecured loans or credit provided this formed part of the terms of the voluntary arrangements approved by creditors or the court.

Sale of assets

In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

The Act provides for the power of the liquidator to sell any of the company’s property by public auction or private treaty with the power to transfer the whole of it to any person or sell the same in parcels. The purchaser acquires the assets ‘free and clear’ of all claims.

Negotiating sale of assets

Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

Under the Act, the liquidator has the power to sell any of the company’s property as stated in question 25. The Act does not provide for ‘stalking horse’ bids. Credit bidding sales are not expressly provided for under the law, although in principle, the secured creditor is free to bid the amount of its debt as a credit bid.

Rejection and disclaimer of contracts

Can a debtor undergoing a liquidation or reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

The liquidator may, by the giving such notice as is prescribed by the insolvency regulations, disclaim any onerous property and may do so even if the liquidator has taken control of it, tries to sell it, or otherwise exercised rights of ownership in relation to it. Onerous property includes ‘an unprofitable contract’. The disclaimer is effected by issuance of the requisite notice under the Act suo moto or in response to an enquiry by a person interested in the property.

In cases of bankruptcy, the Act provides that the bankruptcy trustee may disclaim onerous property. Onerous property has been defined as: an unprofitable contract; property of the bankrupt that is unsaleable, or not readily saleable, or that may give rise to a liability to pay money or perform an onerous act; and a litigation right that, in the opinion of the bankruptcy trustee, has no reasonable prospect of success or cannot reasonably be funded from the assets of the bankrupt’s estate.

Within 14 days after the disclaimer, the bankruptcy trustee shall send a notice of the disclaimer to every person whose rights are, to the bankruptcy trustee’s knowledge, affected by it. The effect of the disclaimer is such that it terminates, on and from the date of the disclaimer, the rights, interests and liabilities of the bankruptcy trustee and the bankrupt in relation to the property disclaimed; and does not affect the rights, interests or liabilities of any other person, except insofar as is necessary to release the bankruptcy trustee or the bankrupt from a liability.

Where the debtor breaches a contract after the insolvency case is opened, the affected party may claim breach of contract and pursue appropriate damages in the liquidation.

Intellectual property assets

May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganisation is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

In the event of liquidation or re-organisation, the licensor or owner of the intellectual property may terminate the debtor’s right to intellectual property, but this will, however, depend on the terms of the licence agreement between the licensor and the debtor.

Also, the intellectual property may be rendered as onerous property by the liquidator. In this regard, the disclaimer operates so as to terminate the rights, interests and liabilities of the company or in respect of the property disclaimed.

Personal data

Where personal information or customer data collected by a company in liquidation or reorganisation is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The Act does not provide for restrictions to the use of personal information or customer data collected or their transfer to purchaser by a company in liquidation or reorganisation. Kenya currently does not have data protection legislation in place, although there is a constitutional right to privacy under article 3 of the Kenyan constitution. There may, however, be a limit in use of the date on the basis of terms and conditions under which the data was collected in the first place or based on the constitutional right to privacy, which guarantees each person the right not to have information relating to their family or private affairs unnecessarily revealed or required or the privacy of their communications infringed.

Arbitration processes

How frequently is arbitration used in liquidation or reorganisation proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganisation case is opened be arbitrated with the consent of the parties?

The use of arbitration in liquidation is uncommon, although parties may by consent or by order of the court refer any dispute to arbitration.

CREDITOR REMEDIES

Creditors’ enforcement

Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

None.

Unsecured credit

What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

Unsecured creditors can pursue their claims through the liquidation process by proofs of debt and distribution by the liquidator upon sale is as provided for in the Act. The process is not difficult but may be time consuming because of possible court interventions in the liquidation process. For companies in respect of which a floating charge relates to its property, the liquidator shall make available for the satisfaction of unsecured debt twenty per cent of the company’s net assets.

