CHAMBERS Global PracticeAUSTRALIADENMARK GuidesBELGIUMKENYA

LAW AND PRACTICE: p.p.3 Contributed by HerbertAnjarwallaGorrissenVan Bael Smith & Federspiel &Bellis Khanna Freehills LawThe ‘Lawand &Practice Practice’ sections – Kenya provide easily accessible information on navigating the legal system when conducting business in the jurisdic- tion. LeadingContributed lawyers explain by local law and practice at key transactional stages and for crucial aspects of doing business. stagesAnjarwalla and for crucial & Khannaaspects of doing business.

DOING BUSINESS IN AUSTRALIA:KENYA:DENMARK:BELGIUM: p.349 Chambers & Partners employ a large team of full-time researchers (over 140) in their2018 London office who interview thousands of clients each year. This section is based on these interviews. The advice in this section is based on the views of clients with in-depth international experience. KENYA

LAW AND PRACTICE: p.3 Contributed by Anjarwalla & Khanna The ‘Law & Practice’ sections provide easily accessible information on navigating the legal system when conducting business in the jurisdic- tion. Leading lawyers explain local law and practice at key transactional stages and for crucial aspects of doing business. Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

Law and Practice Contributed by Anjarwalla & Khanna

CONTENTS 1. Market Trends and Developments p.5 4.5 Special Procedural Protections and Rights for 1.1 Changes to the and Insolvency Secured p.12 Market p.5 5. Unsecured Rights, Remedies and Priorities p.12 2. Statutory Regimes Governing , 5.1 Differing Rights and Priorities Among Classes Reorganisations, and p.6 of Secured and Unsecured Creditors p.12 2.1 Overview of the Laws and Statutory Regimes p.6 5.2 Unsecured Trade Creditors p.12 2.2 Types of Voluntary and Involuntary Financial 5.3 Rights and Remedies of Unsecured Creditors p.12 Restructuring, Reorganisation, Insolvency and 5.4 Pre-Judgment Attachments p.12 p.6 5.5 Typical Timeline for Enforcing an Unsecured 2.3 Obligation to Commence Formal Insolvency Claim p.12 Proceedings p.7 5.6 Bespoke Rights or Remedies for Landlords p.13 2.4 Procedural Options p.7 5.7 Special Procedures or Impediments or 2.5 Liabilities, Penalties or Other Implications for Protections That Apply to Foreign Creditors p.13 Failing to Commence Proceedings p.7 5.8 The Statutory Waterfall of Claims p.13 2.6 Ability of Creditors to Commence Insolvency Proceedings p.7 5.9 Priority Claims p.13 2.7 Requirement for “Insolvency” to Commence 5.10 Priority Over Claims p.13 Proceedings p.7 6. Statutory Restructurings, Rehabilitations and 2.8 Specific Statutory Restructuring and Insolvency Reorganisations p.13 Regimes p.7 6.1 The Statutory Process for Reaching and Effectuating a Financial Restructuring 3. Out-of- Court Restructurings and Consensual Workouts p.9 /Reorganisation p.13 3.1 Consensual and Other Out-of-Court Workouts 6.2 Position of the Company During Procedures p.14 and Restructurings p.9 6.3 The Roles of Creditors During Procedures p.14 3.2 Typical Consensual Restructuring and Workout 6.4 Modification of Claims p.15 Processes p.9 6.5 Trading of Claims p.15 3.3 Injection of New Money p.10 6.6 Using a Restructuring Procedure to Reorganise 3.4 Duties of Creditors to Each Other, or on the a Corporate Group p.15 Company or Third Parties p.10 6.7 Asset Disposition and Related Procedures p.15 3.5 Consensual, Agreed Out-of-Court Financial 6.8 Release of Secured Creditor and Restructuring or Workout p.10 Arrangements p.15 4. Secured Creditor Rights and Remedies p.11 6.9 Availability of Priority New Money p.15 4.1 Type of Liens/Security Taken by Secured 6.10 Statutory Process for Determining the Creditors p.11 Value of Claims p.15 4.2 Rights and Remedies for Secured Creditors p.11 6.11 Restructuring or Reorganisation Plan or Agreement Among Creditors p.15 4.3 The Typical Time-lines for Enforcing a Secured Claim and /Security p.12 6.12 The Ability to Reject or Disclaim p.16 4.4 Special Procedures or Impediments That Apply 6.13 The Release of Non- Parties p.16 to Foreign Secured Creditors p.12 6.14 Creditors Rights of Set-off, Off-set or Netting p.16

3 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

6.15 Failure to Observe the Terms of an Agreed 12. Duties and Personal Liability of Directors and Restructuring Plan p.16 Officers of Financially Troubled Companies p.23 6.16 Receive or Retain Any Ownership or Other 12.1 The Duties of Officers and Directors of a Property p.16 Financially Distressed or Insolvent Company p.23 12.2 Direct Fiduciary Breach Claims p.24 7. Statutory Insolvency and Proceedings p.16 12.3 Chief Restructuring Officers p.24 7.1 Types of Statutory Voluntary and Involuntary Insolvency and Liquidation Proceedings p.16 12.4 Shadow Directorship p.24 7.2 Distressed Disposals as Part Insolvency 12.5 Owner/Shareholder Liability p.24 /Liquidation Proceedings p.20 13. Transfers/Transactions That May Be Set Aside p.24 7.3 Implications of Failure to Observe the Terms 13.1 Grounds to Set Aside/Annul Transactions p.24 of an Agreed or Statutory Plan p.20 13.2 Look-back Period p.24 7.4 Investment or Loan of Priority New Money p.20 13.3 Claims to Set Aside or Annul Transactions p.24 7.5 Insolvency Proceedings to Liquidate a Corporate Group on a Combined Basis p.21 14. Intercompany Issues p.25 7.6 Organisation of Creditors p.21 14.1 Intercompany Claims and Obligations p.25 7.7 Conditions Applied to the Use of or Sale of Its 14.2 Offset, Set off or Reduction p.25 Assets p.21 14.3 Priority Accorded Unsecured Intercompany 8. International/Cross-border Issues and Processes p.21 Claims and Liabilities p.25 8.1 Recognition or Other Relief in Connection with 14.4  to the Rights of Third Party Foreign Restructuring or Insolvency Proceedings p.21 Creditors p.25 8.2 Protocols or Other Arrangements with 14.5 Liability of Parent Entities p.25 Foreign Courts p.21 14.6 Precedents or Legal Doctrines That Allow 8.3 Rules, Standards and Guidelines to Determine Creditors to Ignore Legal Entity Decisions p.25 the Paramountcy of Law p.21 14.7 Duties of Parent Companies p.26 8.4 Foreign Creditors p.21 14.8 Ability of Parent Company to Retain Ownership/Control of Subsidiaries p.26 9. /Receivers/Statutory Officers p.21 9.1 Types of Statutory Officers Appointed in 15. Trading Debt and Debt Securities p.26 Proceedings p.21 15.1 Limitations on Non-banks or Foreign Institutions p.26 9.2 Statutory Roles, Rights and Responsibilities of 15.2 Debt Trading Practices p.26 Officers p.22 15.3 Loan Market Guidelines p.27 9.3 Selection of Statutory Officers p.22 15.4 Enforcement of Guidelines p.27 9.4 Interaction of Statutory Officers with Company 15.5 Transfer Prohibition p.27 Management p.22 15.6 Navigating Transfer Restrictions p.27 9.5 Restrictions on Serving as a Statutory Officer p.22 16. The Importance of Valuations in the 10. Advisors and Their Roles p.22 Restructuring & Insolvency Process p.27 10.1 Types of Professional Advisors p.22 16.1 Role of Valuations in the Restructuring and 10.2 Authorisations Required for Professional Insolvency Market p.27 Advisors p.22 16.2 Initiating Valuation p.27 10.3 Roles Typically Played by the Various 16.3 Jurisprudence Related to Valuations p.27 Professional Advisors p.22 11. Mediations/Arbitrations p.22 11.1 Use of Arbitration/Mediation in Restructuring /Insolvency Matters p.22

4 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

Anjarwalla & Khanna has an established banking and fi- and financial institutions. A&K is the founding member nance practice, with a dedicated team of three partners, and driving force of ALN, a leading independent African eleven associates and one paralegal with offices in Nairobi alliance of top-tier law firms in 16 countries. The banking and Mombasa, Kenya. The team advises on corporate re- and finance team has developed specialist expertise in sev- structuring and insolvency in relation to regulatory, finan- eral practice areas, including all aspects of complex bank- cial, and commercial issues to stakeholders from corporate ing and finance transactions, with a particular emphasis on experiencing financial difficulties to lender groups; syndications, insolvency and restructurings involving cor- agents to syndicated lending groups; commercial creditors porate and commercial organisations and aviation finance.

Authors Sonal Sejpal ‘s expertise covers all aspects James Mungai ‘s main focus is on complex of complex banking and finance transac- banking and finance transactions, and he tions, with a particular emphasis on has particular interests in insolvency and syndications, insolvency and restructuring restructuring in corporate and commer- in corporate and commercial organisa- cial organisations. He has advised credi- tions and aviation finance. Sonal is a tors, debtors and insolvent companies member of the UK-based Loan Market Association (LMA) alike on insolvency in various contexts, such as the priority and is regularly and actively involved in reviewing of docu- of secured creditors or other registered securities; volun- ments for use in East Africa by this Association. She is a tary arrangements; liquidation and of regular speaker at LMA events on various aspects of companies among other areas. James has advised on banking and commercial law, including seminars. Sonal corporate restructuring, insolvency, mergers and acquisi- led the firm’s review of the new Insolvency Act and tions, private equity investments in a wide variety of regularly liaised with the Attorney General’s team in corporate and finance fields. connection with practical issues arising from the new law. In addition, she is a member of the Law Society of England and Wales, the Employment Law Alliance and L2B Aviation.

1. Market Trends and Developments their corporate governance structures in order to suit the banks’ regional expansion. Operational changes have been 1.1 Changes to the Restructuring and Insolvency implemented with the aim that they will lead to efficiency, Market an increase in market share and deliver improved returns on In 2016 Kenya overhauled its companies and insolvency laws investment to shareholders. which had been in place for decades by replacing them with new statutes namely, the Companies Act, 2015 and the In- In addition, there are notable restructurings caused by the solvency Act, 2015. Both of these laws borrow heavily from financial woes that have plagued the banking sector. Over the UK Companies Act, 2006 and the Insolvency Act, 1986 the past two years two banks have been placed under receiv- respectively. Neither of these laws have had much time to ership on account of mismanagement and a tighter grip on be tested but restructurings should benefit from provisions regulatory compliance by the Central Bank of Kenya (CBK) such as financial assistance and squeeze outs which are new coupled with a weary public who is fearful of more bank fail- to our regime. We do not have any empirical data on the ures has necessitated changes at operational and structural Kenyan restructuring market but based on our own expe- level by many banks. At least one of the banks in receivership rience believe that it is a very active sector, and in the last is likely to make history if the restructuring that has been 12-18 months there has been some significant transactions planned by CBK, making way for the entry of a strategic that have involved restructurings. investor, succeeds and will see the first bank ever in Kenya to continue business after the lifting of a receivership. Over the past couple of years major financial institutions, including Kenya’s two biggest commercial banks Equity Financial woes that have plagued national carrier Kenya Air- Bank Limited and KCB Bank Limited, have undergone re- ways have necessitated a major capital restructuring which structurings that have been informed by the need to review will see some of its short-term debts restructured as a means

