The Insolvency Act, 2015: The Impact on Creditors and Their Right to Realise Securities

Posted on October 17th, 2018

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The Insolvency Act, 2015 (the Insolvency Act) was enacted with the key objective of amending and consolidating the legislation relating to the insolvency of natural persons and incorporated and unincorporated bodies. It aims to provide for and regulate the bankruptcy or liquidation of natural persons, incorporated and unincorporated bodies to enable their affairs to be managed for the benefit of their creditors. The Act was assented on 11th September, 2015 and will come into operation on such date as the Cabinet Secretary may direct by notice in the Kenya Gazette, however, any provision that is not brought into force through gazettement within nine months after the publication of the Act shall automatically come into force on the expiry of that period.

Prior to the enactment of the Insolvency Act, corporate insolvency was dealt with under the Winding-up provisions of the Companies Act(Cap 486 of the Laws of Kenya) (the Companies Act) while the insolvency of natural persons was covered in the Bankruptcy Act of Kenya (Cap 53 of the Laws of Kenya) (the Bankruptcy Act).

Unlike the previous legislation, the Act seeks to redeem insolvent companies through administration as opposed to liquidation. The Act focuses more on assisting insolvent natural persons, unincorporated entities and insolvent corporate bodies whose financial position is redeemable to continue operating as going concerns so that they may be able to meet their financial obligations to the satisfaction of their creditors.

Lending institutions are usually at the forefront of bankruptcy and liquidation processes where majority have interests as secured creditors. For this reason, it is important to consider how the consolidated Act impacts secured creditors rights with respect to their securities.

Insolvency of Natural Persons

Creditors Application

A creditor can make a bankruptcy application to the Court under section 15 (a) and 17 of the Insolvency Act. This was previously provided for in section 6 of the Bankruptcy Act. Though the effect of such an application on a secured creditor is to convert them to an unsecured creditor upon the debtor being adjudicated bankrupt, it is important to note the changes thereto with respect to the requirements under the Insolvency Act.

Previously, a bankruptcy petition would only be applicable where the debtor was domiciled in Kenya or within a year before the date of presentation of the petition, had ordinarily resided, had a place of business or carried on a business in Kenya. Section 15(3) of the Act now provides that an application can also be brought if the debtor is personally present at the date of application or had ordinarily resided or carried on business within three years of the date of application. The Act has therefore widened the scope to allow bankruptcy application to be brought against debtors ensuring that creditors’ interests such as those of lending institutions are protected.

Powers of a Bankruptcy Trustee over Charges

Section 200 of the Act provides that a bankruptcy trustee can on its own initiative cancel a charge over any property of a bankrupt if the charge was created within the two(2) years immediately before the bankruptcy commenced and immediately after the charge was given, the bankrupt was unable to pay the bankrupt’s due debts. However, a charge may not be cancelled if it either secures money actually advanced or paid, if it secures the actual price or value of property sold or transferred or if any other valuable consideration is given in good faith by the secured creditor at the time when the charge was created. This means that where a lending institution advances money to a debtor secured by a charge, this will not be subject to cancellation of the charge by the bankruptcy trustee.

Secured Creditor’s Options in the Event of Bankruptcy

Previously, the Bankruptcy Act provided three options available to secured creditors when proving a debt owed to them. These provisions are mirrored in section 226 and 228 of the Insolvency Act. In particular, the secured creditor has the option to:-

  1. realize the charge;
  2. surrender the charge to the bankruptcy trustee for the benefit of creditors; or
  3. have the property valued and prove for the balance due after deducting the amount of the valuation

Formerly, the Bankruptcy Act did not provide a time frame within which a secured creditor could exercise these options. The Insolvency Act now provides that the bankruptcy trustee may, at any time by notice, require the secured creditor who holds a charge over a bankrupt’s property to choose any of the options within thirty(30) days after receipt of the notice.