Pre-judgment attachments are available through the Civil Procedures applicable in Kenya, but only if certain conditions are met. It Is unlikely that this option will be unchallenged as the Act allows the liquidator to apply to stay all proceedings against the company once an insolvency action is commenced.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

During the liquidation or reorganisation, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

Where a company has passed a resolution for its voluntary liquidation, a notice shall be published in the Kenya Gazette setting out that resolution. Thereafter, the company that is in the course of liquidation shall convene a meeting of the company’s creditors. There are two kinds of creditors’ meetings: first meeting of creditors and subsequent creditors’ meeting. The notice convening these meetings must similarly be published.

In the case of liquidation by the court, the official receiver may appoint a qualified person as liquidator instead. The official receiver shall send a notice of the appointment of the liquidator to the company’s creditors.

The directors of the company shall, at inception of the liquidation, prepare a statement setting out the financial position of the company that shall specify the details of the company’s assets, debts and liabilities, names and addresses of the company’s creditors, the securities held by them respectively, and the dates when the securities were given.

The liquidator shall lay before each of the creditors’ meetings an account of the liquidator’s acts and dealings, and of conduct of liquidation during the preceding year. The liquidator has a duty to share information and the creditors have a right to access information in the hands of the liquidator by, if necessary, moving to court to compel the liquidator to share the information.

Creditor representation

What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The creditors on the first meeting, if they think appropriate, can appoint a liquidation committee of not more than five members who shall inspect the accounting records, the company’s financial statement and carry out the necessary inquiries on behalf of the creditors. The representatives are selected by consensus of creditors, but normally the value of the debt plays a role in the vote that the creditor has. The creditors may retain advocates or certified public accountants to inspect the documents on their behalf. The remuneration of those experts is recoverable under the Insolvency Act as a liquidation expense, if the amount is incurred in protecting, preserving the value of, or recovering those assets.

Enforcement of estate’s rights

If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The creditors may contribute towards or pursue a claim on behalf of the liquidator from the estate. Although the power to assign rights to pursue a claim are not expressly provided for under the Third Schedule of the Act, the liquidator may where the company may not have funds to pursue the claim under provisions 13 and 14, exercise power to appoint an agent to do any business that the liquidator is unable to do personally and power to take all other action that may be necessary for the beneficial liquidation of the company.

The fruits of the remedies belong to the company and shall be vested in the liquidator for the benefit of the creditors.

Claims

How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognised? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

A creditor (including a creditor who has a preferential claim) who wishes to claim in the bankruptcy shall submit a creditor’s claim to the bankruptcy trustee before the deadline for submitting claims together with a prescribed fee. Evidence in support of the claim must also be submitted. The deadline is either the time specified by the bankruptcy trustee in a notice given to the creditors or the time specified in an advertisement published by the bankruptcy trustee in a newspaper widely circulated in the area in which the creditor normally resides or carries on business. The bankruptcy trustee makes a determination on a claim based on evidence supplied and verified as appropriate.

A creditor can challenge a decision on a claim at the High Court and the court may make an order cancelling the creditor’s claim or reducing the amount claimed, if it considers that the claim was improperly allowed or was improperly allowed in part.

If a creditor’s claim is subject to a contingency or the amount of the claim is uncertain, the bankruptcy trustee may estimate the amount of the claim.

The debtor has to disclose transfers to avoid mischief.

Set-off and netting

To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?

Under the Act, the court may, in the case of an unlimited company, allow to the contributory as a set-off money due to the contributory or the estate that the contributory represents from the company on any independent dealing or contract with the company (but not money due to the contributory as a member of the company in respect of a dividend or profit). If, in the case of a company (whether limited or unlimited), all the creditors have been paid in full (together with interest at the official rate), money due on an account to a contributory from the company may be allowed to the contributory as a set-off against any subsequent call. There are no statutory provisions for circumstances when then the creditors’ right of set-off is deprived.

Modifying creditors’ rights

May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

Pursuant to the provisions of the Act, if the court makes an order against officers of the company and others found to have participated in fraudulent trading by the company in liquidation, it may direct that the whole or any part of any debt owed by the company to that person, and any interest on the debt ranks in priority after all other debts owed by the company and after any interest on those debts.