5 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

to reduce the company’s overall indebtedness. This will in- • Competition Act: The act deals with antitrust matters in- clude renegotiating the terming of some of these short-term cluding notification to the competition authority for share facilities with a view to having the repayments reduced, pe- and asset transfers above certain thresholds. riods extended or a reduction on interest costs. • The Movable Property Security Rights Act: The act deals with the registration of security rights in movable prop- In addition, the crises in the banking sector as a result of erty. The act provides for the prioritisation of securities the three banks that have gone into receivership (with one registered under it where the creditors are deemed to be proceeding to liquidation) together with the surprise intro- secured creditors upon due registration (for purposes of duction of a law that restricts banks on the rate of interest insolvency). they charge on loans and minimum rates of interest that must be paid on deposits have also been further shaken by a 2.2 Types of Voluntary and Involuntary Financial recent proposal by the Ministry of Finance during the 2016 Restructuring, Reorganisation, Insolvency and budget reading to have banks raise their minimum capital Receivership levels fivefold over the next three years. These proposals have Types of proceedings include: however been rejected by Parliament and the CBK based on the premise that the proposal will further squeeze smaller • Administration: The Insolvency Act 2015 provides for this banks, congest fiscal development and limit lending. in order to maintain a company as a going concern; the court, holder of a or the company or its directors may appoint an administrator to come up with a 2. Statutory Regimes Governing plan to rescue the company from liquidation. Restructurings, Reorganisations, • Company voluntary arrangements (CVA): The Insolvency Act also provides for CVA’s whereby insolvent companies Insolvencies and Liquidations can enter into compositions allowing them to reach a vol- 2.1 Overview of the Laws and Statutory Regimes untary agreement with their business creditors regarding Below are the major laws relevant In Kenya: repayment of all, or part, of their corporate debts over an agreed period of time. • The Companies Act, 2015: The principal statute governing • Mergers and acquisitions: The restructurings that involve companies operating in Kenya. the merger of two or more companies or the takeover of the • The Insolvency Act, 2015: This act deals with the liquida- shareholding of other companies either wholly or substan- tion of incorporated and unincorporated bodies (including tially or the sale of assets and liabilities. For publicly listed ones that may be solvent); provides for administration as companies mergers and acquisitions are governed by the an alternative to liquidation; and also deals with matters Capital Markets Act while the Companies Act deals with related to of natural persons. non-listed companies. Transfers of assets will require con- • The Banking Act, Chapter 488: The principal law dealing sideration of the application of the Transfer of Businesses with the regulations of banks, their capitalisation, the con- Act (Cap. 500 Laws of Kenya). duct of banking business, corporate governance and con- • Liquidation: This is the process of winding up a company nected matters. which involves the sale of a company’s assets to settle its • The Central Bank Act, Chapter 491: The act establishes the debts or attempt to settle its debts. The Insolvency Act stip- CBK and provides for the operation thereof, the functions ulates that liquidations can be sanctioned by the company and powers of the CBK. The act also provides for the estab- itself, ie members/shareholders; or by way of a creditors lishment of the currency of Kenya, foreign exchange and sanctioned liquidation where the company is unable to transfers of money in and out of the country. pay its debts; and by way of a court sanctioned liquida- • Central Bank of Kenya Prudential Guidelines, 2013: The tion where an application is made to a court and the court guidelines govern a wide variety of issues relevant to bank- makes an order for liquidation. ing including acquisitions, mergers, amalgamations, trans- • Receivership: Following the changes introduced by the new fers of assets and liabilities of banks and governance. Companies Act and the Insolvency Act, there is no longer • The Kenya Deposit Insurance Act, 2012: The act provides a statute that recognises the concept of other for the establishment of a deposit insurance system and for than for banks and insurance companies and in the case the receivership and liquidation of deposit taking institu- of receiverships over land for the purpose of exercising a tions. The act also establishes the Kenya Deposit Insurance statutory power of sale. We believe this is an error and the Corporation (KDIC) which is the entity tasked with the concept of receiverships as a matter of law (for management of lending institutions that go into receiver- example under a security created to secure a debt) would ship. still be relevant under the law.

6 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

2.3 Obligation to Commence Formal Insolvency 2.6 Ability of Creditors to Commence Insolvency Proceedings Proceedings There are no specific timelines per se when a company is Creditors can commence involuntary proceedings against a obligated to commence insolvency proceedings but the In- company where the company is unable to pay its debts and solvency Act imposes an obligation on directors to consider has become insolvent. Under Section 384 of the Insolvency whether to continue trading or not, if to do so would amount Act a company is deemed to be unable to pay its debts if: to fraudulent or . Generally insolvency pro- ceedings commence if it becomes apparent that a company • A creditor serves a notice to pay a company for an amount is unable to pay its debts. According to the Insolvency Act of KES100,000 or more and the company fails to pay within the business of a company undertaken 12 months prior to 21 days; its insolvency can be called into question. Among the key • An order is obtained against a company directing the com- offences that officials of a company can be charged with is pany to pay its due debts and the order is returned to court wrongful trading where it is deemed to be an offence if the unsatisfied; officials knew or ought to have known that the company was • It is proved to the satisfaction of a court that a company is unable to pay its debts and there was no other recourse other unable to pay its debts; or than placing it in insolvency. A worthy point to note is that • It is proven to the satisfaction of a court that a company’s a can make an application to the court to have assets are less than the amount of its liabilities (including officials contribute personally to pay for a company’s debts. contingent and prospective liabilities).

2.4 Procedural Options The Insolvency Act gives creditors the right to initiate a In the event of insolvency, companies in Kenya can opt to creditor’s voluntary winding-up if a company becomes un- choose the various insolvency processes in the Insolvency able to pay its debts. The creditors would convene a meeting Act (except receivership which is not expressly recognised organised by a company whereby they resolve to liquidate in the Insolvency Act). Banking institutions can however the company. If the directors of a company refuse to convene be placed under receivership as they are not governed by the meeting they commit an offence and on conviction are the Insolvency Act and have their own unique insolvency liable to pay a fine of KES5,000. A creditor can also apply regime. Companies can elect to either: to a court for liquidation or administration of a company.

• Pass resolutions opting to liquidate and wind-up a com- 2.7 Requirement for “Insolvency” to Commence pany; Proceedings • Proceed to place a company into administration either by There is no express definition of insolvency under the Insol- the directors resolving to do so at a board meeting or via vency Act, but insolvency is associated with a company’s in- an application to court by a creditor; or ability to pay its debts as and when they become due. For in- • Enter into compositions with creditors: The company can voluntary proceedings insolvency of a company is required. elect to enter into a company voluntary arrangement with The term involuntary indicates a situation where it is against its creditors in a bid to settle its debts and come up with a a company’s wish for proceedings to be commenced or un- plan on how debts will be settled in the future, which can dertaken. For example, a liquidation sanctioned by a court include restricting creditors foregoing debt for equity. on the application of a creditor.

2.5 Liabilities, Penalties or Other Implications for On the other hand, for voluntary proceedings it is not neces- Failing to Commence Proceedings sary that a company be in an insolvency situation. The share- The directors of a company can be held liable for wrongful holders can simply pass a resolution to wind-up a company. trading or . The Insolvency Act makes it In fact, for a shareholder’s winding-up a company must show an offence for a director or officer of a company to continue that it does not have creditors, that it is able to pay its debts trading if they are aware or ought to know that a company and that the reasons for its decision to wind-up are not to is insolvent. Further, if the directors knowingly engage in avoid paying its debts. fraudulent trading behaviours, ie disposing company assets or shares, they can be held liable for having committed a 2.8 Specific Statutory Restructuring and Insolvency criminal offence. The penalties for such offences include a Regimes fine of KES2 million or imprisonment for a term of up to Banks and financial institutions regulated by the CBK have five years. These two penalties can be issued concurrently. their own insolvency regime set out in the Kenya Deposit In addition, a court can order that the responsible directors Insurance Act. The CBK in consultation with the Cabinet pay or contribute to the losses that a company incurred as a Secretary of Finance may appoint a receiver in the following result of their actions. cases: i) the institution’s assets are less than the institution’s obligations to its creditors; ii) the institution is likely to fail

7 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

to meet any financial obligation or meet its depositors’ de- spondence, documents or other information relating to the mands in the normal course of business; iii) the institution insurance business which is false or misleading; or has incurred or is likely to incur losses that will deplete all • If the Insurance Regulatory Authority discovers any fact or or substantially all of its capital, and there is no reasonable circumstance which warrants the exercise of the relevant prospect for the institution to become adequately capitalised power in the interests of the insurer, its shareholders, poli- without assistance; and iv) the institution is undercapitalised cyholders, or reinsurer or is in the public interest. or significantly undercapitalised. While under receivership, a financial institution remains closed until shareholders invest Within 12 months of appointment, the statutory manger has more capital to save it. The KDIC as receiver determines to prepare and submit a report on the status of an insurance whether or not to restructure an institution, run it or sell it company and recommend whether the company can be re- to repay depositors. vived or if it should be liquidated. If a recommendation for liquidation is made, the insurance company is liquidated in Membership to KDIC is compulsory for all institutions accordance with the provisions of the Insolvency Act. licensed by CBK who carry on deposit taking business as commercial banks, financial institutions, mortgage finance A clearing house entity established under the Central De- companies, building societies and micro finance institutions. positories Act (No. 4 of 2000) (the CDA) is to be subjected These institutions pay a premium to insure their customer’s to an insolvency process in accordance with the provisions of deposits in the event of insolvency. The maximum payout a the CDA. Section 43A of the CDA provides that the depositor can receive on liquidation of an institution regu- processes of a central depository entity shall take precedence lated by KDIC is KES100,000. over any insolvency laws, ie distributions made under a CDA default process need not follow the order of priority under Insurance companies are regulated by the Insurance Regu- the Insolvency Act. What this means is that the Insolvency latory Authority established under the Insurance Act (Cap Act is to be applied second to the CDA where the CDA is 487, Laws of Kenya). Pursuant to Section 67C of the Insur- silent with respect to an insolvency process. ance Act an insurance company can be placed under statu- tory management in the following instances: The State Corporations Act (Cap 446 Laws of Kenya) (SCA) is the primary state that governs the establishment, control • If the insurer is found to have failed to meet the minimum and functions of state corporations. The SCA, among others, solvency margin required under Section 41 of the act; provides for the manner in which state corporations should • If the insurer has failed to submit any of the accounts, re- be dissolved (wound up) and states that the State Corpora- turns, statements, actuarial valuations or other reports un- tions Advisory Committee is established under the SCA with der Part VI for over six months after the end of the financial the function of, inter alia, investigating the conduct of state year to which they relate; corporations and if found fit recommend their . • If the insurer having failed to comply with any requirement The SCA further provides that upon the recommendation of the Insurance Act and having received notice to comply, that a state corporation should be dissolved then the dis- continues to be non-compliant for a period exceeding six solution process is to be carried out in accordance with the months; statute that establishes that state corporation. It’s not clear • Where, having regard to the financial circumstances of the however what happens when the statute establishing a state insurer, the Insurance Regulatory Authority is satisfied that corporation is silent on dissolution. Section 3 (2) of the In- the insurer cannot carry on the business, or any part of the solvency Act could, however, possibly be argued to offer an business, as an insurer; alternative. It provides that the Insolvency Act applies to • If an amount due by the insurer, pursuant to a court order natural persons, partnerships, limited liability partnership, made in Kenya arising out of a policy of insurance issued companies and other corporate bodies established by any by the insurer or a contract of reinsurance entered into by written law. There is no definition of what corporate bodies a reinsurer, has remained unpaid for three months after the established by any written law means, and the implications date of a court order; of this are that the meaning here becomes very wide and • If the business of the insurer is wholly or is unproportion- arguably includes state corporations and other statutory es- ately reinsured with another person; tablished corporate entities. Going by the literal meaning of • If the insurer is unable to pay his debts within the meaning Section 3(2) of the Insolvency Act it would therefore follow of 384 of the Insolvency Act; that corporations established by statute, ie state corpora- • If the insurer is found not to have made adequate reserves tions, that do not have mechanisms envisaged in their es- or to have understated the level of his liabilities; tablishing statutes on how they can undergo insolvency have • If the insurer is discovered to have submitted or provided the Insolvency Act become the default law to be applied. any accounts, returns, statements, books, records, corre-