Should a secured creditor choose to surrender its charge to the trustee for the benefit of creditors or have the property valued and prove for the balance due after deducting the amount of the valuation, then this is to be done within the thirty(30) day period. It is important to note that failure to comply with the notice with respect to selecting an option will be deemed to be a surrender of the charge to the bankruptcy trustee for the general benefit of the creditors. This is such that the secured creditor will prove the whole debt as an unsecured creditor.  This was not previously the case under the Bankruptcy Act. It is therefore necessary that a lending institution exercise its option to realise its security within the thirty day notice.

Claim for Interest by a Creditor

A creditor may claim interest on the debt up to the date on which the bankruptcy commences. Where the debt relates to a contract, interest is levied at the rate specified in the contract and where the debt is with respect to a judgment debt, then the interest is at rate payable on the debt. Post bankruptcy, the bankruptcy trustee can only pay interest on the allowed creditor’s claims, if surplus assets remain after the bankruptcy trustee has paid the claims.

Power of the Court to Order Disposal of Charged Property

The power of the Court to order the disposal of charged property as provided in rule 62 of the Bankruptcy Rules has been retained in sections 227 (1) and (2) of the Insolvency Act.  However under the Bankruptcy Rules, the Court if satisfied that a sale was necessary would give notice as to when, where, how and by whom the property would be sold. The Insolvency Act provides that the bankruptcy trustee may make an application to Court; the Court may make an order enabling the bankruptcy trustee to dispose of the property as if it were not subject to the security, but only if the Court is satisfied that the disposal of the property would be likely to provide a better overall outcome for the creditors of the bankrupt.

Section 227(3) of the Insolvency Act provides that such an order, if granted, is subject to the condition that the bankruptcy trustee apply towards discharging the amounts secured by the security the net proceeds of disposal of the property, and any additional money, required to be added to the net proceeds. This is so as to produce the amount determined by the Court, as the net amount that would be realised on a sale of the property at market value. In contrast, Rule 64 of the Bankruptcy Rules provided that monies would in the first place, be applied in payment of the costs, charges and expenses of the trustee occasioned by the application and the sale. It can therefore be deduced that a secured creditor will now rank in priority in receiving the proceeds of the sale over the trustee’s costs.

Where a Secured Creditor Realises the Security

Section 228(3) of the Insolvency Act prescribes that where a secured creditor realises the security, they are required to account to the bankruptcy trustee for any surplus remaining after payment of the debt, interest and any proper payments to the holder of any other charge over the property. It is therefore necessary that a creditor accounts for any surplus to the trustee upon realizing its security.

Automatic Discharge of a bankrupt

The Bankruptcy Act previously did not provide a time frame within which a bankrupt would be discharged. Section 254 of the Insolvency Act now provides for an automatic discharge of a bankrupt after three(3) years except under the circumstances set out under subsection 2 which includes an objection by a creditor or the bankruptcy trustee to the discharge under section 256.

On being discharged, a bankrupt is released from all debts provable in the bankruptcy except debts incurred by fraud or fraudulent breach of trust or amounts payable under the Matrimonial Causes Act or the Children Act.

However it is expected that a secured creditor would have already realized its security before the end of this period therefore, it would not be generally affected by an early discharge of the bankrupt.

Voluntary Arrangement – an Alternative to Bankruptcy

The Insolvency Act allows a debtor to enter into an arrangement with the creditors as an alternative to bankruptcy. A debtor’s proposal(with or without modifications) takes effect as a voluntary arrangement by the debtor on the day after the date on which it is approved by the Court. On taking effect, the approved proposal binds every person (including a secured creditor and a preferential creditor) who was entitled to vote at the meeting or would have been so entitled if the person had received notice of the meeting, as if the person were a party to the arrangement. The provisional supervisor thereafter becomes the supervisor of the arrangement.

Pursuant to section 310(7), if a proposal or a modification to a proposal affects the right of a secured creditor to enforce their security, the proposal or modification may not be approved unless the secured creditor consents to it. If the secured creditor does not consent to it, it will not be approved unless the secured creditor would be in a position no worse than if the debtor were adjudged bankrupt or would receive no less from the assets to which the creditor’s security relates, or from their proceeds of sale, than any other secured creditor having a security interest in those assets that has the same priority as the creditor’s. Also, where the secured creditor does not consent to it, it will not be approved unless the secured creditor would be paid in full from those assets, or their proceeds of sale, before any payment from them or their proceeds is made to any other creditor whose security interest in them is ranked below that of the creditor, or who has no security interest in them.