Priority claims

Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?

Apart from employee-related claims, other major privileged and priority claims in liquidations and reorganisations, as provided in the Act, include: the expenses of the liquidation such as the liquidator’s remuneration; costs for the person who applied to the court for an order placing the company under liquidation; and amount of costs incurred by that creditor in protecting, preserving the value of or recovering those assets (this has priority over the secured creditors), and outstanding taxes due to the Kenya Revenue Authority.

Employment-related liabilities

What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

The employee claims that may arise where employee contracts are terminated during a restructuring or liquidation include any compensation for redundancy, contractual claims on termination depending on the wording of the employment contract and depending on how a termination is effected, claims for compensation for unlawful termination. For termination on account of redundancy, the following conditions as stipulated under the Employment Act, 2007 must be met:

  • where the employee is a member of a trade union, the employer notifies the union to which the employee is a member and the labour officer in charge of the area where the employee is employed of the reasons for, and the extent of, the intended redundancy not less than a month prior to the date of the intended date of termination on account of redundancy;
  • where an employee is not a member of a trade union, the employer notifies the employee personally in writing and the labour officer;
  • the employer has, in the selection of employees to be declared redundant, had due regard to seniority in time and to the skill, ability and reliability of each employee of the particular class of employees affected by the redundancy;
  • where there is in existence a collective agreement between an employer and a trade union setting out terminal benefits payable upon redundancy, the employer has not placed the employee at a disadvantage for being or not being a member of the trade union;
  • the employer has, where leave is due to an employee who is declared redundant, paid off the leave in cash;
  • the employer has paid an employee declared redundant not less than one month’s notice or one month’s wages in lieu of notice; and
  • the employer has paid to an employee declared redundant severance pay at the rate of not less than 15 days’ pay for each completed

year of service.

The Act, however, limits the value of a pay-out to each employee in a liquidation for which priority is given to 200,000 Kenya shillings with the rest of any pay-out becoming an unsecured claim subject to abatement.

Employee claims are likely to be increased where large numbers of employees’ contracts are terminated.

All other terminations must be effected procedurally and for just cause (misconduct or poor performance).

Pension claims

What remedies exist for pension-related claims against employers in insolvency or reorganisation proceedings and what priorities attach to such claims?

Pension payments are classified as second priority payments under the Act.

Section 615(6)(e) of the Act provides that the occupational pension schemes from company’s property have priority over holders of floating charges. This is because it is classified under liability arising under a contract of employment adopted by the former administrators or predecessors before the termination or adoption and the salaries and wages due under such contracts that unpaid contributions to occupational pension schemes. In effect, if there is a deficiency in the occupational pensions scheme of a company immediately before the insolvency of this company, it is a preferential debt ranking ahead of the holders of floating charges of the company. The priority in employee claims under plans and schemes during liquidation and restructuring, however, depends on the type of scheme in question.

Claims arising from defined contribution schemes can be brought against the employer or the liquidator who continues to have a contractual obligation to make necessary deductions and remittances to the pension scheme as long as the contracts of employment are in force. The employees similarly have a remedy against the directors of the company personally for any monies unremitted to the pension scheme pre-liquidation.

Environmental problems and liabilities

Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The liability arising from environmental problems may be civil or criminal in nature. Where there are environmental problems within the company’s premises, the ‘polluter pays’ principle shall apply, meaning that liability is imposed on the party who caused the pollution. Therefore, if the company is found responsible, resulting from its operations, it shall be liable to remedy the damage caused as appropriate, whether it is by paying a penalty or undertaking a clean-up process. This obligation falls on the liquidator once he or she is in place, as environmental damage is usually a continuing injury.

If a secured creditor enforces a mortgagee and becomes a mortgagee, he or she shall be liable for the environment liabilities accruing thereto. Where the environmental problem is caused by a third party, they shall be held personally liable.

Liabilities that survive insolvency or reorganisation proceedings

Do any liabilities of a debtor survive an insolvency or a reorganisation?

No further claim can be brought against a debtor once a liquidation process has been concluded.