8 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

3. Out-of-Court Restructurings and restructurings and arrangements as opposed to the statutory Consensual Workouts involuntary processes. 3.1 Consensual and Other Out-of-Court Workouts Consensual negotiations are discretionary between the con- and Restructurings cerned parties. However, where a company is already in ad- The practice of voluntary liquidation is provided for under ministration or liquidation the administrator or liquidator the Insolvency Act and this can be done by creditors, direc- so appointed has the right to make a proposal that a com- tors and members. Under the Insolvency Act, the directors pany enter into voluntary arrangements. of an insolvent company can make a proposal to the com- pany and its creditors for a voluntary arrangement under It is an offence for directors to continue trading if they are which the company enters into a composition in satisfaction aware or ought to know that a company is insolvent, and of its debts or a scheme for arranging its financial affairs. The they can be held liable for insolvent trading or fraudulent composition may include a consensual restructuring of the trading. They can also be held personally liable and ordered insolvent company. The courts will generally observe and to contribute to a company’s assets. The point to note here respect these consensual arrangements. Once a proposal has is that if a company is insolvent directors should take steps been made and an arrangement entered into, a supervisor is to place a company in an insolvency process, for example appointed to oversee the arrangement and has to prepare a either choosing to rescue a company by continuing trading report within 30 days of appointment and submit the same under administration or by entering into voluntary arrange- to a court with recommendations as to whether the proposal ments/compromises or in another alternative by electing to has reasonable prospects of benefiting the company. The IN- proceed to liquidation. SOL principles are incorporated in these arrangements and for example, it is typical for creditors to be given full access 3.2 Typical Consensual Restructuring and Workout of the insolvent company’s records to determine the viability Processes of the arrangements, and in almost all cases where the ar- A standstill in Kenya is recognised as a moratorium under rangement is agreed upon the creditors agree not to pursue the Insolvency Act. The directors of an insolvent company any other debt recovery processes and give priority to the who are proposing a voluntary arrangement can apply for a consensual arrangement. moratorium with respect to a company’s debts. The applica- tion for a moratorium is made to a court and is accompanied There is a general perception that consensual restructuring by a report from the directors setting out the contents of a processes are much better because they tend to hold more voluntary arrangement, the company’s financial statements possibility for full recovery and value in terms of debts owed. and a statement by a supervisor appointed by the directors The rationale here being that placing a company in a statu- stating that the supervisor believes the voluntary arrange- tory involuntary process is not in the best interest of a com- ment is in the best and is likely to pany in terms of limiting its trading and, in some instances, succeed. Once a moratorium has been granted a company reducing trade entirely which would mean a company’s debts cannot be subjected to statutory insolvency processes un- become even more irrecoverable. Having a consensual ar- til the voluntary arrangement is finalised and creditors are rangement gives a company the chance to recover and re- estopped from enforcing their debts. A voluntary arrange- gain a solvent position. The new Insolvency Act advocates ment once proposed and approved becomes binding on a a rescue culture. company and its creditors. For a company to be eligible for a moratorium it has to meet certain requirements, such as There is no empirical data to assist in gauging how support- the company should not be in liquidation or administration ive borrower companies are, but from a practical perspective and should not have a debt of more than one billion shillings. where there is probability of saving a company lenders will A moratorium takes effect after a consensual arrangement generally wait and gauge the situation. The court process in (agreement) is lodged in court together with the supervi- Kenya can be long as there is much backlog. Taking a matter sor’s report. all the way to a final appeal can take ten years or more. This is another reason why lenders will try and see if a settlement With respect to default waivers, a moratorium cannot be can be achieved. Otherwise, in most instances lenders insist granted unless secured creditors have given their consent for on having securities over a company’s assets so as to have the moratorium. The consent of secured creditors amounts priority over other debtors and have a realistic possibility of to a waiver of their right to enforce their securities on ac- realising their debts in the event of liquidation. count of default.

As discussed earlier, Kenya’s new insolvency regime is still During a moratorium, a company is usually under the super- being tested by insolvency and legal practitioners. However, vision of a supervisor appointed by concerned stakeholders, we believe that the new regime leans towards consensual ie directors and creditors with the approval of the courts.

9 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

The supervisor oversees a company’s operations with a view settled first as they are deemed to be part of the expenses of to enforcing the terms of a voluntary arrangement and to an insolvency process. Capital injection into an insolvent see whether a company is adhering to the arrangement. The company is mostly in situations where an insolvent com- insolvent company, it directors and officers are obligated to pany has real prospects of being revived. A potential investor ensure that a company performs any agreements entered would ordinarily carry out due diligence on a company to into pursuant to a voluntary arrangement. determine whether or not to acquire equity. This is because equity holders (shareholders) are the last parties to be paid During a voluntary arrangement a company arranges for a in the event of liquidation after unsecured debts have been creditors’ meeting whereby the creditors appoint one of their settled. own as chairman of the meeting. The creditors will usually be divided into three groups, secured creditors, preferential 3.4 Duties of Creditors to Each Other, or on the creditors and unsecured creditors. The purpose of separation Company or Third Parties is for voting rights differentiation since unsecured creditors The Insolvency Act is quite extensive and places various ob- cannot vote in matters concerning secured creditors, ie with ligations and fiduciary duties on directors and insolvency respect to consents for a moratorium. practitioners (ie administrators, liquidators, supervisors etc). The underlying principle is that each of these persons has A moratorium can be extended by a moratorium committee. to act in the best interest of a company and exercise utmost The Insolvency Act provides that the meeting held between good faith in performing these duties. creditors, an insolvent company and the supervisor can elect to extend the moratorium if the need arises. A moratorium 3.5 Consensual, Agreed Out-of-Court Financial may be formed with the consent of the supervisor granting Restructuring or Workout certain mandates to the committee, ie committee to over- In the case of a syndicated finance there will usually be the see the moratorium. The committee is dissolved when the concept of majority lender decision. A proposal for a com- moratorium ends or when a creditors’ meeting resolves to position in a voluntary arrangement can be approved by the dissolve it. majority of creditors (75% in number and value) who attend the initial meeting to approve a proposal. This also applies The creditors meeting appointing the moratorium com- to modifications in the proposal for a composition. In addi- mittee also sets the budget for the committee and it cannot tion, the Insolvency Act provides that if a secured creditor incur any expenses above the approved budget without ap- does not consent to a voluntary arrangement, the proposal proval of the meeting. The operations of the committee are for the arrangement can still be approved by a majority of therefore restricted to the budget limit set by the creditors the creditors provided it can be proved that: i) the secured meeting. Subject to the budget limit, the costs and expenses creditor would be in a position no worse than if the company of the committee are paid by the supervisor. The supervi- was in liquidation; ii) the secured creditor would receive the sor’s expenses and costs are also debated by the meeting and same amount under the voluntary arrangement similar to approved. the amount the creditor would get if the asset was realised; and iii) the secured creditor would be paid in full from those The appointment of a supervisor is a statutory requirement. assets before any other creditor is paid. Appointment of the moratorium committee depends on the creditors and whether they require a committee to oversee it. As previously mentioned, the Insolvency Act is fairly new and so it is not possible to draw any conclusions at this stage The creditors do have the right to request for and be given a about informal consensual processes. A cramdown is argu- company’s records including, balance sheet, profit and loss ably recognised in the Insolvency Act whereby a voluntary accounts and any other relevant information related to the arrangement will be approved despite the fact that certain company that would enable a creditor to make an informed creditors oppose its application. The proposal for the compo- decision concerning a consensual arrangement. Company sition once lodged in court is binding on creditors including officers are under a duty to provide accurate information those that did not approve it. Similarly, secured creditors and can be held liable for fraud if they provide inaccurate who do not consent to a proposal can still be bound by an information. agreement if certain prerequites (as above) are met.

Priority rights can only be vindicated or changed with con- sent of the concerned party.

3.3 Injection of New Money New money is injected mostly by way of debt. Debts incurred during an insolvency process have priority and have to be

10 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

4. Secured Creditor Rights and tangible movable assets. The MPSR Act provides that the Remedies following securities can be created over movable assets: 4.1 Type of Liens/Security Taken by Secured • Chattels mortgages; Creditors • Credit purchase transaction; Real Estate • Credit sale agreements; Under Kenyan law real estate securities are governed by a • Floating and fixed charges; separate and distinct legal regime from the Insolvency Act • Pledges; due to the unique land law regime in the country. The Land • Trust indentures; Act, 2012 and Land Registration Act, 2012 govern securities • Trust receipts; and created over real estate. In Kenya one can only create security • Financial leases. by way of a charge over land which is required to be regis- tered at the relevant Lands Registry to take effect as a formal The MPSR has established the office of registrar of security security. If a charge is not registered but the documents of rights where such securities will be registered. a title to the land are deposited with a lender, such an ar- rangement is deemed to create an informal charge. Formal Special rules apply regarding the taking of security over air- charges, however, take precedence over informal charges. crafts and ships. For aircrafts, a is noted on the certificate of registration, which is issued by the Kenya Shares Civil Aviation Authority and registered at the International Security over shares in a Kenyan company can be taken by Registry of Mobile Assets (and the Companies Registry, if way of a charge or a memorandum of deposit which entails the chargor is a company registered in Kenya). For ships, the deposit of share certificates. For the charge, the security registering the security interest (either of the ship or a share is taken by way of a fixed or floating charge over the shares. in the ship) at the Kenya Maritime Authority registry is re- In the case of a memorandum of deposit, the share certifi- quired. cates are deposited with the lender. To perfect such a security additional measures are added such as the delivery of blank 4.2 Rights and Remedies for Secured Creditors share transfer forms (and ancillary supporting documents) Secured creditors in Kenya have priority over all other credi- to ensure a lender is able to transfer and dispose of shares in tors and secured assets do not usually form part of an insol- the event of a default. vent’s estate. A secured creditor usually has a right to realise the asset secured and dispose of the secured asset. If there Bank Accounts is any surplus, the appointed by the Security over the proceeds of a bank account is taken by secured creditor to realise the asset is obligated to remit such way of a fixed or floating charge. Where the charge is a fixed surplus to a liquidator if a company is being wound up. In a charge, the lender takes control over the charged account restructuring, if a company is not insolvent secured credi- and prevents the chargor from withdrawing monies from, tors may opt to give their consent to a restructuring if they or otherwise dealing with, the account without the lender’s are satisfied that the restructuring will not result in a loss. If consent. Where the charge is floating, the chargor is permit- the restructuring is occasioned by the fact that a company is ted to retain control of the charged account unless and until insolvent it is more likely that the secured creditor will opt the charge converts into a fixed charge following an event to realise the asset rather than consent to the restructuring of default. and risk a loss on its security.

Contractual Rights, Intellectual Property and Insurance Rights accruing to creditors are subject to intercreditor cov- Proceeds enants if there was an agreement between creditors on how Security may be granted over contractual rights by way of proceeds will be distributed in an insolvency situation. Oth- an assignment of those rights, provided there is nothing erwise, if a secured creditor has not willingly submitted to in the relevant contract that prohibits the granting of such an intercreditor agreement they cannot be subjected to the security. A company will typically take security over trade terms of such an agreement. marks, copyrights and other intellectual property by way of a fixed charge. Secured creditors have a right to make an application to a court in relation to any voluntary and involuntary processes. Personal Property and Tangible Assets However, whether or not to uphold and/or grant a specific Kenya recently enacted the Movable Properties Security remedy to a secured creditor will depend on a courts’ dis- Rights Act, 2017 (the MPSR Act) which has established a cretion. A secured creditor will need to provide sufficient new regime to deal with securities that can be created over reasons as to why they need a certain order disrupting or blocking an involuntary process. For example, a secured

11 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

creditor can make an application to challenge a voluntary 5. Rights, Remedies process where a company’s directors seek to undertake such and Priorities a process without giving the statutory notice required to the secured creditor or seeking the secured creditor’s consent. 5.1 Differing Rights and Priorities Among Classes of Secured and Unsecured Creditors Secured creditor rights are subject to discretionary stays Schedule 2 of the Insolvency Act sets out the preferential granted by a court in instances where an application has been debtors in priority as being: i) expenses of the liquidation; made to stay such rights. This is, for example, in instances ii) wages and other employee costs; iii) certain taxes and where the security of a secured creditor is being called into other levies due in law; and iv) unsecured creditors to be question by an insolvency practitioner. paid .