Insolvency of incorporated and unincorporated bodies

Liquidation of a Company by the Court

Creditors including any contingent or prospective creditors can make an application to the Court for liquidation of company where the company is unable to pay its debts. The liquidator in liquidation has numerous functions and one such function is to ensure that the assets of the company are realized and distributed to the company’s creditors. However, it is important to note that if the assets of the company available for payment of general creditors are insufficient to meet the expenses of liquidating a company, these expenses have priority over any claims to property subject to any floating charge, created by the company and are to be paid out of any such property accordingly.

Where a creditor proves a debt, interest on such debts may also be paid out by the liquidator if surplus permits. However, this interest ranks equally whether or not the debt ranked in priority with other debts.

When a company is in liquidation, the liquidator must make available for the satisfaction of unsecured debts, a portion of the company’s net assets, as is prescribed by the insolvency regulations and may not distribute that part to the proprietor of a floating charge except to the extent that it exceeds the amount required for the satisfaction of unsecured debts.

Administration

The Act provides an option for the administration of an insolvent company; pursuant to section 522, the objectives of administration are to maintain the company as a going concern, to achieve a better outcome for the company’s creditors as a whole than would likely to be the case if the company were liquidated and to realise the property of the company in order to make a distribution to one or more secured or preferential creditors. Whereas previously, a company could be wound up immediately it became insolvent, the Insolvency Act now gives the company an opportunity to operate as a going concern and not necessarily engage in the sale and realization of its assets as a primary option.

Appointing an Administrator

An administrator may be appointed by the Court, a holder of a floating charge or by the company or its directors. The administrator is deemed an officer of the Court, whether appointed by the Court or not. With respect to a holder of a floating charge, section 534 of the Act provides that the holder must be a holder of a qualifying floating charge in respect of a company’s property. A qualifying floating charge is one which is created by a document that states that this section of the Act applies to the floating charge or purports to empower the holder of the floating charge to appoint an administrator of the company. The holder of a qualifying floating charge may also apply to Court for an administration order. The Court has the power to make an administration order in respect of a company even if a company may be able to pay its debts.

Position of Creditors once a Company is under Administration

Once appointed, the administrator shall assume control of all the property to which the administrator believes the company is entitled to and is to manage the affairs and property of the company. While a company is under administration, a creditor may take steps to enforce a security over the company’s property only with the consent of the administrator or with the approval of the Court. The administrator may also make a distribution to creditors of the company and where a creditor is neither a secured nor a preferential creditor, a payment may be made to the creditor as part of a distribution only with the approval of the Court.

Administrator’s powers over charge property

The administrator of a company may dispose of, or take action relating to, property that is subject to a floating charge as if it were not subject to the charge. If this is done, the holder of the floating charge has the same priority in respect of acquired property as that holder had in respect of the property disposed of. However where a company’s property is subject to a non-floating charge, an administrator, should they intend on disposing the property, must make an application under section 588 of the Act to dispose property secured by charge if the Court believes that disposal of the property would be likely to promote the purpose of the administration of the company. Even so, the Act still provides protection to secured creditors where it expressly provides that an administrator’s statement of proposals may not include action that affects the right of a secured creditor of the company to enforce the creditor’s security (section 590).

Company Voluntary Arrangement

The provisions with respect to the voluntary arrangement for an insolvent company are similar to those for an insolvent natural person. Therefore, there are restrictions where a proposal’s effect is to affect a secured creditor’s right to enforce their security. A voluntary arrangement once approved, is binding on every person, including the secured creditor.

The Position of Securities during moratorium

When a company’s directors propose a voluntary arrangement, a moratorium takes effect. The implications of a moratorium are that the company is restricted in obtaining credit or paying its debts and liabilities during this period. Further, any steps taken to enforce any security over the company’s property can only be done with the approval of the Court and the Court may impose some conditions on such an approval. Also, approval of the Court is required where proceedings are commenced against the company or its property.