Distributions

How and when are distributions made to creditors in liquidations and reorganisations?

The distribution is made by the liquidator once debts have been proven and the liquidator has recovered funds from sale of assets of the debtor. The liquidator of course has to take into account the order of priority as set out under the Act. In reorganisations, the payments are made as per the terms of the scheme of arrangement as approved by the court.

SECURITY

Secured lending and credit (immovables)

What principal types of security are taken on immovable (real) property?

The principal securities on immovables are equitable mortgages (are also known as charges) and legal mortgages.

Secured lending and credit (movables)

What principal types of security are taken on movable (personal) property?

The principal securities on movables are liens (a possessory right to retain the debtor’s asset until the debt is repaid), fixed charges (providing security over a particular asset; for example, bank accounts or insurance proceeds) and an equitable mortgage.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? Who can attack such transactions?

A transaction that is undervalued can be annulled. This is when a company makes a gift to a person or otherwise enters into a transaction with a person on terms that provide for the company to receive no consideration or a company enters into a transaction with the person for a consideration the value of which in money or money’s worth is significantly less than the value in money or money’s worth of consideration provide by the company.

An extortionate credit transaction can be annulled. This would be a situation where the insolvency officeholder notes that an extortionate transaction was entered into during the three years immediately preceding the date on which the company entered administration or on which a liquidator was appointed in respect of the company.

A transaction may be annulled if it is based on certain preferences. For example, if the person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities or the company does not act or allows an act to be done that (in either case) has the effect of placing the person in a position that if the company were insolvent liquidation is better than the position the person would have been in had the act not been done.

The court or a creditor or a liquidator can challenge any such transaction. The application must be made without unreasonable delay and the end result if successful is that the entire transaction is reversed.

Equitable subordination

Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganisation proceedings?

None.

GROUPS OF COMPANIES

Groups of companies

In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

This would be applicable in instances where the corporate veil is lifted but is in very exceptional circumstances. This lifting of the corporate veil means a situation in which the courts put aside the limited liability and hold a corporation’s shareholders or directors personally liable in the corporation’s actions or debts.

This would also apply in cases where fraud is proved and also in instances where there is, or it is shown there was, a direct or deliberate intention to put assets beyond the reach of the creditors.

Combining parent and subsidiary proceedings

In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

No.

INTERNATIONAL CASES

Recognition of foreign judgments

Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Yes, foreign judgments or orders are recognised. There is a law in Kenya that is the Foreign Judgments (Reciprocal Enforcement) Act, which allows enforcement of judgments (or arbitral awards) given in countries outside Kenya that accord reciprocal treatment to judgments given in Kenya and for other purposes in connection therewith. In the absence of the reciprocal arrangement, a foreign judgment is enforceable in Kenya as a claim in common law.

The countries known to enjoy this reciprocal arrangement are Australia, Malawi, the Republic of Rwanda, Seychelles, Tanzania, Uganda, the United Kingdom and Zambia. The same law does allow the Minister in charge at the time of foreign affairs to extend application of the Act to other countries that have made or will make reciprocal arrangements for the enforcement of Kenyan judgments.

UNCITRAL Model Law

Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?

Yes, the UNCITRAL Model Law adopted by the United Nations International Trade Law on 30 May 1997 and approved by the General Assembly of the United Nations on 15 December 1997 has been adopted in Kenya with minor amendments and modifications set out in the Fifth Schedule.

Foreign creditors

How are foreign creditors dealt with in liquidations and reorganisations?

With the adoption of the UNCITRAL Model Law by Kenya, which simply provides for internationally recognised and accepted guidelines on cross-border insolvency and also provides for cooperation and coordination between jurisdictions, the Insolvency Act 2015 allows foreign creditors to access foreign courts in Kenya.

The foreign creditor would therefore apply to commence insolvency proceedings in Kenya and would equally be allowed to participate in the proceeding under the law as creditors in Kenya would.

Cross-border transfers of assets under administration

May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

An administrator is usually appointed to manage the company affairs and property of the insolvent company. The law provides that an 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.