4.3 The Typical Time-lines for Enforcing a Secured Secured assets do not form part of an insolvency estate in Claim and Lien/Security Kenya and a secured creditor has the right to realise the se- There are no specific timelines for when a secured creditor curity and set off debts due to them, but must account for any has to enforce their claim. However, there are various in- excess funds from the realisation which must be remitted to stances where timelines have to be observed or a creditor’s the liquidator for distribution. claim may fail, such as where in a liquidation the security created is not readily apparent ie it is an equitable security 5.2 Unsecured Trade Creditors and the secured creditor has not come forward to claim and/ Unsecured creditor rights rank parri passu and any distri- or prove its debt. The creditor may, in such a case, lose its butions to be made are shared on a parri passu basis among rights in the instance where the liquidation is finalised and them. It should be noted that when realising assets secured assets have been sold to bona fide purchasers for value with- by floating charges, the insolvency practitioner is required out notice. It should be noted however that the Kenyan legal to set aside 20% of the proceeds of realisation to cater for the system has a unique procedure for secured creditors when debts due to unsecured creditors. it comes to land. Where a secured creditor holds a security over land there are specific procedures and timelines that 5.3 Rights and Remedies of Unsecured Creditors the creditor has to observe in order to realise its asset. The As far as insolvency is concerned unsecured creditors rank approximate time that a secured creditor holding a security last when it comes to distributions. However, unsecured over land takes to realise the asset is six months. creditors (if they have proven their debts) have the right to make applications to a court in relation to disputes regarding 4.4 Special Procedures or Impediments That Apply the suitability or lack thereof of an insolvency practitioner; to Foreign Secured Creditors disputes relating to distributions made by an insolvency There are no special procedures or impediments applicable practitioner; and generally any issue regarding the process to foreign secured creditors. In the instance where an insol- of insolvency. vent company in Kenya has assets in another jurisdiction that are secured, the provisions of cross-border insolvency In voluntary proceedings, the directors of a company are will apply and, in particular, the provisions of the Model Law obliged to notify creditors (secured and unsecured alike) on Cross-Border Insolvency adopted by the United Nations of the intention to liquidate, wind-up or place a company Commission on International Trade Law of 30 May 1997. in administration. The creditors have the right to object to The secured creditor will need to familiarise itself with the such processes. insolvency legislation of the country where the assets are lo- cated and determine whether, for example, court approval in 5.4 Pre-Judgment Attachments that jurisdiction is required. In Kenya leave of court will be A secured creditor can proceed to enforce its security by at- required where a company in a foreign jurisdiction is being taching and selling attachment without the need for a court liquidated to realise an asset in Kenya. judgment where the company is in liquidation as the secured asset is not deemed to be part of the insolvency estate. How- 4.5 Special Procedural Protections and Rights for ever, a secured creditor will need court approval or consent Secured Creditors of an administrator to realise an asset while a company is in As mentioned above, holders of security over land have a administration. special procedure to follow provided for in the Land Act, 2012. Otherwise, the general principle that assets of secured 5.5 Typical Timeline for Enforcing an Unsecured creditors do not form part of an insolvency estate are ap- Claim plicable. There is no specific timeline for enforcing unsecured claims as unsecured creditors are paid last in the order of prior- ity. However, once a company is undergoing an insolvency

12 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

process all creditors have to first of all submit proof of their 6. Statutory Restructurings, claims within a certain period of time, usually before 4 pm Rehabilitations and Reorganisations on the day before the day of the initial creditors meeting, otherwise if an unsecured creditor has not proven their 6.1 The Statutory Process for Reaching and claim then they will not have their debts settled while the Effectuating a Financial Restructuring/ rest of creditors are being paid. An unsecured claim there- Reorganisation fore will be settled at the end of an insolvency process or in Unanimous approvals of either secured or unsecured credi- instances where a court has intervened and given an order or tors are not required for restructurings. During the meeting where the settlement of an unsecured claim is pursuant to an to approve a voluntary arrangement which may include a insolvency process, ie the claims settled by an administrator restructuring, the approval required is by a special majority trying to revive a company by settling some debts. vote (75% in value and number). In addition, where secured creditors do not give their consent for an arrangement, the 5.6 Bespoke Rights or Remedies for Landlords proposal will be accepted provided it can be proven to the Landlords are treated as unsecured creditors. Before an courts in the event of a dispute that: i) the secured credi- insolvency process begins a landlord retains the right to tor would be in a position no worse than if the company distress for rent due by attaching a company’s assets. In an was in liquidation; ii) the secured creditor would receive the insolvency a practitioner may disclaim an onerous property same amount under the voluntary arrangement similar to (premises leased by an insolvent company) where they are the amount the creditor would get if the asset was realised; of the opinion that the property is an unsustainable debt. and iii) the secured creditor would be paid in full from those A landlord on the other hand may only exercise a right of assets before any other creditor is paid. forfeiture by peaceable re-entry in relation to premises let to a company with the consent of the administrator or with The Insolvency Act provides for the initiation of a voluntary court approval. arrangement/composition by the directors of a company and does not allow such a proposal from creditors. 5.7 Special Procedures or Impediments or Protections That Apply to Foreign Creditors The Insolvency Act does not specifically list what a composi- There are no special rules where the creditor is a foreigner tion agreement should contain. However, once approved the and the debtor is Kenyan. The creditor needs to adhere to agreement or proposal has to be lodged in court together the provisions of Kenyan law. with a recommendation from the supervisor on whether the proposal is viable or not. 5.8 The Statutory Waterfall of Claims Schedule 2 of the Insolvency Act sets out the priority of As far as insolvency is concerned, a company’s financial po- claims as follows (in order of priority): sition is important and has to meet certain capital require- ments. For example, debts must not be in excess of KES1 • The expenses of the liquidation; billion for purposes of moratoriums. • Wages and other employee costs; • Certain taxes and other levies due in law; and The directors, upon taking stock of a company’s affairs, elect • Unsecured creditors to be paid parri passu. to pursue a restructuring with the underlying principle of ensuring a company is able to meet its debt obligations. Oth- Any surplus is payable to the contributories of a company erwise, if a company’s position is beyond redemption and the on a pro rata basis. only option is to liquidate, the directors cannot purport to pursue a restructuring, and if they falsify company records 5.9 Priority Claims or misrepresent a company’s position they can be held li- Expenses of a liquidation or administration are paid in pri- able for such actions, including being liable to personally ority to the preferred creditors. Otherwise distribution is in contribute to any losses a company suffers. accordance with Schedule 2 of the Insolvency Act as set out above. However, during the process of liquidation or administra- tion the administrator or liquidator can also make a pro- 5.10 Priority Over Secured Creditor Claims posal for a company to enter into a voluntary arrangement in Secured creditors have priority but expenses of realising as- certain exceptional circumstances. The ordinary provisions sets are paid first before the secured creditor. to be followed by a supervisor in a normal voluntary ar- rangement process have to be met and observed, ie that the proposal must be viable to be met first, and a report made and lodged in court making a recommendation.

13 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

The supervisor has to submit a report indicating whether the contributory of a company or a material irregularity has objectives of a voluntary arrangement will be achievable. If occurred at or in relation to any meetings. The following not achievable it is not permissible to allow a company to persons have the right to make applications to the courts: continue with the arrangement. • A person who was entitled to vote at the meeting of a com- The processes are not court driven but certain approvals have pany or the meeting of its creditors; to be sought from the courts. For example, the proposal/ • A person who would have been so entitled if the person agreement for the voluntary arrangement has to be lodged had had notice of the relevant meeting; in court to be binding on all creditors. Courts thus play a • The provisional supervisor or, if a proposal has taken effect restricted supervisory role. as a voluntary arrangement, the supervisor of the arrange- ment; and The process of entering into a voluntary composition is com- • If a company is in liquidation or is under administration menced by the directors making a formal proposal to a com- — the liquidator or administrator. pany and its creditors setting out their suggestions. An ad- ministrator or liquidator can also apply for commencement Once a voluntary arrangement is approved and takes effect, if there is a real and viable prospect of rescuing a company. the supervisor becomes responsible for implementing the arrangement in the interests of a company and its creditors, Once the directors make a proposal the supervisor appoint- and monitoring compliance by a company with the terms of ed has 60 days within which to provide a report to a court the arrangement. The arrangement comes to an end and/or indicating whether the proposal is viable and whether meet- is vitiated where the arrangement is not fully implemented ings should be held to discuss the proposal, noting timelines with approval of the concerned stakeholders or where an where meetings are deemed to be necessary. Creditors at- application is made in court to set it aside. tending the meetings should be notified at least seven days prior to the meetings. When a proposal takes effect as a vol- 6.2 Position of the Company During Procedures untary arrangement, the supervisor becomes responsible for During a formal restructuring procedure, a moratorium is implementing the arrangement in the interests of a company not automatically given to a company, and an application has and its creditors and monitoring compliance by a company to be made seeking for a stay of claims against a company. with the terms of the arrangement. A company continues to operate since restructuring proce- There is no formula used to calculate a creditor’s claim but a dures are meant to ensure a company is returned to a posi- creditor has to submit proof of debt whereupon an insolven- tion where it is able to pay its debts. This is only possible if a cy practitioner either elects to accept it or decline it. In vol- company continues trading. untary arrangements debts are proven and accepted during the meeting to debate a proposal so as to establish who the A supervisor is appointed to oversee a voluntary arrange- valid creditors are and the various classes. Failure to prove a ment. The supervisor is appointed during preliminary meet- debt means that a creditor cannot vote in the meeting. ings between a company and its creditors to discuss a pro- posal. Restructuring/reorganisation proceedings bind unknown and/or contingent creditors. If feasible, a voluntary arrangement can envisage proposals for a company to borrow to finance its operations. However, Bearing in mind the nature of proceedings, ie that they in- the borrowing has to be in the best interest of a company volve creditors and documents that require filing in court, and the report made by the supervisor should ideally entail confidentiality may not be achieved. the borrowing proposals and the recommendation on the suitability. Generally, access to the courts by creditors or concerned stakeholders is not absolutely restricted. Applications can 6.3 The Roles of Creditors During Procedures still be made to the courts for various reasons, ie creditors During procedures creditors are divided into three groups, can make applications to a court for the removal of a super- namely secured creditors, preferred creditors and unsecured visor where the supervisor has failed to submit the report creditors. required by this section or has died; and creditors can also make applications to the courts challenging the contents of The Insolvency Act does not make express provisions for a voluntary arrangement proposal. Section 631 of the Insol- the formation of committees and generally provides for the vency Act states generally that applications may be made separation of creditors into three groups. During the meet- to the courts on the grounds that a voluntary arrangement ing to discuss a proposal for a voluntary composition, the detrimentally affects the interests of a creditor, member or creditors are obligated to appoint a chairperson during the

14 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

meeting. The Insolvency Act does not state whether each The Insolvency Act is silent on creditors bidding to acquire separate sub-group of creditors has to have a chairman and an insolvent company’s assets and as such the presumption is it is arguable that this is dependent on the nature of each that creditors can make such bids. However, the Insolvency arrangement, ie where there are too many creditors then it Act is fairly new and there may be amendments to address would perhaps be efficient to have a representative from each matters that are not clear or have not been addressed at all. sub-group. It is arguable that as long as any pre-negotiated deals are in In addition, votes are calculated based on the strength of the best interests of a company and would assist in its revival numbers and value of creditor claims, such that creditors and/or solvency, then they are allowed. with high claims may carry much more weight in decision making. 6.8 Release of Secured Creditor Liens and Security Arrangements Creditors have the right to access company records, docu- Secured creditor rights can be released subject to secured ments related to a proposal, including the actual proposal, creditors consenting to such a release and, where there is no and the report(s) prepared by the supervisor. consent, where it is proven that a secured creditor will be in a better position if the security is released. 6.4 Modification of Claims The Insolvency Act states that a voluntary arrangement can 6.9 Availability of Priority New Money be approved by the majority of creditors. This envisages a New money can be made available to a company. The ad- situation whereby dissenting creditors are bound by the pro- ministrator of a company has powers to create securities over visions of a proposal if approved by the courts. However, assets of an insolvent company provided that the threshold it is not clear how claims can be modified. The underlying of the security created is in the best interest of a company principle however is such that dissenting creditors will only and being fulfilled. In Kenya, the encumbered assets will be bound if the proposed voluntary arrangement will leave first need to be discharged for them to be disposed of. If them in a similar position or better than they are in. the assets are secured by fixed charges and the borrowing is from the same lender who holds the fixed charges, then such 6.5 Trading of Claims borrowing is allowed provided that the existing security is The Insolvency Act is unclear on the possibility of trading an all monies security. claims. 6.10 Statutory Process for Determining the Value 6.6 Using a Restructuring Procedure to Reorganise of Claims a Corporate Group The Insolvency Act does not have a set formula on how It is possible for a restructuring procedure to be used for claims are valued. Claims are proven by a creditor providing the purposes of achieving administrative efficiency. If a pro- evidence of the existence of a debt which ideally incudes the posal is to the effect that a reorganisation is more appropriate value. If an insolvency practitioner does not accept a proof to gain certain economic efficiencies then a restructuring of debt a creditor may make an application to the courts would be allowed. contesting the refusal and the court would then make a deci- sion on the debt. 6.7 Asset Disposition and Related Procedures If a company is in administration or liquidation then the 6.11 Restructuring or Reorganisation Plan or liquidator or administrator is the person executing the sale Agreement Among Creditors of assets. On the other hand, where a company only has a The proposal for a voluntary arrangement is usually initi- supervisor appointed the Insolvency Act provides that the ated by a company (or liquidator and administrator in some supervisor is responsible for implementing a voluntary instances) and is filed in court for approval together with arrangement, which suggests that the supervisor plays an the supervisor’s declaration supporting the proposal. Where oversight role with execution being the prerogative of di- an agreement is between the creditors only approval from rectors. This is in addition to the fact that the Insolvency a statutory office holder is still required, ie a liquidator or Act provides that the supervisor can make an application administrator where a company is in liquidation or admin- to the courts claiming that a company is not implementing istration. Further, where a plan for restructuring is proposed a proposal. by a company, and if the creditors agree between themselves on a separate agreement, such an agreement will still need Since the restructuring process is approved by the courts to be approved by the courts as there is still the requirement purchasers would acquire good title and be deemed to be for a supervisor to give recommendations on voluntary ar- bona fide purchasers for value. rangements.