Security given by a company at a time when a moratorium has effect in relation to the company can only be enforced, if at that time, reasonable grounds existed for believing that enforcement of the security would benefit the company. A company in respect of which a moratorium has effect may dispose of any of its property only if there are reasonable grounds for believing that the disposal will benefit the company and the disposal is approved by the moratorium committee. It is important to note however that a company may transfer property as if it were not subject to the security only where the holder of the security consents or the Court gives its approval.

Repealed Acts and Transitional Provisions

The Insolvency Act repeals the Bankruptcy Act, certain provisions of the Companies Act and section 89 of the Law of Succession Act. The transitional and savings provisions of the Act provides that the Bankruptcy Act and the relevant provisions of the Law of Succession Act will continue to apply to any past event and to any step or proceeding preceding, following, or relating to that past event, even if it is a step or proceeding that is taken after the commencement of the Act. Past events include where a bankruptcy notice is issued, making an application for a bankruptcy order or entering into a voluntary arrangement among others.

Conclusion

The consolidation of the laws with respect to insolvency is aimed at not only providing for and regulating the bankruptcy or liquidation of natural persons, incorporated and unincorporated bodies but also to enable their affairs to be managed for the benefit of their creditors. The latter is done by providing alternatives to bankruptcy and liquidation.

Does Your Development Require an Environmental Impact Assessment Licence?

Posted on September 12th, 2018

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Kenya has experienced a boom in development projects in the last couple of years with resulting transformation of whole neighbourhoods as the demand for land outstrips the prescribed zones. This rapid growth is due to growth in population leading to a soaring demand for housing in most parts of the country and a huge deficit in infrastructure such as rail, roads and ports. There are many considerations that prospective developers must deliberate on including the availability of raw materials, funding and compliance with laws such  as the Physical Planning Act, Cap 286 Laws of Kenya and the Environment Management Coordination Act, Cap 387 Laws of Kenya (EMCA) as well as various provisions of the Constitution.

The impact of a proposed development on the environment is critical and the regulatory body charged with approving the environmental aspects of projects and issuing the relevant environmental licences is the National Environment Management Authority (NEMA). The requirements of EMCA  with  respect to development projects reflect a worldwide appreciation of  the adverse effects of unbridled development that now find a Constitutional anchor in the right to a clean and healthy environment and  public  participation  as  well   as the obligations of the Courts under Article 70 of the Constitution. These concerns are aptly captured by the phrases sustainable development and the pre-cautionary principle. With such enhanced rights and greater awareness, developers increasingly experience spirited resistance from residents and environmental activists.

At the heart  of  numerous  cases  filed in the National  Environment  Tribunal is the challenge by objectors of proposed developments with respect to developers’ failure to conduct a proper Environmental Impact Assessment (EIA) as well as irregularities in the grant of EIA Licences.

When is an EIA report necessary?

An EIA is a systematic examination conducted to determine whether or not a programme, activity or  project will have any adverse impact on the environment.  The  requirement  of  an EIA licence is prescribed in Section 58 of EMCA. It provides that any person, being a proponent  of  a  project, shall before financing, commencing, proceeding with, carrying out, executing or conducting any undertaking specified in the Second Schedule of the Act, submit a project report to the Authority in the prescribed form. The proponent of the project is to undertake the EIA study at its own expense.

Section 1 of the Second Schedule sets out general projects that require EIA to include any activity out of character with its surrounding, any structure of a scale not in keeping with its surrounding and major changes in land use. Section 2 provides a more specific and comprehensive list of projects such as urban development, transportation, dams and rivers, mining, forestry and agriculture.

In the recent case of Registered Trustees of Jamie Masjid Ahl-Sunnait- Wal-Jamait Nairobi v Nairobi City County & 2 others [2015] eKLR the Plaintiff owner of a mosque sought to challenge the ongoing development of a public toilet facility by the 1st Defendant who owned the adjoining land. The Plaintiff contended that the intended project required a proper EIA and that the project being commercial in nature would result in a major change in land use. It was the 1st and 2nd Defendant’s argument that the project did not fall under the projects prescribed in the Second Schedule of the Act.