The Fourth Schedule allows an administrator power to transfer to subsidiaries of the company the whole or any part of the business and property of the company. There appears to be no limit on cross-border transfers to subsidiaries of the company. However, in the event it is determined post the transfer that this transfer did not benefit the administration of the company or benefit the creditors, such a transaction can be reversed and the administrator may be determined to be personally liable for the consequent loss to the company.

COMI

What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

In Kenya, there is no test to determine the COMI provided in the legislation governing insolvency; however, as the COMI concept forms part of the UNCITRAL Model Law, which Kenya has adopted, it may be an option for parties to consider forum shopping to move the COMI of a debtor company to a jurisdiction with a more favourable restructuring or insolvency regime.

Cross-border cooperation

Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognise foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Yes, Kenya provides a system for recognition of foreign insolvency proceedings. The law provides that an application may be made in court for recognition of the foreign proceeding in which the foreign representative has been appointed. The provisions of the Act oblige Kenyan courts to cooperate to the maximum extent possible with foreign courts or foreign representatives, either directly or through an insolvency administrator.

The application may, however, be rejected on the following grounds:

  • if a certified copy of the decision commencing the foreign proceeding is not attached to the application;
  • if a certificate from the foreign court affirming the existence of a foreign proceeding and the foreign representative is not attached to the application;
  • if any other evidence that is acceptable to the court of the existence of the foreign proceeding is not attached to the application; or
  • if there is no statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative.
Cross-border insolvency protocols and joint court hearings

In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

Kenya is yet to enter into cross-border insolvency protocols as there first needs to be harmonisation in terms of cooperation and communication of interests between states before this area of law can become a reality, though it would be important to note that with the enactment of the Insolvency Act No. 18 of 2015, Kenya can be said to be moving in the right direction.

Winding-up of foreign companies

What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

Kenyan courts can only order the winding up of a foreign company registered under the Companies Act, 2015 and, on commencement of insolvency proceedings in respect of the foreign company in the country or territory of its incorporation or in any other country or territory in which it carries on or formerly carried on business.

On recognition by the Kenyan court of a foreign insolvency proceeding, the foreign representative authorised in a foreign proceeding to administer the reorganisation or the liquidation of the foreign company’s assets or financial affairs or to act as a representative in the foreign insolvency proceeding may intervene in any proceeding in which the foreign company is a party, so long as the requirements of the law of Kenya are complied with. After the Kenyan Court has recognised the foreign insolvency proceeding, an insolvency proceeding under the Insolvency Act 2015 may be commenced limited to the assets of the foreign company that are located in Kenya and, to other assets of the foreign company that, under the law of Kenya, should be administered in that proceeding.

Update and trends

Trends and reforms

Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Trends and reforms59 Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

The enactment of the Insolvency Act has seen the introduction of corporate rescue mechanisms for companies that would previously have been forced into liquidation, which often resulted in losses for both the creditors and the shareholders. More particularly, insolvency does not serve as a death sentence for companies and two such general rescue mechanisms have been advanced as follows: administration and company voluntary arrangements.

Notably, administration seems to be the preferred method at the moment and in that regard one of Kenya’s largest retailers, which once controlled the lion’s share of the local and regional retail market for several years, successfully applied to go into administration. Also, recently, a large regional cement manufacturer went into administration.

Administration provides among others, the following benefits:

  • maintaining the company as a going concern;
  • achieving a better outcome for the company’s creditors than liquidation would offer;
  • helping to realise the property of the company in a controlled environment to make distributions to secured or preferential creditors; and
  • keeping off creditors and execution or enforcement processes for a specified period through a moratorium.

The Office of the Official Receiver is currently going through a process of review and amendment of the Act. The amended statute will likely come into force in 2020 after going through the ordinary legislative process.

Kenya has made resolving insolvency easier by facilitating the continuation of the debtor’s business during insolvency proceedings, providing for equal treatment of creditors in reorganisation proceedings and granting creditors greater participation in the insolvency proceedings.