15 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

6.12 The Ability to Reject or Disclaim Contracts Voluntary Liquidation Statutory office holders have the power to unwind transac- A company may be liquidated voluntarily if: tions or call them into question where such transactions do not meet certain thresholds in the Insolvency Act, ie where • The company in a general meeting has passed a resolution the transactions involve disposing property at an under- providing for its voluntary liquidation when the period value, where a contract is fraudulent or where a court de- fixed for the duration of a company by the articles expires, termines that a contract is unconscionable. In addition, a or on the occurrence of an event upon which the articles liquidator of a company has the power to disclaim onerous provide that a company is to be dissolved; or property which is described as being an unprofitable con- • The company resolves by special resolution that it be liq- tract; or other property of a company that is unsalable or not uidated voluntarily. readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. The effect Before passing a resolution for voluntary liquidation, a com- of the unwinding is that the company officers involved are pany must give notice of the resolution to the holder of any made personally liable for any losses. Where it is not possible qualifying floating charge in respect of a company’s property. to unwind contracts the directors can be held personally li- Where a notice is given proposing a resolution for voluntary able to pay for any losses incurred as a result. winding-up it shall be passed only after the expiry of seven days from and including the date on which the notice was 6.13 The Release of Non-debtor Parties given, or if the person to whom the notice was given has If a statutory procedure release is not a preference then it is consented in writing to the passing of the resolution. Within possible to release non-debtor parties from liabilities. How- 14 days of the passing of such a resolution a company shall ever, this position would require further consideration. In publish a notice setting out the resolution once in the Kenya addition, bearing in mind that the Insolvency Act is based Gazette (the Gazette); once in at least two newspapers cir- on the UK 1986 Insolvency Act, the practice in the UK on culating in the area in which a company has its principal this issue could be argued to be applicable in Kenya. place of business in Kenya; and on a company’s website. If a company fails to comply with the publication, each officer 6.14 Creditors Rights of Set-off, Off-set or Netting of a company is liable on conviction to a fine not exceeding Set-off can be made by creditors with approval from the KES500,000. statutory office holder, keeping in mind that a creditor has to prove its debt first before it makes any claims against an The directors of a company are required to make a solvency insolvent company. As such the right to set-off is not auto- declaration within five weeks immediately before the pass- matic. ing of the resolution for voluntary declaration, stating that they have made a full inquiry into a company’s affairs and 6.15 Failure to Observe the Terms of an Agreed that they have formed the opinion that the company will Restructuring Plan be able to pay its debts in full, together with interest at the The supervisor of an agreed restructuring plan/agreement official rate, within such period as may be specified in the can make an application seeking redress to tame an errant declaration. A director who makes a solvency declaration creditor or company. The courts can then make an order it without having reasonable grounds for the opinion is liable deems fit to be in the best interests of a company. on conviction to a fine not exceeding KES2 million or to imprisonment for a term not exceeding five years, or both. A 6.16 Receive or Retain Any Ownership or Other company is further required to lodge a copy of the solvency Property declaration with the Registrar of Companies (the Registrar) Existing equity holders are, for purposes of priority, ranked within 14 days after the date on which the resolution for last. Any disposal of assets to them on the basis of their eq- liquidation passed, failure of which a company, and each uity only arises if there is a surplus. officer of a company who is in default, commits an offence.

Voluntary liquidation can either be a members’ voluntary 7. Statutory Insolvency and Liquidation liquidation or a creditors voluntary liquidation. Proceedings Members’ Voluntary Liquidation 7.1 Types of Statutory Voluntary and Involuntary Insolvency and Liquidation Proceedings The company in a general meeting shall appoint one or more Liquidation authorised insolvency practitioner(s) to act as liquidator. On Under the act there are two types of liquidation, voluntary the appointment of a liquidator, all the powers of the di- liquidation and liquidation by the court. rectors cease except in so far as the company in a general meeting or the liquidator sanctions their continuance. If the

16 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

liquidation continues for a period of 12 months or more, at least two newspapers circulating in the area in which a the liquidator shall convene a general meeting of a company company has its principal place of business in Kenya; and on within three months and thereafter every three months after a company’s website. Failure to issue the notice together with the end of each subsequent 12-month period. all the information required without any reasonable excuse is an offence, and an officer of a company in default is liable A liquidator is required to lay before the meeting an account on conviction to a fine not exceeding KES500,000. of the liquidator’s acts and dealings, and of the conduct of the liquidation during the preceding year. If a liquidator does The statement setting out the financial position to be laid not call the meeting within the set timeframes he commits before a creditors meeting shall be verified by a statutory an offence and, upon conviction, is liable to a fine not -ex declaration signed by two or more of a company’s directors. ceeding KES500,000. A liquidator shall convene the final The statement shall specify: meeting after completion of the liquidation of a company’s affairs by publishing an advertisement specifying the time, • The details of a company’s assets, debts and liabilities as date, place and purpose of the meeting once in the Gazette; prescribed by insolvency regulations; once in at least two newspapers circulating in the area in • The names and addresses of a company’s creditors; which a company has its principal place of business; and • The securities respectively held by them and the dates when on a company’s website at least 30 days before the meeting. the securities were respectively given; and • Such other information as may be prescribed by insolvency A liquidator shall lay before the meeting the final liquida- regulations. tion accounts showing how a company’s property has been disposed of. Within seven days after the meeting, a liquida- Creditors may, if they think appropriate, appoint a liquida- tor shall lodge with the Registrar a copy of the liquidation tion committee of no more than five persons at a creditors’ account. If a liquidator fails to lodge the liquidation account meeting or at any subsequent meeting. Where such a com- with the Registrar, and continues to fail to do so, he commits mittee has been appointed a company may also appoint a an offence and on conviction is liable to a fine not exceed- number of persons, not exceeding five, to be members of ing KES500,000 or KES50,000 for each day of continuing the committee. However, the creditors may resolve that per- such an offence. Where a liquidator is of the opinion that sons appointed by a company are disqualified from being a company will be unable to pay its debts in full within the members of the liquidation committee. On appointment of period stated in the directors’ declaration, a liquidator shall a liquidator all powers of the directors shall cease except as convene a creditors’ meeting for a date no later than 30 days the liquidation committee or the creditors, where there is no after forming that opinion. A liquidator shall lay before the liquidation committee, may sanction. meeting a statement setting out the financial position of a company. The statement shall specify: If a liquidator continues in office for a period of more than 12 months, a liquidator is required to hold quarterly meetings • The prescribed details of a company’s assets, debts and li- on the progress of the liquidation. A liquidator is required to abilities; lay before each of these meetings an account of the liquida- • The names and addresses of a company’s creditors; tor’s acts and dealings, and of the conduct of the liquidation • The securities respectively held by them and the dates on during the preceding year. If a liquidator does not call the which they were respectively given; and meeting within the set timeframes, they are liable on convic- • Such other information as may be prescribed by insolvency tion to a fine not exceeding KES1 million. regulations. After the liquidation of a company’s affairs is complete, a As from the date in which a creditor’s meeting is held, the liquidator prepares an account of the liquidation showing liquidation shall be converted from members voluntary liq- how the liquidation has been conducted and how a com- uidation to creditors voluntary liquidation. pany’s property has been disposed of and convene a general meeting of a company for the purpose of laying before it the Creditors’ Voluntary Liquidation account and giving an explanation of it. Within 30 days after preparing the account, a liquidator is required to convene A company that is in the process of liquidation must convene the meeting by publishing a notice in the Gazette; once in a meeting of a company’s creditors no later than 14 days after at least two newspapers circulating in the area in which a the meeting at which the resolution for voluntary liquidation company has its principal place of business; and on a com- is to be proposed. A company is required to send notices pany’s website. A liquidator is further required to, within of a creditors’ meeting to the creditors no less than seven seven days of the meeting, lodge with the official receiver a days before the meeting day, and ensure that notice of the copy of the liquidation account, together with a return giv- creditors’ meeting is published once in the Gazette; once in

17 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

ing details of the holdings of the meetings and the dates on • The company has, by special resolution, resolved that the which they were held. company be liquidated by the courts; • It is a public company that was registered as such on its Provisions Applying to Both Members and Creditors Vol- original incorporation and: untary Liquidation (a) The company has not been issued with a trading On a company’s voluntary liquidation, its property is to be certificate under the Companies Act, 2015; and applied in satisfaction of the company’s liabilities equally (b) More than 12 months has elapsed since it was so and without preference. Thereafter, it is to be distributed registered; among the members according to their rights and interests • The company does not commence its business within 12 in a company unless a company’s articles provide otherwise. months from its incorporation or suspends its business for If, for any reason, there is no liquidator or the liquidator is a whole year; unable to act a court may appoint one. The acts of a person • The company is unable to pay its debts within the meaning appointed by the courts as a liquidator of a company are of Section 384 of the Insolvency Act; valid despite any defect in the person’s appointment. • At the time a moratorium ends, a voluntary arrangement does not have effect in relation to a company (this can only The liquidator may also, with the required approval, enter be made by one or more creditors); into any other arrangement under which the members of • A court is of the opinion that it is just and equitable that a the transferor company may: company should be liquidated; and • By an application made by the Attorney General. • In the case of a transferee company, participate in the prof- its of or receive any other benefit from a transferee com- An application for liquidation by the courts may be made by: pany instead of or in addition to receiving cash, shares, a company or its directors; a creditor or creditors (includ- policies or similar interests; or ing any contingent or prospective creditor or creditors); a • In the case of a transferee limited liability partnership, in- contributory or contributories of a company; a provisional stead of receiving cash or membership rights (or in addi- liquidator or an administrator of a company; or if a company tion to them), participate in some other way in the profits is in voluntary liquidation. of, or receive any other benefit from, that partnership. The Attorney General may apply to the courts if it appears A liquidator, or a contributory or creditor may apply to the that it would be in the public interest for a company to be courts to determine any questions arising in the liquidation liquidated from: of a company, and a court may decide on the application as it considers appropriate upon which the Registrar of a court • A report made or information obtained from investigations shall, without delay, forward a copy of an order halting the carried out or an inspection of documents produced under proceedings in the liquidation to the Registrar of Companies the Companies Act, 2015; for registration. • A report made or information obtained, by the Capital Markets Authority under the Capital Markets Act; Where a company is in voluntary liquidation and a liquida- • Information provided by the Registrar; tor has not been appointed or nominated by a company, its • As a result of a company or its directors having been con- directors may exercise their powers only with the approval victed of an offence involving fraudulent conduct; or of a court. This however does not prevent directors from • A report made by an inspector appointed to conduct an exercising their powers to dispose of perishable goods and investigation into the affairs of a company under the Com- other goods, the value of which is likely to diminish if they panies Act, 2015. are not immediately disposed of. The directors can also do all such other things as may be necessary for the protection In a liquidation ordered by the courts any disposition of a of a company’s assets. In all cases, the voluntary liquidation company’s property and any transfer of shares, or alteration of a company does not prevent a creditor or contributory in the status of a company’s members shall be void. Addi- from seeking to have a company liquidated by a court. How- tionally, any attachment, sequestration, distress or execution ever, a court is required to be satisfied that the rights of the instigated against the assets of the liquidation shall be void. other contributories will not be detrimentally affected where Within seven days after a liquidation order is made regard- a contributory makes such application. ing a company, the company is required to lodge a copy of the order with the Registrar for registration, and also lodge Liquidation by the Court a copy of it with the Official Receiver (theB ). A company may be liquidated by the courts if: Where a court has made a liquidation order or appointed a provisional liquidator in respect of a company, the OR may

