INS NSOLV LVENC NCY ACT CT 201 015 INTR NTRODUCTION The - - PDF document

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INS NSOLV LVENC NCY ACT CT 201 015

INTR NTRODUCTION The Insolvency act was assented into law on 11th September, 2015. It consolidates procedures relating to bankruptcy of natural persons and corporate insolvency matters. The two are now under one Act that is Insolvency Act. Bankruptcy was previously governed by the Bankruptcy Act chapter 53 of laws of Kenya (Formerly the English Bankruptcy Act 1930) while the liquidation of companies was governed by the Companies Act chapter 486 laws of Kenya (formerly the English Companies Act of 1948). The Acts largely reflected the English position of the time as they had not been repealed and were rarely ever amended. For purposes of the Insolvency Act, the recognized professional bodies are:- 1) Law Society of Kenya. 2) Institute of Certified Public Accountants. OBJECTIVES OF REPEALI ALING NG THE BAN ANKRUPT UPTCY AC ACT AND AND THE COMP MPANI ANIES S AC ACT PAR ART VI i. To secure an equitable distribution of the property of the debtor/ Company among his/its creditors according to their respective rights against him/it. ii. To relieve the debtor/company of his/its liability to his/its creditors and to enable him/it to make a fresh start in life/business free from the burden of his/its debts and obligations. iii. To protect the interests of the creditors in his/its affairs and for the imposition of punishment where there has been fraud or other misconduct on his part. iv. To offer suitable alternatives other than declaring bankruptcy or liquidation

• companies. Focus is shifted from debt recovery to restructuring mechanisms.

v. To promote business. When there are better safeguards for investors business tends to grow.

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SA SALI LIENT NT FEAT ATUR URES OF THE NE NEW INS NSOLVENC NCY AC ACT 20 2015 BAN ANKRUPT UPTCY OF NATUR NATURAL AL PERSON SONS – PAR ART III

• 1. The Act amalgamates the Bankruptcy proceedings and the Companies liquidations

into one insolvency law.

• 2. The Act regulates Insolvency Practice and the practice of insolvency practitioners.

The Official Receiver’s office is in charge of regulation of insolvency practice in

• Kenya. Qualified insolvency practitioners/professional bodies will apply to the

Official Receiver to act as such.

• 3. The Act introduces an instant Bankruptcy for three years once a petition for

bankruptcy is filed (Section 41) and an automatic discharge (section 254). A bankruptcy order takes effect when the court makes an order in respect of a debtor been adjudged bankrupt. This means that there is no need of a Receiving Order and one will head straight to Bankruptcy upon the court issuing the order.

• 4. The new act introduces a different approach other than liquidation and focuses

also on debt restructuring mechanisms.

• 5. The Act introduces several alternatives to bankruptcy:-

i. Enter into voluntary arrangement with the creditors; ii. Pay creditors in instalments under summary instalment order; iii. Enter the no asset procedure. This is done by a debtor filling with the Official Receiver a statement in the prescribed form stating he has no realizable assets. The Official Receiver will admit such person if satisfied. The debtor is discharged from participation of no-asset procedure automatically at the expiry of twelve months thereof when the debtor was admitted to the no-asset procedure. Once the debtor is discharged, his debts that were unenforceable on the debtor’s entry to the no-asset procedure are cancelled. SIO and NAP do not require the debtor to go to court. The act gives discretion to the Official receiver to take charge of these alternatives and do constitute out of court settlements.

• 6. Once a bankruptcy order is issued against a person, the person is restricted as to

the business activities they can undertake. This is meant to protect the public from trading with insolvent persons. The Bankrupt must disclose to potential business

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partners of his current position. There is also a provision for a registry (database) for all bankrupts accessible to members of the public.

• 7. Section 19 of the Act introduces a provision where a creditor can expedite a

creditor’s application for bankruptcy, where there is a risk of the debtors’ property depreciating or the value of the property can significantly reduce. Need not wait for the mandatory 21 days indicated in the statutory demand.

• 8. Section 35 introduces a new provision on Joint Bankruptcies. Where two or more

debtors who are partners in a business partnership may make a joint application for bankruptcy order.

