INSOLVENCY LAW IN KENYA

INSOLVENCY DOCUMENTATION.

Key Principles of Insolvency Law in Kenya

1. Who are the key stakeholders in the insolvency process? Which body can we consider an actor or stakeholder in the insolvency proceedings?
2. What are the grounds upon which an insolvency/bankruptcy process can be commenced.
3. What are the key steps in an insolvency or a bankruptcy proceeding?
4. Various alternative procedures in insolvency, corporate insolvency and personal bankruptcy.
5. What circumstances are those alternatives available? What are the procedures when undertaking those alternatives?
6. What are the options open to the court when an insolvency proceeding has been commenced and why?
7. What orders can the court make, at what point and what will the court be looking for?
8. What are the consequences of a liquidation order?
9. What will you not be allowed to do when adjudged bankrupt?
10. Various offences during, before and after insolvency proceedings?
11. Special legal problems arising from insolvency proceedings eg how the estate of a deceased bankrupt is administered?

Insolvency Law in Kenya is strictly provided for by the Insolvency Act 2015 supported in detail by the Insolvency Regulations. This Act has provided a single harmonized regime for personal bankruptcies and insolvencies for body corporates. This is a departure from what obtained in prior where there was the Bankruptcy act for personal bankruptcy and companies act which catered for body corporates. The word insolvency Is a legal term and a person is bankrupt when a court order is issued adjudging him bankrupt. The reasons for adjudging someone bankrupt will include financial distress but that is not the only ground. On the other hand, a company can also can be declared to be an insolvent company if either an order for liquidation or administration or a scheme of arrangement has been made and the court has in fact determined or found that as a question of fact, the company is insolvent. The accountants may however determine that a company is solvent but in law a judicial determination, the court determines bankruptcy.

PS: Corporates are insolvent, persons are bankrupt.

The grounds for making someone bankrupt include but are not limited to financial reasons.

Underlying Objectives of the Law

1. It is to ensure an orderly, efficient and effective realization of the assets of the insolvent company or for the bankrupt for the benefit of the creditors.
2. Sustain the business. The law also tries to provide opportunities to continue the business of the undergoing bankrupt as a going concern so that it can be able to repay its debts and also continue to provide a benefoit for the insolvent or bankrupt
3. Provide legal alternatives to the very drastic liquidation order. Ie Reviving the business

The insolvency act is clear where similar proceedings for a company to insolvency are provided for in another law, that company will be excluded from the provisions of the Insolvency Act for example all financial institutions that are licensed under the banking Act are regulated by the provisions of the Banking Act.

Kenya Airways

• Massive debt burden, little money to pay
• Entered into a major expansion phase
• Terrorism
• Harsh economic operating environment
• Increased competition from subsidized airlines
• Epidemics(ebola) and natural disasters.
• Hike in oil prices
• Mismanagement and poor strategies

Clear Actors in Insolvency Proceedings

1. Creditors
2. Debtor
3. Insolvency Practitioners- All insolvency proceedings should be handled by duly registered IPs. The requirements are:
4. Must possess the requisite academic and professional qualifications.
5. Must belong to a recognized professional association recognized by the Cabinet Secretary in charge of treasury
6. Must have been registered by the official receiver under the Act.
7. Only individuals can be IPs. Body Corporates can’t

IPs are required to be:

• A trustee in bankruptcy.

Holds the estate of the bankrupt in trust pending conclusion of bankruptcy proceedings.

• Liquidator
• Administrator

Appointed where an order of administration has been made with respect to a company. The administrator takes up all the powers of the directors and eventually runs the company.

• Supervisor

In the case of a voluntary arrangement has made a proposal to pay his creditors in a specific way, a supervisor is appointed to ensure that the bankrupt does exactly that

• Official Receiver

It is a statutory office established under the Act. He oversees bankruptcy proceeding to ensure that they are carried out in accordance with the Act. Is the official administer of the Act. Any notices that are to be filed under the Act are filed by the official receiver. Any time there is a vacancy, the official receiver acts like the trustee.

Bankruptcy and insolvency proceedings are handled by the High Court. It is the court who can make a liquidation/administration order. Handled by the Commercial and Admiralty jurisdiction.