18 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

require some or all of the prescribed persons to make out not less than one quarter in value of the total amount of a and submit to the OR a statement of affairs relating to a com- company’s debts - he shall be obliged to do so. The OR (being pany. The prescribed persons: are or have been officers of a the liquidator) may, at any time, appoint a qualified person company; have taken part in the formation of a company at as liquidator instead and immediately notify the courts of any time during the 12 months before the relevant date; are the appointment. The person appointed as liquidator shall, in a company’s employment, or have been in its employment no later than seven days after being appointed, send a notice during that period and are, in the OR’s opinion, capable of of the appointment to a company’s creditors or upon ap- giving the information required; and those who are or have plication made to the courts advertise the appointment in been within that period officers of, or in the employment accordance with the directions of the courts. of, a company that is, or within that period was, an officer of a company. Where separate meetings of a company’s creditors and con- tributories are held, the creditors choice will prevail if the The prescribed persons are required to submit a statement of meetings nominate different liquidators. However, a con- affairs within 21 days from the date of a notice of the require- tributor or creditor has the power to apply to the courts for ment and verify their statements with a statutory declara- their choice of liquidator to be confirmed as liquidator. The tion. The statement of affairs of a company should include creditors may establish in their meeting a liquidation com- the following information: mittee to perform such functions as may be imposed. How- ever, in so far as the insolvency regulations shall provide, a • Particulars of the company’s assets, debts and liabilities as liquidation committee may not, and may not be required prescribed by insolvency regulations; to, perform its functions while the OR is liquidator. After • The names and addresses of a company’s creditors; making a liquidation order, the courts shall settle a list of • The securities held by them respectively and the dates when contributories, with the power to rectify the register of the the securities were respectively given; and members in all cases in which the rectification is required, • Such further or other information as the OR may reason- and take all practicable steps to have a company’s assets col- ably require. lected and applied in discharge of its liabilities. A liquidator shall ensure that the assets of a company are realised and On the making of a liquidation order, the OR shall conduct distributed to a company’s creditors or, if there is a surplus, an investigation to discover why a company failed and, gen- distribute the surplus to the persons entitled to it, ie the erally, to investigate the promotion, formation, business, shareholders. dealings and affairs of a company. The OR shall then make a report to a court as he/she considers appropriate and such If a liquidator (not being the OR) is satisfied that the liquida- report shall be evidence of the matters stated in it until the tion of a company is complete, the liquidator shall convene a contrary is proven. The OR may, at any time before the dis- final meeting of the creditors. Those present at the meeting solution of a company, apply to the courts for the public shall consider the liquidator’s report of the liquidation. The examination of any person who: is or has been an officer of court has the power to: a company; has acted as provisional liquidator, liquidator or administrator of a company; or any other person who is • Order money due to a company to be paid into the Central or has been concerned, or has taken part in the promotion, Bank of Kenya account of the liquidator instead of to a formation or management of a company. liquidator; • Fix deadlines by which creditors are required to prove their The courts may appoint a provisional liquidator either on debts or claims; or after, or at any time before, the making of a liquidation • Make orders enabling creditors and contributories to in- order in respect of a company. Only the OR or an authorised spect a company’s records; and insolvency practitioner is eligible for appointment as a provi- • Issue a warrant authorising the arrest of an absconding sional liquidator. Where the courts make a liquidation order, contributory. the OR becomes the liquidator of a company and continues in office until some other person becomes the liquidator. These powers of a court can be delegated to a liquidator. Sec- tion 459 of the act provides that the insolvency regulations The OR may convene separate meetings of a company’s may enable or require all or any of the functions imposed, or creditors and a company’s contributories for the purpose of powers conferred on the courts to be performed or exercised choosing a person to be liquidator of a company in place of by a liquidator as an officer of the court and in accordance the OR. The OR is supposed to exercise that power within with its directions. three months, if he/she does not wish to then the OR gives notice to the courts, creditors and contributors provided that - if the OR is requested to do so by creditors who hold

19 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

Administration that disposal of the property would be likely to promote the The Insolvency Act provides an option for the administra- purpose of the administration of a company. Even so, the tion of an insolvent company; pursuant to Section 522, the Insolvency Act still provides protection to secured creditors objectives of administration are to maintain a company as a where it expressly provides that an administrator’s statement going concern, to achieve a better outcome for a company’s of proposals may not include action that affects the right of creditors as a whole than would likely be the case if a compa- a secured creditor of a company to enforce the creditor’s ny were liquidated and to realise the property of a company security (Section 590). in order to make a distribution to one or more secured or preferential creditors. Whereas previously, a company could Priority of Claims Under the Insolvency Act be wound up as soon as it became insolvent, the Insolvency Assets secured by way of fixed charges do not form part of Act now gives a company the opportunity to operate as a an insolvency estate and a secured creditor has the right to going concern and not necessarily engage in the sale and sell such an asset to recover their debt but will be account- realisation of its assets as a primary option. able to remit any surplus to an insolvency practitioner for distribution to preferred debtors. The Second Schedule to Procedure for Appointment if an Administrator the Insolvency Act sets out preferential debts (applicable to An administrator may be appointed by a holder of a floating both administration and liquidation) in order of their prior- charge, the courts or by the directors of a company. Once ap- ity as follows: pointed, an administrator is deemed an officer of the court, whether appointed by the courts or not. With respect to ap- • First priority claims: Costs of a liquidator’s/administrator’s pointment by a holder of a floating charge, Section 534 of the remuneration and operational costs for the administration Insolvency Act provides that the holder must be a holder of or liquidation; any reasonable costs incurred during court a qualifying floating charge in respect of a company’s prop- proceedings and costs incurred by a creditor to preserve an erty. A qualifying floating charge is one which is created by insolvent company’s assets. an agreement that states that Section 534 of the Insolvency • Second priority claims: These include wages and salaries Act applies to the floating charge or gives the right to the payable to employees up to a maximum of KES200,000; holder of the floating charge to appoint an administrator of a statutory deductions from employees (ie PAYE, NSSF [Re- company. The holder of a qualifying floating charge may also tirement benefits contribution], NHIF [statutory health apply to the courts for an administration order. The courts insurance contributions]); and other amounts required by have the power to make an administration order in respect other written law. of a company even if a company may be able to pay its debts. • Third priority claims: Unpaid taxes such as customs duty and excise duty. Creditor’s Status After Administration • Fourth priority claims: Unsecured creditors. These claims Once appointed, an administrator shall assume control of have the same priority rank equally among themselves and the property to which an administrator believes a company are payable on a pari passu basis. is entitled to and manages the affairs and property of the company. While a company is under administration, a credi- 7.2 Distressed Disposals as Part Insolvency/ tor may take steps to enforce a security over a company’s Liquidation Proceedings property only with the consent of an administrator or with Please see 7.1 Types of Statutory Voluntary and Involun- the approval of the courts. The administrator may also make tary Insolvency and Liquidation Proceedings. a distribution to creditors of a company and where a creditor is neither a secured nor a , a payment 7.3 Implications of Failure to Observe the Terms of may be made to the creditor as part of a distribution, but an Agreed or Statutory Plan only with the approval of the courts. Please see 7.1 Types of Statutory Voluntary and Involun- tary Insolvency and Liquidation Proceedings. Powers of Administrator of Secured Properties The administrator of a company may dispose of, or take ac- 7.4 Investment or Loan of Priority New Money tion relating to, property that is subject to a floating charge In the Kenyan jurisdiction an administrator can borrow as if it were not subject to the charge. If this is done, the money during an administration. Paragraph 3 of Schedule holder of the floating charge has the same priority in respect 4 of the Insolvency Act provides that an administrator gener- of acquired property as that holder had in respect of the ally has power to borrow money for the beneficial realisation property disposed of. However, where a company’s prop- of a company’s assets and to give security over those assets erty is subject to a non-floating charge, an administrator, for the borrowing. should they intend to dispose of the property, must make an application under Section 588 of the Insolvency Act to dispose of the property secured by charge if a court believes

20 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

7.5 Insolvency Proceedings to Liquidate a 8.2 Protocols or Other Arrangements with Foreign Corporate Group on a Combined Basis Courts The Insolvency Act does not envisage combined group pro- The Insolvency Act does not recognise express collaboration ceedings. Each Kenyan company is its own entity and has between courts. However, the provisions on cross-border to undergo its own process as set out in the Insolvency Act. insolvency generally provide that the courts in different ju- risdictions will act in the mutual benefit of each other and 7.6 Organisation of Creditors will observe and respect foreign decisions so far as they are Liquidation consistent with Kenyan law. Section 409 of the Insolvency Act empowers creditors in a liquidation during the initial creditors meeting (if they deem 8.3 Rules, Standards and Guidelines to Determine it fit) to appoint a committee of no more than five persons to the Paramountcy of Law perform various tasks provided for under the Act, including The Insolvency Act provides that the provisions of the Unit- approving the action of a liquidator pursuant to the powers ed Nations Commission on International Trade Law (Model granted to such a liquidator under the Third Schedule of the Law on Cross-Border Insolvency) are to be utilised to de- Insolvency Act. The liquidation committee may be dissolved termine the standards to be adhered to including which law by resolutions of the majority creditors. Further, if the liqui- takes precedence and in what situation. dator is the official receiver, a liquidation committee cannot be formed and if already formed ceases to have the authority 8.4 Foreign Creditors to exercise any of their powers. Foreign creditors are not treated differently compared to Kenyan creditors. Section 5 of the Fifth Schedule of Insol- Administration vency Act provides that foreign creditors have the same When a company is placed in administration, Section 574 rights regarding the commencement of, and participation in, empowers creditors, if they so decide and deem fit, to ap- a proceeding under the Insolvency Act or any other written point an administration committee. A creditors committee law relating to insolvency, as creditors in Kenya. in administration has general powers to summon an admin- istrator and call for information relating to the administra- tion at least seven days prior. The committee also reserves 9. Trustees/Receivers/Statutory Officers the power to make an application to a court for the disquali- fication of an administrator if they deem it fit to do so. The 9.1 Types of Statutory Officers Appointed in committee can be dissolved by a resolution of the creditors Proceedings to dissolve it. Statutory officers in relation to the insolvency of companies includes: 7.7 Conditions Applied to the Use of or Sale of Its Assets • Liquidator: A liquidator is described in the Insolvency Act Please see 7.1 Types of Statutory Voluntary and Involun- as an officer appointed when a company goes into liquida- tary Insolvency and Liquidation Proceedings. tion who has the general responsibility of collecting all of a company’s assets and settling all claims against it before putting the company into dissolution. The Insolvency Act 8. International/Cross-border Issues describes the function of a liquidator as that of liquidating and Processes a company’s affairs and distributing its assets. A liquidator may be appointed by either a company at a general meet- 8.1 Recognition or Other Relief in Connection with ing or by the creditors to a company at a creditors meeting Foreign Restructuring or Insolvency Proceedings held to notify of the intention to liquidate, or by a court The Insolvency Act incorporates the provisions of the United of law. It is important to note that on appointment of a Nations Commission on International Trade Law (Model liquidator, a company’s directors lose their powers. This Law on Cross-Border Insolvency) which are indicated to is so as to allow a liquidator full reign on his exercise of a have the force of law in Kenya, mutatis mutandis. The Insol- company’s assets without interference. On completion of vency Act further provides that a foreign representative (ie the process, a liquidator is required to give a full account liquidator) is entitled to directly make applications to a Ken- of the liquidation showing how it has been conducted and yan court with respect to the insolvency of foreign compa- how a company’s property has been disposed of to a general nies. This is in instances, inter-alia,where there is a “foreign meeting of the company. A liquidator reports to the official main proceeding” which is defined as a foreign proceeding receiver and is required to file certain documents includ- taking place in a foreign state if a debtor (company in insol- ing a company’s records so far as the liquidation process is vency) has the centre of its main interests in that state. concerned. A liquidator also owes an obligation to a court where a liquidation was sanctioned by a court.