• 9. Creditors meetings can be attended by a non-creditor, who is not a proxy for the
• creditor. The non creditor can offer information on the debtor’s affairs.
• 10. The list of Bankruptcy offences have been increased and updated in the Act

(division 25). For example, the offence by bankrupts in relation to management

• f companies, offence in relation to fictitious losses or expenses, bankrupt leaving

Kenya without consent etc.

• 11. The Act introduces entitlement of surviving spouse to household, furniture and
• ther personal effects. This will not form part of the bankrupt’s estate.
• 12. The Act introduces an allowance which may be made out of the estate to the

surviving spouse or to any of the relatives or dependants of the deceased debtor. This is not provided for in the former Act. LI LIQUI UIDAT ATION N OF COMP MPANI ANIES -PAR ART VI

• 13. The Act provides that when a company is being liquidated, every present and

former member (includes directors, former directors, shareholders and former shareholders) are liable to contribute to its assets to any amount sufficient for pursuant of its debts and liabilities and the expenses of the liquidation. The Companies Act does not have provisions holding former members of a company liable to contribute in the liquidation process.

• 14. The Act makes void the transfer of shares and attempts to alter members’ status

after a resolution for voluntarily liquidation has been passed thereby securing the interest of existing members during the liquidation period.

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• 15. In the Act only an authorized insolvency practitioner is eligible for appointment as

a liquidator.

• 16. The Attorney General can apply to court to liquidate a company on grounds of

Public Interest. For example, where a company is suspected of Commission of Offences or where information has been obtained from Capital Markets Authority under the Capital Markets Act or by the Registrar of Companies on fraud or other

• ffences or its directors are convicted of an offence involving fraudulent conduct.
• 17. The mandate of the Official Receiver has been expanded. The Act has placed

upon the Official Receiver the duty to conduct investigations into the failure of the company and if need be the Official Receiver can apply to court to have any person examined in court.

• 18. Section 474 is new to our laws. It makes it possible for an unsecured creditor to

share into the assets of a company under liquidation where there is a floating charge on the company’s property. This provision will place a holder of a floating charge in the same position as unsecured creditor in sharing the company’s assets.

• 19. The Act gives power to the court to rescind contracts entered into by company in

liquidation before the liquidation. Questionable contracts may be set aside therefore ensuring the financial viability of companies. 20. The Act gives power to the liquidator to transfer assets of the company to its employees provided the company’s liabilities have been fully satisfied. This power is however subject to authorization by a resolution of the company and /or the company’s articles provide for the exercise of this power.

• 21. Section 487 exempts documents relating to a company in liquidation from stamp

duty. 22. The Act introduces new offences during the liquidation period. Previously offences related to conduct by the directors of the company before liquidation. There is also an update to the number of the offences listed. 23. The Act makes it possible to liquidate unregistered companies. Provisions relating to registered companies will apply. 24. The act provides for alternatives to liquidations:-

• a. Company voluntary arrangement with the creditors;
• b. Administrations;

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• c. Administrative Receiverships.

25. The Act provides for an administrator of insolvent companies to manage the company and pay off its debts. Compare Receivership vs. Administration. Administration is only valid for 12 months and subject to extension for 6 months. An administration order in respect of a company prevents making of application for liquidation order and suspends pending applications for liquidation order. While a company is under administration, a resolution or court order for its liquidation has no effect. The appointment of an administrator automatically terminates at the end of twelve months from the date on which it took effect. This, however, can be extended on application of the administrator for a specified period not exceeding six months. 26. The Act provides for company voluntary arrangements. The directors of a company may make proposals to its creditors for a voluntary arrangement under which the company enters into a composition in satisfaction of its debts or a scheme for arranging its financial affairs. 27. The Act provides for a moratorium on debt payments when company’s directors propose voluntary arrangement. 28. The Act provides for the general legal guidelines that the company must adhere to while in liquidation, such as lodging documents with the Registrar of Companies, circumstances and procedure where the Official Receiver or any person may make an application for injunction against the action or omission of a company amongst

• thers.