Common Issues in Insolvency

1. Determining and harmonizing the competing interests between the debtor and creditor. Eg debtor wants to pay as little as possible, creditor will want as much as possible.
2. Debtors and creditors will engage in fraudulent activities to benefit as much as possible or give as least as possible for example transferring assets to family members.
3. Procedural problems. Insolvency or bankruptcy must be done in accordance to the appropriate procedure.
4. Realizable assets. These are the assets that belong to the debtor. Jointly owned assets

Priority of Creditors

Any secured creditor is allowed to exercise the rights under the charge and not insolvency proceedings

All debts must be proved. They have to be incurred within the prescribed period that is before the person was adjudged bankrupt. Unless stated otherwise, debts should be paid pro rata.

Who can make an application to be declared bankruptcy?

Creditors can make the application to court

Debtor

Supervisor

Where the debtor has met the threshold to be declared bankrupt, there are the following alternatives:

1. Enter a voluntary arrangement.

He makes a compromise this is where the debtor agrees to pay a lesser sum than what is owed or at least to exchange certain assets or services or renders the arrangement of payment of the debts that is acceptable to the creditors.

2. The debtor can make a proposal to his creditors. A proposal is where the debtor gives additional assurances to the creditors for payment such as may give them additional property and agree for someone to supervise his affairs to ensure the creditors are paid. A debtor can only make a proposal when the sum outstanding is below the prescribe amount
3. A debtor can enter into an arrangement known as an installment order where he makes a written proposal to pay the creditors in installments.
4. A debtor who has net assets below the minimum threshold can enter a no asset procedure.

JURISDICTION IN BANKRUPTCY.

High Court has the jurisdiction .

The following conditions should be met

1. Debtor must be domiciled in Kenya
2. Debtor is ordinarily resident in Kenya
3. At the time of making the application, the person is present in Kenya
4. If he is not any of the above, 3 years preceding the application: the debtor must have been resident in Kenya or carried out business in Kenya.

Grounds for making bankruptcy application by creditors

1. The amount of debt owed by the debtor must exceed the prescribed bankruptcy level which is currently 100k
2. The debt must be a liquidated sum ie it is a debt in monetary terms
3. The debtor appears unable to pay the debt or has no reasonable prospect to pay that debt. Test to determine no reasonable prospect to pay: The creditor must have issued a notice of not less than 21 days. Expiry of the notice, the debt remains unpaid.
4. Where a judgment has been entered, execution has been done and order for attachment has been returned and satisfied.

Grounds for a debtors application

A debtor can apply himself to be adjudged bankrupt. This is made when he is unable to pay his debts. A debtor proves this by meeting the following conditions:

1. Debtor must file his statement of financial affairs. He must faithfully set out the entirety of his assets, liabilities and debts in the prescribed format. An affidavit should accompany the statement stating the liabilities exceed the assets thus unable to pay his debts. The debtor must also provide any other information that shows that he is unable to pay his debts.

A supervisor-person appointed by the court or by the official receiver to supervise the alternatives to bankruptcy. If in his reasonable opinion is of the view that the debtor is unable or has no reasonable prospect to pay his debts, then the supervisor must apply for a bankruptcy order.

PROCESS

Commences when a bankruptcy order is made against the debtor.

The process however depends on who is making the application.

1. Creditors

If creditor wants the debtor adjudged bankrupt:

1. Creditors must issue a statutory notice. A statutory notice is a letter of demand. PS…Draft it. Demand must be a demand of payment of money. The sum must be expressed in liquidated sum. You must give 21 days notice and express how the money is to be made. Must state the consequences of non-payment.
2. When the money is not paid, make the application to court to adjudge the debtor bankrupt through notice of motion supported by an affidavit to the High Court.

The prayers to the court:

• Certified urgent
• Appointment of a trustee
• That the court be pleased to make interim orders served on the debtor to preserve his assets.
• The court be pleased to adjudge the debtor bankrupt.

When the court receives the application, the next stage is that the application must be served on the debtor. The application is served by the Registrar

The application must be publicly published in newspapers that circulates in the area in which the debtor is ordinarily resident or in the gazette.  It is addressed to any other person to any other person owed money to invite them to register their debts and file such information as they may wish.

• The court will then determine the application for bankruptcy on the basis of documents/responses filed by creditors. The court may hold a hearing on that application as well as requiring debtor particulars.

1. Hearing/Determination

The court can allow the application and make a bankruptcy order or adjourn the application. Adjournment will be to allow the debtor go through another alternative e.g. installment order or dismiss the application.