21 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

• Administrator: When a company is under administra- Restructuring professionals can serve as statutory officers tion, it is being maintained as a going concern in order provided they meet the requirements of an insolvency prac- to achieve a better outcome for a company’s creditors as titioner and have been duly licensed to act in such a capacity. a whole than would likely be the case if a company were liquidated (without first being under administration). It therefore follows that an administrator is an officer of the 10. Advisors and Their Roles court, appointed by the court, by the holder of a floating charge or by company directors or the court with the obli- 10.1 Types of Professional Advisors gation of trying to rescue a company. There are various professionals who are appointed to assist • Supervisor of a voluntary arrangement: This arrangement in restructuring and insolvency processes and this is usually is made pre-insolvency as a means to avoid placing a com- dependent on the nature of a transaction so as to determine pany in an insolvency process, ie liquidation or adminis- which adviser to appoint. There is no particular bar or re- tration. A supervisor is tasked with the duty of overseeing striction on appointment of advisers and an administrator the arrangement. or liquidator generally has the power to appoint such a pro- fessional. 9.2 Statutory Roles, Rights and Responsibilities of Officers If a professional is appointed during an insolvency process, Please see 9.1 Types of Statutory Officers Appointed in then they are compensated by the statutory office holder and Proceedings. their compensation ranks in priority as it is deemed to be an expense of the insolvency process. On the other hand, 9.3 Selection of Statutory Officers if a professional is appointed by a company pre-insolvency Please see 9.1 Types of Statutory Officers Appointed in they would be compensated by a company and in the event a Proceedings. company is placed in an insolvency process then their com- pensation will be claimed as an unsecured debt. 9.4 Interaction of Statutory Officers with Company Management 10.2 Authorisations Required for Professional Once statutory officers are appointed they owe a duty first Advisors and foremost to a company, and its management and/or di- There are no specific authorisations required and a statutory rectors are deemed to have vacated their offices at least as office holder has the general power to appoint profession- far as their powers are concerned. The day-to-day running als. However, nothing stops a stakeholder with capacity, ie a of a company is undertaken by the statutory office holder. creditor, from moving to court to challenge the appointment The directors are required to comply with the directions of a of such a professional. statutory office holder and may be liable to have committed offences and thus subjected to various penalties should they A professional adviser’s duty is usually to the person who be found guilty by a court for not abiding by any directions appointed him. given to them. 10.3 Roles Typically Played by the Various 9.5 Restrictions on Serving as a Statutory Officer Professional Advisors The Insolvency Act provides that only an insolvency practi- The roles played by a professional’s advisers are dependent tioner can be appointed to a statutory office with respect to on the particular need that informed their appointment. For the carrying out of an insolvency process. Section 8 of the instance, if a company is in need of a financial adviser, such a Insolvency Act provides that anyone wishing to become an professional adviser will be appointed to that capacity based insolvency practitioner has to make an application to the on that need. official receiver. It should be noted that there are certain -re quirements that one must meet in order to qualify to become an insolvency practitioner, such as: 11. Mediations/Arbitrations

• Satisfying the requirements of insolvency regulations with 11.1 Use of Arbitration/Mediation in respect to education, practical training and experience in Restructuring/Insolvency Matters insolvency matters; Arbitration in Kenya is governed by the Constitution of • Being a member of a professional body recognised under Kenya 2010, the Arbitration Act 1995 (Chapter 49 Laws of the Insolvency Act (the Cabinet Secretary has the power Kenya) (the Act) and the Nairobi Centre for International to Gazette recognised professional bodies for purposes of Arbitration Act of 2013. The Arbitration Act applies to both insolvency); and domestic and international/foreign arbitration, governing • Satisfying the rules that govern such a professional body. proceedings and enforcement of the awards. There is no

22 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

statutory law that limits the use of arbitration to a particu- Fraudulent Trading lar subject matter. Article 159 of the Constitution provides The consequences of fraudulent trading are the same as the that, in promoting alternative dispute resolutions methods, consequences of wrongful trading. If, in the course of liqui- the ends of justice must be met giving the appearance that it dation of a company, it appears that any business of a compa- allows the application of arbitration to any dispute. However, ny has been carried on with the intent to defraud creditors, it should be noted that in practice, arbitration is not applied or for any other fraudulent purpose, and a liquidator believes to criminal, land, insolvency, bankruptcy, divorce and tax that such persons participated (directly or indirectly) in the matters. The administrator however in an insolvency has the business with the knowledge that the business was being general power, under paragraph 6 of the Fourth Schedule carried on in that manner, a court may order the person to to the Insolvency Act, to refer to arbitration any question make such contributions to a company’s assets as the court affecting a company. considers fair and reasonable. Additionally, where a court order is made the court may also disqualify the person from being or acting as a director of a company or a limited li- 12. Duties and Personal Liability of ability partnership for any period not exceeding 15 years. Directors and Officers of Financially Fraudulent trading is also a criminal offence under the Com- Troubled Companies panies Act and the offence is applicable whether or not a 12.1 The Duties of Officers and Directors of a company has been liquidated or is in liquidation. A person Financially Distressed or Insolvent Company found guilty of fraudulent trading is liable on conviction to Wrongful Trading imprisonment for a term not exceeding ten years or a fine If in the course of the liquidation of a company it appears not exceeding KES10 million or to both. that a director/officer of the company knew or ought to have known that there was no reasonable prospect the company There is a lower burden of proof in order to prove wrongful would avoid being placed in insolvent liquidation, a liquida- trading compared to proving fraudulent trading. In princi- tor may make an application to the courts which may then ple, it is therefore easier for a liquidator to obtain an order make an order declaring the person to be liable to make such for wrongful trading than for fraudulent trading and the a contribution to the company’s assets as the courts consider consequences are the same as a court, on consideration of appropriate. However, no order can be made if a court is an application, may order a director to contribute personally. satisfied that the person took steps to avoid potential loss to the company’s creditors as the person ought reasonably have Additional offences under the Insolvency Act that can apply taken. Where an order is made, a court may also disqualify to directors include, inter alia, fraud in anticipation of wind- the person from being or acting as a director of a company ing-up, transactions to defraud creditors, misconduct in the or a limited liability partnership for any period not exceed- course of a liquidation, falsification of a company’s books, ing 15 years. material omissions from a statement relating to a company’s affairs and false representations to creditors. In the UK (relevant to us because the Insolvency Act is mod- elled on the corresponding statute in the UK), the quantum Additional Duties Under the Companies Act, 2015 of a directors’ liability for wrongful trading is both a subjec- The Companies Act, introduced significant changes in rela- tive and objective test, and the same test is likely to be ap- tion to company directors in Kenya. Key changes include plied in Kenya. The two standards are: changing the definition of a “director,” which now covers both directors validly appointed to the office of director (de • The general knowledge, skill and experience that a director jure directors) as well as persons who have not been validly has (the subjective test); and appointed, but who nonetheless act as directors (de facto/ • The general knowledge and experience that may be reason- shadow directors). De facto directors or shadow directors ably of a person carrying out the same functions as were although not validly appointed, are deemed directors under carried out by the director (the objective test). the Companies Act and must adhere to the general duties prescribed by the Companies Act; and Directors are at risk of liability for wrongful trading at any time after they knew or ought to have known that a company Directors’ Duties could not avoid insolvent liquidation. Where a company is The Companies Act now codifies various duties, and in do- in financial difficulty it is important that there are regular ing so provides clarity on directors’ duties, the role of direc- board meetings and any directors’ decisions are reported in tors, effectiveness and their disqualification. It is important full in a company’s minutes. to note, however, that directors are not guarantors of the success of a company. The statutory obligation is that direc- tors’ are to act in the way they consider would be most likely

23 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

to promote the success of a company for the benefit of its The Companies Act imposes fines ranging from KES100,000 members as a whole. The duties are as follows: to a maximum of KES1 million. Furthermore, officers may be held liable for defaulting on certain acts, for example, fail- • Duty to act within powers: A director shall act in accord- ure to keep proper records. Other existing laws such as the ance with a company’s constitution and only exercise pow- Penal Code, which imposes both civil and criminal sanctions ers for purposes which they were conferred. Breach of this for wrongful actions by directors, must also be considered. duty has been demonstrated by English case law, where it has been found that an action by directors amounting to a 12.2 Direct Fiduciary Breach Claims breach of the articles of association of a company amount- The claim for a breach is ideally channelled through a stat- ed to a breach of duty to act within its powers, making the utory office holder who is in charge of a company. In the directors liable for action. event that such claims are not addressed by an office holder a • Duty to promote the success of a company: This duty was creditor has the ability of moving to court to assert its claims previously implied via the fiduciary duty to act bona fide on grounds that the office holder is in dereliction of his/her in the interests of a company. duties. • Duty to exercise independent judgement: The duty is a re- formulation and an encapsulation of the common law duty 12.3 Chief Restructuring Officers placed upon directors not to fetter their discretion when There is no specific position of a chief restructuring officer exercising their powers. in the Kenyan jurisdiction but various professionals are en- • Duty to exercise reasonable care, skill and diligence: Un- gaged, usually in a consultancy capacity, to advise in restruc- der this duty a director is to act with such care and skill turing, including legal and tax advisers. as might reasonably be expected from a director having regard to his knowledge and experience. 12.4 Shadow Directorship • Duty to avoid conflicts of interest: Conflicts of interest Kenya recognises the concept of shadow directorship. Shad- include situational conflicts, transactional conflicts and ow directors are deemed to have the same obligations as or- third-party benefits. This duty is met by identifying and dinary directors. disclosing the nature of the conflict and procuring authori- sation for the same. 12.5 Owner/Shareholder Liability The owners/shareholders are liable to the extent that the Liability of Directors constitutive documents of a company, ie the memorandum Directors can be exposed to various claims for personal li- and articles of association, provide that they are liable to ability arising from wrongdoing while managing a company. contribute to a company’s debts in the event of liquidation as contributories. Liability to Third Parties Directors do not, by virtue of the office of director, owe fidu- ciary duties to a company’s shareholders or creditors; their 13. Transfers/Transactions That May Be duties are owed to a company. Shareholders or third parties Set Aside will normally only have a cause of action against a company and not against individual directors. 13.1 Grounds to Set Aside/Annul Transactions If a historical transaction is deemed to be at an undervalue, Shareholder Derivative Claims fraudulent transactions and unconscionable contracts en- In pre-insolvency a company’s shareholders may bring tered into defeat a company’s creditors’ claims. proceedings to enforce the obligations of a director to his company. Such action is known as a “shareholder derivative 13.2 Look-back Period action.” Because a director owes his duties to a company, this There is no blanket/overall provision which indicates what involves a shareholder bringing an action against a director the look-back period is, but the Insolvency Act provides that on a company’s behalf, which the company itself has not if certain transactions were entered into 12 months prior to chosen to pursue. the commencement of the insolvency processes then they can be reversed. Penalties for Directors The Companies Act sets out various penalties depending on 13.3 Claims to Set Aside or Annul Transactions the particular duty that has been breached by a director. It is An insolvency practitioner has the prerogative to assert important to note that a director in breach will be personally claims or to set aside or annul transactions. liable to a company and, in addition, shall be liable to repay a company for any loss incurred. Claims are usually brought about in insolvency proceedings. In a restructuring however where there is no insolvency, di-