29. The Act seeks to establish and maintain public registers for bankrupts and other insolvent persons. The Act also provides for preservation of information relating to any person who has been bankrupt and discharged or bankrupt for two or more occasions in the public register. It also imposes restrictions on information to be placed in the public register and circumstances that may require such restriction,

• mission, or removal of information or access to such information. It establishes

the right to inspection of such information by members of the public. 30. The Act provides for provisions on Cross – Border Insolvency in Kenya (5th Schedule). It also provides for enforcement of the provisions of the United Nations Commission on International Trade Law (Model Law on Cross – Border Insolvency) in Kenya. Previously international treaties and agreements with relation to insolvency did not have legal force in Kenya. In line with the

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Constitution, the Bill seeks to adopt such law as part and parcel of the Kenyan legislation.

• 31. The Act provides for publication of orders by the Courts on their Court website.

The purpose is to inform creditors and other interested parties of the effect of the

• rder. It also provides the same obligation to the Official Receiver, liquidators and

administrators to publish notices on their respective websites. The relevant office holders are also required to inform and notify all creditors of prescribed steps taken during the entire insolvency process. 32. The Act sets out clear priority rules regarding payment of debts (second schedule). IMP MPAC ACT OF THE INSO NSOLV LVENC NCY LAW LAWS ON N COMMER MMERCIAL AL LE LEGAL GAL PRAC ACTICE IN N KENY NYA The new Insolvency Act 2015 has impact on commercial legal practice. These include:

• a. Unlike the previous companies Act Cap 486 that was subjecting companies to

liquidation, the new Insolvency Act seeks to redeem insolvent companies through administration (work out) as opposed to subjecting them to liquidation. The Act focuses more on assisting insolvent natural persons, unincorporated entities and insolvent corporate bodies whose financial position is redeemable, so that they may continue to operate as a going concern and meet their financial obligations to the satisfaction of their creditors. This means that there will be more business for lawyers operating in the commercial law.

• b. The new concept of Insolvency Practitioners under Part II of the Insolvency Act

allows members of two professional bodies’ i.e ICPAK and LSK to be the licensed Insolvency Practitioners. The Insolvency Act does not allow automatically members of these bodies to be Insolvency Practitioners, they have to apply to the Official Receiver. In the previous Acts, lawyers were not obligated to apply to the Official Receiver for them to handle bankruptcy and winding up matters.

• c. The Insolvency Act 2015 introduces the concept of cross border insolvency,

currently we do not have regulations on cross-border. This is a challenge as commercial lawyers would be in a very difficult predicament on how to handle cross-border insolvency as there are no regulations. However, regulations on cross-border insolvency are currently being developed by the United Nations Commission on International Trade Law (UNCITRAL) working group V (Insolvency); Kenya is a member of the working group. Once the UNCITRAL

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regulations are developed, Kenya will adopt and domesticate the same. This will enable Kenyan lawyers to practice in other jurisdictions.

• d. It is relatively expensive to apply to be an Insolvency Practitioner as one is

required to: pay a Kshs. 50,000 fee to the Official Receiver; obtain a professional indemnity cover; obtain security in the form of an enacting bond. Many upcoming lawyers interested in Insolvency practice may find this difficult for them.

• e. The complexity of insolvency matters may require rigorous training for both the

bench and commercial lawyers to get a sound grasp of the insolvency law.It is noted for good measure that the proper functioning and development of the judicial insolvency system is dependent upon the quality of the people who are in charge of the running of the courts and those who use it to advance their clients’ interests.

• f. The Act has no regulations for part VI-XIII, there is dire need to review and

amend the insolvency act. The Official Receiver is currently working on that. CHALLE ALLENGES NGES FAC ACING NG IMP MPLEMENT MENTATION N OF THE INSO NSOLV LVENC NCY AC ACT THUS US FAR

• 1. Act is too bulky.
• 2. Lack of understanding of the law.
• 3. Need for sensitization.
• 4. Complex concepts that are difficult and/or impractical to grasp.
• 5. Regulations are not complete.
• 6. Inadequate staff to implement/lack to technical knowhow.
• 7. Some concepts may not be practicable in the Kenyan context.
• 8. Complex nature of insolvency.
• 9. Although we have made significant strides, we still have a long way to go before

we catch up to the latest trends in insolvency e.g.  DIP Financing (Post commencement financing),  cross-collateralisation,  Bankruptcy restriction orders/bankruptcy restriction undertakings,  pre-packs. CONC NCLUSI LUSION It is still early. Act has only been in force for a year. We have identified the need to amend some parts of it but this can only be conclusively done once the act is tried and tested.