The question faced by the Court was if a project does not fall within those listed in Section 2 of the Second Schedule, then who ought to determine if it falls within the general provisions of Section 1?

The Court stated that section 58 (1) of the EMCA suggests that the proponent of the project is the one to determine whether the project falls under the Second Schedule. The Court went on to state that the criteria for determination would be to first ascertain if the project falls and is specified under any of the sections of the Second Schedule. If it does not then a determination has to be made if it falls within section 1 of the Second Schedule. The Court recognized that this is not a simple task. The second criteria  would  be  to  appreciate  and understand that an EIA is intended to help protect the environment. Third, would also be to appreciate and understand that the “EIA process is indeed to be an aid to an efficient and inclusive decision making in special cases, not an obstacle race”.

The relevant matters that the developer ought to take into account in screening the project for the necessity of an EIA include but are not limited to:-

  1. the characteristics of the intended development;
  2. the location of the intended development and characteristics of potential impact;
  3. the size of the development as well as cumulation with other neighboring developments;
  4. the probability of any environmental impact; and
  5. the duration and reversibility of such

The Court in the above case conclusively held that it was not enough to read through the second schedule to the EMCA and state that the intended project does not fall under the  said schedule. The above listed matters must be exhaustively considered by the proponent and only upon thorough analysis of these matters shall a proponent  rightfully  conclude  that an EIA report is not required. To this end, the Court granted the injunction prohibiting further works on the ground that there was no indication of the criteria used by the 1st and 2nd Defendants in determining whether or not an EIA was necessary.

Therefore, it is important that proponents adhere to such guidelines in the interest of progressive, timely and sustainable development. The lesson of Registered Trustees of Jamie Masjid Ahl-Sunnait- Wal-Jamait Nairobi v Nairobi City County & 2 others [2015] eKLR is that in a sense developers should adopt for their developments the precautionary principle in favour of conducting an EIA and obtaining a licence.

Grease-Proofing: Highlights of Kenya’s Anti-Bribery Legislation

Posted on June 27th, 2018

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A banner headline touching on a mega corruption scandal is an all too familiar feature in Kenyan newspapers. Similarly, irregularities in the conduct and award of public tenders are commonplace in the country, so much so that the sarcastic jibe, “lipa kama tender” (which translates to pay like a tender) is often directed at Government. The corruption vice has an obvious adverse impact on the economy and is an impediment to business where there is an unspoken rule that “facilitation” payments and other inducements are necessary in order to obtain certain services or business opportunities. Sadly, the country ranked 145 out of 176 countries on Transparency International’s Corruption Perceptions Index 2016.

There is really no shortage of legislation meant to tackle corruption in Kenya, as Parliament has enacted the Anti-Corruption and Economic Crimes Act, 2011, the Ethics and Anti-Corruption Commission Act, 2011 and more recently, the Bribery Act, 2016 (the Act). The Act came into operation on 13th January 2017 and its purpose is to govern the prevention, investigation and punishment of bribery.

Offences under the Act

The Act prescribes that it is a bribery offence where a person offers, promises or gives financial or other advantage to another person who knows or believes the acceptance of that advantage would constitute the improper performance of a function or activities.

An advantage has been defined to include money, loan, fee, reward, office, employment, contract, release/discharge of any loan or liability, as well as protection from any penalty including disciplinary penal proceedings. It is important to note that it does not matter whether the person to whom the advantage is offered, or promised, or given is the same person who is required to perform the function. This essentially aims to place liability on any person involved in connection with the impugned activity.

One would imagine that receiving a bribe only entails the actual receipt of the advantage. However, the Act provides that a mere request or an agreement to receive the advantage also constitutes an offence. The inverse also applies where the recipient of the bribe requests for or agrees to receive or accepts an advantage and the request, agreement, or acceptance constitutes the improper performance of a relevant function by that person.