24 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

rectors can be brought to task by the shareholders. Under 14.5 Liability of Parent Entities the Companies Act, 2015 there are various instances where In Kenya, a subsidiary is a separate legal entity from its par- directors can be held liable for breaching their statutory du- ent company. A holding company would be liable for the ties and these include: liabilities of a subsidiary if the memorandum and articles of association of the holding company provide that it will, as a • Duty to act within powers; contributory, be liable to contribute to the debts of a subsidi- • Duty to promote the success of a company; ary in the event of insolvency. • Duty to exercise independent judgement; • Duty to exercise reasonable care, skill and diligence; 14.6 Precedents or Legal Doctrines That Allow • Duty to avoid conflicts of interest; Creditors to Ignore Legal Entity Decisions • Duty not to accept benefits; and Creditors would be allowed to assert their claims against af- • Duty to declare interests in proposed or existing transac- filiates in instances where the corporate veil of a company is tions or arrangements. lifted. Lifting of the veil of incorporation entails disregarding the distinction between a company and its shareholders as Directors also have many other duties under the Compa- distinct entities and treating them as one. Some instances nies Act and, in addition, under a wide variety of other laws where the corporate veil is lifted include: and regulations. The Companies Act, 2015 sets out various penalties depending on the particular duty that has been • Where a company is a sham: The courts will lift the veil breached by a director. It is important to note that a director where the device of incorporation is used for some illegal in breach will be personally liable to a company and, in addi- or improper purpose. tion, shall be liable to repay a company for any loss incurred. • Protection of revenue: The courts may disregard the cor- porate entity of a company where it is used for tax evasion or to circumvent tax obligation. Further, where it is desired 14. Intercompany Issues to establish for tax purposes in what country a company is resident, the courts will lift the veil and find out where the 14.1 Intercompany Claims and Obligations control management is and that determines a company’s Unsecured intercompany claims are treated in the same residential status. manner as unsecured creditors and they enjoy the same pri- • Investigation of company’s affairs: Section 788 of the Com- ority, parri passu. If the claims are secured then they enjoy panies Act gives an inspector appointed by the courts to priority over unsecured claims. investigate a company’s affairs, the power to investigate the affairs of a company’s subsidiary or holding company, if an 14.2 Offset, Set off or Reduction inspector thinks it necessary to do so for the purpose of his Intercompany claims are usually dependent on the mutual investigation. understanding of parties to a transaction and/or the con- • Takeover bids: Section 600 of the Companies Act provides tractual terms of their agreement. However, for insolvency that where a takeover bid is made for a company that has purposes this is dependent on an insolvency practitioner’s listed securities, if the relevant takeover rules are not fol- discretion and also whether the set-off is between a company lowed for the bid, then the shareholders may be held liable and the shareholders. to have committed an offence. • Fraudulent trading: Section 505 of the Insolvency Act pro- 14.3 Priority Accorded Unsecured Intercompany vides that if, in the course of the winding-up of a company, Claims and Liabilities it appears that any business of a company has been carried As indicated in 14.1 Intercompany Claims and Obliga- on with the intent to defraud creditors of a company or tions, unsecured intercompany claims will be treated in the for any fraudulent purpose the courts on application by a same way as other unsecured creditors. Similarly, secured liquidator, or any creditor or contributory, may order that intercompany claims will be treated in the same manner as any person (including the members) who knowingly en- other secured creditors. gaged in carrying on the business in such a manner to be personally responsible for all or any of the debts incurred 14.4 Subordination to the Rights of Third Party for such trading. Section 1002 of the Companies Act simi- Creditors larly provides for personal liability for any person found to Unless a subordination agreement has been entered into have engaged in fraudulent trading. between the relevant parties, intercompany claims will not be subordinated to favour claims of third-party creditors. In the above instances where the veil is lifted, if the affili- ates of an insolvent company are found guilty of impropriety then they are liable for the debts incurred and would essen- tially owe the creditors their dues.

25 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

14.7 Duties of Parent Companies riving at the tax measure of profit. The higher the level of A parent company owner will not be liable for the debts debt in a company, and thus amount of interest it pays, of its subsidiary provided that the owner is not liable as a the lower its taxable profit will be. For this reason, debt is contributory to pay the debts of the parent company in in- often a more tax efficient method of finance than equity. stances where the parent company is also indicated as a li- In Kenya, the Income Tax Act provides for that interest able contributory for the debts of its subsidiary. There is a payable on loans as being tax deductible and companies specific definition of who a contributory is in the Insolvency are allowed to deduct it from their profits hence reducing Act, but the Act variously refers to a contributory as every their tax. However, there is a limit in Kenya and the ration person liable to contribute to the assets of a company in the allowed for thin capitalisation is 2:1 for extractive indus- event of its being wound up, and includes the holder of any tries, ie mining, and 3:1 for other companies. For the 3:1 shares which are fully paid up and any person alleged to be ratio, a company’s debts should not exceed three times its a contributory. equity and if it does then the interest over and above the ratio is not tax deductible. Furthermore, where the corporate veil is lifted the parent of • Deemed interest: The Kenyan tax legislation gives the an insolvent subsidiary would be liable for liabilities that led Commissioner for Domestic Taxes the discretion to deem to the lifting of the veil. The Companies Act, 2015 provides interest on interest-free borrowings received by foreign- that the corporate veil would be lifted in instances where the controlled entities in Kenya. The deemed interest is based business of a company is carried on with intent to defraud on the Commissioner’s prescribed rates. Such that where creditors of a company or for any fraudulent purpose. The an entity controlled by foreign entities receives an interest Companies Act goes on further to provide that each person free loan it will be deemed that they are paying interest who knowingly participates in carrying on the business in on that loan and they will be liable to pay withholding tax that manner commits an offence. As such, if a parent is guilty (WHT). The WHT rate on payments of interest is depend- of fraudulent trading then it would be liable to repay any ent on whether the loan is by a resident or non-resident. losses incurred by creditors. Interest payments due to non-residents are currently 15% (in the absence of a double tax treaty). 14.8 Ability of Parent Company to Retain • Transfer pricing: A company that has related-party trans- Ownership/Control of Subsidiaries actions is required to ensure such transactions are at arm’s Under the Insolvency Act once an insolvent company is length including intercompany loans. A company is there- placed in a statutory insolvency process, a company’s man- fore required to prepare a transfer pricing policy to justify agement is assumed by an insolvency practitioner appointed the pricing arrangements. The Commissioner of Domestic to oversee its affairs. The parent company would not have a Taxes is allowed to specify conditions and procedures on controlling say over an insolvency practitioner as the prac- the application of the methods for determining the arm’s titioner is bound by law to act in the best interests of a com- length price and to adjust the prices if they do not con- pany as opposed to the owners of a company. form to the arm’s length principle. The policy should be prepared and submitted to the Kenya Revenue Authority upon request. 15. Trading Debt and Debt Securities 15.2 Debt Trading Practices 15.1 Limitations on Non-banks or Foreign Kenyan banks, like other financial institutions elsewhere, Institutions face the same problems and rely heavily on collateral lend- The preclusion of holding loans or bonds depends on the ing which is a traditional instrument of providing security type of institution and whether it belongs to a regulated against loan advances to a borrower. The Loan Market Asso- industry such as banking or insurance. However, generally ciation (LMA) has produced a short user guide and recom- there is no preclusion from holding loans or bonds but there mended forms of facility agreements for use in South Africa are certain issues that companies need to have in mind while (the South Africa Documentation) and in Kenya, Nigeria, borrowing, such as: Tanzania and Uganda (the East African and Nigerian Docu- mentation). The LMA has formulated a standard form facil- • Adherence to thin capitalisation requirements: A company ity agreement to be utilised by lenders and borrowers alike, is typically financed (or capitalised) through a mixture of in inter alia, the Kenyan market. Other typical documents debt and equity. Thin capitalisation refers to the situation in used for the Kenyan lending market include debentures, which a company is financed through a relatively high level charges, pledges, security rights agreements and deeds of of debt compared to equity. The way a company is capital- assignment of proceeds etc. ised will often have a significant impact on the amount of profit it reports for tax purposes. Country tax rules typi- The customary methods of the transfer of debts in Kenya in- cally allow a deduction for interest paid or payable in ar- clude assignments and novation. Typically when debt is be-

26 Law and Practice KENYA Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

ing transferred, the previous lender usually discharges their and obligations. Typical interlenders (or intercreditor agree- securities (if any) on the undertaking that the new lender ments) contain transfer provisions allowing lenders to trans- will pay all debts due to the previous lender upon transfer fer their rights and obligations provided that the incoming of the debt to the new lender. Any securities held by the lender executes a deed of accession undertaking to be bound previous lender are usually discharged first and then new by the terms of the interlenders/intercreditor agreement. securities are created in favour of the new lender.

15.3 Loan Market Guidelines 16. The Importance of Valuations in the In Kenya, most banks have their own standardised terms Restructuring & Insolvency Process which are covered in their facility letters, agreements or offer letters that set out preliminary terms of a loan. In syndicated 16.1 Role of Valuations in the Restructuring and loans, most banks would adopt LMA documentation as a Insolvency Market starting point for their respective transactions. Valuations are important in determining whether or not a company has been carrying out its business on an arm’s 15.4 Enforcement of Guidelines length basis and for its benefit. The Insolvency Act provides The guidelines do not have legal or quasi legal effect and that transactions at an undervalue are prohibited and officers they are deemed to be of a persuasive nature as between the of a company found guilty of engaging in such transactions various loan market players. can be held personally liable for the arising losses. Section 682 of the Insolvency Act defines an undervalue transaction 15.5 Transfer Prohibition as one where: a) a company makes a gift to the person or The Kenyan loan market is over collateralised in the sense otherwise enters into a transaction with the person on terms that banks insist on collaterals before loans can be processed that provide for a company to receive no consideration; or (although this is not always the case). As such, in practice the b) a company enters into a transaction with the person for security documents will ordinarily have clauses restricting a consideration the value of which, in money or money’s the transfer of secured assets without consent of the lenders. worth, is significantly less. On application by the relevant In addition, it is also normal to have change of control provi- insolvency practitioner a court may reverse such a transac- sions whereby the sale of shares or a change in management tion if the transaction was entered into two years before the is restricted by the loan documentation without consent of commencement of insolvency proceedings. the lender. These clauses are usually couched to be events of default. 16.2 Initiating Valuation For the purposes of insolvency, an insolvency practitioner 15.6 Navigating Transfer Restrictions holding office at the material time has the power to call for Due to the nature of the Kenyan loan market, the drafting of a valuation of a transaction. documentation is mostly lender driven. To ensure that their interests are fully secured lenders ensure that loan agree- 16.3 Jurisprudence Related to Valuations ments and security documents are watertight. Therefore, Bearing in mind how relatively new the Insolvency Act is, in practice, provisions that allow for transfers are usually jurisprudence on valuations is scarce. It is important to note avoided and not included in the documentation. However, that disposal of assets has to be done at fair market value. in cases where there is a syndicated loan agreement, transfer This is based on the fact that an insolvency practitioner is may be restricted on the part of the borrowers but the syn- duty bound to ensure that a company is not prejudiced and, dicated lenders can allow each other to transfer their rights for example when a secured creditor disposes of an asset, a secured creditor needs to account to an insolvency practi- tioner how the sale was conducted and give any surplus to Anjarwalla & Khanna the insolvency practitioner. Otherwise, an insolvency practi- The Oval tioner has the right to question a contract or make an appli- 3rd Floor cation to the courts for scrutiny of a contract on the grounds Junction of Ring Rd. that the transaction was at an undervalue or was extortion- Parklands & Jalaram Rd. ate. In determining these factors a valuation would need to P.O. Box 200-00606 be done to determine whether or not a transaction was at Nairobi Kenya an undervalue or extortionate or was fair. In addition, based on prior experiences, valuation of certain assets, ie land, can Tel: +254 (0)20 364 0323 be done by government entities to determine the fair mar- Email: [email protected] ket value. The office of the government valuer is responsible Web: www.africalegalnetwork.com for undertaking valuations on land to be transferred for the purposes of enabling the basement of the duty payable in

27 KENYA Law and Practice Contributed by Anjarwalla & Khanna Authors: Sonal Sejpal, James Mungai

the event that such land is transferred or for purposes of determining the land rates payable. Besides the government valuer there are various private entities in Kenya that are in the business of conducting valuations that extend beyond land. The valuation methodologies employed differ depend- ing on each entity conducting the valuation, but needs to be based on acceptable benchmarks or as the courts may direct in case of a dispute with respect to a valuation.

28