2. In the case of a debtor
3. Publish notice of intention to file for bankruptcy in a newspaper that circulates in the area. Debtor must state his full names and the address where the application can be obtained and specify the date by which he intends to file the application.
4. Application must state that he is unable to pay his debts as well as being supported by an affidavit of the facts disclosed

• On debtors own motion, the court will appoint an interim trustee. The interim trustee holds debtor’s property pending meeting with creditors. An interim trustee must be an insolvency practitioner

1. In the prescribed format, the debtor must submit a statement of financial position. This statement is then given to the interim trustee who shall consider it and make a report to court. Any creditor who has notified the court of the intention to be enjoined in the application is allowed to make comments on the submission of the report of the interim trustee on the basis:
2. Debtor must be adjudged bankrupt
3. There are alternatives that the court has to make instead of adjudging him bankrupt.
4. The court will then make a decision

Ministry of industrialization administers Insolvency

Consequences of a bankruptcy order

1. Whenever the order is made, all proceedings against the bankrupt are stayed. Only on civil matters. The proceedings stayed are those against the bankrupt. The court may allow the proceedings to continue on application. Proceedings by the bankrupt will be taken over by the trustee.
2. All the property of the bankrupt vests in the trustee. He has no title to all his property.
3. The moment a bankruptcy order is made, the registrar of the court is supposed to serve the bankruptcy order on the official receiver who is then supposed to publish the notice in all newspapers or gazette.
4. Debtor must be served the bankruptcy order by the Official Receiver within 30 days.
5. The bankrupt then suffers other legal disabilities as provided for under any other written law e.g. you can enter any contract, run for public office, can’t practice as an advocate or trustee.

INSOLVENCY PROCESS

1. Official receiver publishes the notice of the bankruptcy order in the newspaper as well as serving the bankruptcy order
2. The bankrupt is then required to lodge with OR statement of financial position if he has not done so before. Must be done within 60 days of the bankruptcy order. Must state clearly full particulars of the creditors ie name, debt and nature of the debt. The statement of financial position must be prepared in the prescribed form and given to the OR .
3. First meeting of creditors is then convened within 30 says of the bankruptcy order. Notice should be given in newspapers and gazette. Time, date and location should be given. OR may decide to do away with this first meeting for example where the debtor has one creditor. When creditors come for the meeting, they must have sent particulars of their debts to the OR in the prescribed form. A creditor can either attend in person or through proxy (the proxy form should be filled) or send duly appointed agents. The only 2 agents allowed are either lawyers or accountants.
4. Order of business for first creditors meeting. The minutes of the first meeting should be shared with OR. A new trustee to be appointed or confirm interim trustee. Representatives of the creditors committee to be elected.
5. Public examination of the debtor. The law requires that a public examination be carried out. Debtor will be examined on his debts and assets. This will be presided over by the trustee. Any creditor and/or the trustee can ask the debtor questions on his financial position.
6. Every creditor must prove his debt. Trustee or creditor may make an application to compel debtor to answer questions during public examination. It verifies that the declared assets and liabilities have been declared faithfully.

Provable debts.

1. Liquidated sum
2. Not incurred as a consequence of an insolvent act. Acts done to defeat the interest of the respective bankrupt

Insolvency Acts are irregular transactions, transactions under value contribution of the bankrupt to the property of another person.

Don’t have to be proved in writing. Is done by the creditors to the trustee. The trustee is therefore empowered to require that the debtor or creditor proves the debt in doubt. Has powers to cll for any documents in the course of proof of debts. Bankruptcy is a continuous process therefore immediately the process begins, it cant stop

7. Satisfaction of debt.

Order of Payment

• Remuneration of the trustee. Keep clear tabulation of the services.
• Reasonable costs of the person who made the application of the bankruptcy order.
• The costs incurred by any creditor who has preserved the assets of the bankrupt.

2^nd Priority Claims

• Wages or salaries of bankrupt’s employees
• Any holidays for the employees
• Compensation for redundancy
• PAYE
• Any reimbursments under the Labour Act

3^rd Priority

• Preferential Claims (Sec 175)

4^th Priority

• Other claims

8. The trustee must prepare a final report once all assets have been collected. It must state what his trusteeship did eg what has been collected etc
9. Report is then given to the Official receiver who then submits it to Court.
10. An order is then made that brings the bankruptcy to an end

The trustee or official receiver may make an application to extend the bankruptcy buy showing that more will be recovered. The trustee can also choose to apply to court to have the debtor discharged early. End of Bankruptcy is however within 3 years of such order

POST BANKRUPTCY

If you can prove that either due to fraud or concealment that certain assets weren’t declared…