It does not matter whether the recipient requests for, agrees to receive, receives or intends to request for the advantage directly, or through a third party, or whether the advantage is intended for the benefit of the recipient or another. Further, knowledge by the person giving the bribe that the performance of the function is improper is irrelevant.

The offence is deemed to be committed where it relates to a function or activity where the person is expected to perform it in good faith, be impartial or is in a position of trust. These functions are characteristic of many transactions in Kenya, for example approvals from Government agencies and procurement processes. A relevant function whether performed within or outside Kenya, includes any function or activity of a public nature, carried out by a State or public officer, or a foreign public official. The scope of the Act is quite wide as a relevant function has been defined to include any activity connected with a business or in the course of employment.

Responsibility of Organisations

Apart from an individual being held liable under the Act, where a person associated with a private entity bribes another with the purpose of obtaining business or an advantage for the private entity, that private entity is deemed to have committed an offence. This provision places investors and organisations on alert to be aware of the activities and conduct of their employees and to avoid liability being imputed on the organisation on account of an employee or agent.

In light of the above, the Act recognises the need for organisations to train their employees and agents and therefore places a mandatory obligation on public and private entities to put in place procedures for the prevention of bribery and corruption (prevention procedures). The Cabinet Secretary in consultation with the Ethics and Anti-Corruption Commission is to publish guidelines to assist in the preparation of prevention procedures.

A director or senior officer of a private entity is deemed to commit an offence under the Act if it is proved that failure of the private entity to put in place prevention procedures was done with their consent or connivance. It would however appear that no penalties apply to public entities such as the Government and statutory public bodies for failure to comply with the requirement to put in place prevention procedures. It is peculiar why public entities cannot be held liable in this respect, yet a majority of hurdles faced by investors is with respect to their dealings with public entities.

In addition to placing prevention procedures, there is an obligation on a person holding a position of authority in a public or private entity to report within twenty four (24) hours of any knowledge or suspicion of instances of bribery. Failure to do so constitutes an offence under the Act.

Whistle Blowers

The Act also recognises that for the effective prevention and investigation of bribery, some protection must be given to those persons with information relating to such activities. To this end, a whistle blower is protected from intimidation to provide information or give testimony in Court. Further, any adverse actions with respect to a whistle blower’s employment, for example, demotion, termination or unfavourable transfer is deemed to be an offence punishable by a fine of KES 1 million (USD 10,000) or imprisonment for a term not exceeding one (1) year.

Accessories to Bribery

Liability under the Act is not limited to the person offering the bribe, the recipient or person performing the function. It also attaches to a person or private entity that obtains property intended for use in a bribe, uses, transfers or has in possession property obtained in connection with a bribe or records such property in the financial records of the entity. Investors and organisations must therefore be cautious when investing or acquiring assets where property may have been obtained in connection with a bribe, and this underscores the importance of thorough due diligence.

Penalties

The investigation and prosecution of offences under the Act are to be governed by the already existing Anti-Corruption and Economic Crimes Act, 2011. A person found guilty of offering, receiving or assisting in the giving or receiving of a bribe shall be liable on conviction, to imprisonment for a term not exceeding ten (10) years or to a fine not exceeding KES 5 million (USD 50,000) or both. Further, if the person received a quantifiable benefit or another person suffered a quantifiable loss, a mandatory fine equal to five (5) times the amount of benefit or loss may be imposed.

Additional remedies imposed by the Court include an order compelling the person or entity to pay back the amount or value of the advantage received or an order for confiscation of property received.

Other penalties relate to the ability of the persons found guilty to continue in their roles. Persons such as directors and partners may be disqualified from serving in those positions for a period not more than ten (10) years. There are also restrictions on running for public office or transacting with the Government if found culpable of an offence under the Act.

Conclusion

Investors and organisations can now be protected under the provisions of the Act to eradicate hurdles previously faced in doing business. However, on the same token, individuals and private entities are placed on alert as they may be held liable if found to have engaged in activities in connection with bribery.

On the effectiveness of accountability and liability, only time can tell as a leaf may be borrowed or lessons learned from the effectiveness of prosecutions conducted under the Anti-Corruption and Economic Crimes Act, 2011.

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