Guidelines for Companies on the Conduct of Hybrid and Virtual General Meetings During the COVID-19 Period

Posted on June 19th, 2020

The COVID-19 pandemic has brought with it unprecedented disruptions in the corporate world. The Government of Kenya, in a bid to combat the spread of the virus, issued directives including the imposition of restrictions on public gatherings. This essentially meant that companies are not able to conduct their Annual General Meetings (“AGMs”) in the usual manner and as required by law (except for sole member companies). Consequently, the Director General in exercise of his powers under section 876 of the Companies Act, 2015 (the “Act”) has issued Guidelines on the conduct of hybrid and virtual meetings by companies (the “Guidelines”). Below are some of the options provided under the Guidelines for companies in relation to conducting general meetings (“GMs”):

Written Resolutions in lieu of General Meetings

A private company may, subject to the provisions of the Act and its Articles of Association, pass written resolutions that are as effectual as resolutions passed at a GM. The written resolutions may be proposed by directors or members of the company. It is however important to note that a resolution to remove a director or an auditor from office before the end of their term in office, may not be passed by way of a written resolution.

Delaying or postponing of Annual General Meetings

Companies have the option of applying to the Registrar to extend the period of conducting an AGM. The Guidelines provide for the electronic submission of applications for the delay or postponement of AGMs through the email address eo@brs.go.ke. However, the applicant company needs to consider the potential effects that a delay or postponement of an AGM might occasion to its business and the interest of its shareholders.

Conducting of Hybrid and Virtual Meetings

Companies can now conduct either hybrid or virtual meetings during the COVID-19 pandemic period if the companies’ Articles of Association allow for the same. A hybrid meeting is where the members have the optionality of either attending the meeting in person, subject to the public gathering restrictions, or doing so virtually. A virtual meeting, on the other hand, is conducted purely on an online platform without members having the option of attending the meeting physically. It is important to note that the Articles of the company have to provide for the conduct of the meetings in such a manner.

Companies that have adopted the model articles can use the appropriate technology to hold a GM at two or more venues provided that the members are provided with a reasonable opportunity to participate in the meeting. Public companies can adopt the use of virtual or hybrid meetings where: (i) their Articles permit members to attend meetings remotely; (ii) their quorum requirements for a meeting is at par or lower than the prescribed maximum number of people allowed in a public gathering per the government’s directive; and (iii) for publicly listed companies, they have to comply with the court order issued under Miscellaneous Application No E680 of 2020 on the proposed conduct of its GM and keep the Registrar in copy.

Considerations to be made before conducting a Virtual Meeting

The Guidelines require a company to put in place the following considerations before using a virtual platform to conduct meetings:

  1. Appropriate technology that enables both the participation and recording of attendance of members.
  2. Reliable technology that facilitates the communication and voting by members.
  3. An online voting process permitting members to cast their votes in time during the proceeding of the GM.
  4. Provision of proxy forms appointing the chairperson, or any other individual, to vote on a member’s behalf where a member does not have access to the internet.
  5. Provision of guidance to members on the requirements of participating and voting using the selected platform, the means of accessing the meeting electronically and the mode of participation.
  6. Prior circulation of the rules of procedure on how participants would use the selected technology including how members may provide questions or matters raised during the meeting, cut-off time for submitting questions and voting procedures.
  7. Implementation of a secure authentication measures to identify attendees, verify quorum of members and ensure that quorum is maintained throughout the meeting.
  8. Considerations of the technological implication of the selected virtual meeting platform such as user accessibility, data security, management of question and answer (Q & A) sessions, shareholder participation and voting arrangements.

In addition, companies will still be required to comply with all the other requirements of conducting meetings under the Act. These requirements include: (i) complying with the notice provisions; (ii) maintaining the quorum required for a valid meeting at the start and during the meeting; (iii) maintaining a proper record of the meeting; and (iv) for a hybrid meeting, conducting the physical meeting at the registered office of the company or a venue determined by the board and ensuring that key persons in the company attend the meeting physically to supervise compliance with the directives on public gatherings as determined by the government from time to time.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng (jacob@oraro.co.ke) (Partner), Naeem Hirani (Partner), or your usual contact at our firm, for advice relating to the Guidelines and how the same might affect you.

Keeping it Fluid During COVID-19 – Means of Preserving Liquidity in Turbulent Times

Posted on May 21st, 2020

The first case of coronavirus (COVID-19) was reported in Kenya on 13th March, 2020 and with it came the disruption of Kenyan business on an unprecedented scale. Businesses have had to cut down on operations with many being forced to reduce operating costs, lay off workers, close down branches, among other measures. The snowball effect has been reduced liquidity in the economy as very few people can meet their day to day cash obligations. As Harry Truman once said “…It is a recession when your neighbour losses his job; it’s depression when you lose yours…” the adverse economic and financial effects of the pandemic are truly felt when they hit home. It is therefore imperative for businesses to not only tighten their financial and strategic belts by controlling their operational costs but also find creative ways of enhancing their liquidity.

In this alert, we consider the measures taken by the government to financially cushion corporate entities in this pandemic as well as corporate measures that companies may take to enhance their liquidity and ensure business continuity.

A. Corporate Measures

Debt Discounting

Debt discounting generally involves banks or financial institutions lending money with the deduction of interest or premiums in advance of the amount being received by the borrower. This would generally ensure that the institution recovers its interest in advance and at the same time allow borrowers easy access to liquid cash.

Factoring and Receivable Financing

Factoring and receivable financing transactions offer easier access to capital by corporate entities through the sale of receivables, invoices, and other highly traded commercial assets.

Factoring is a financial transaction in which an enterprise sells its account receivables to an entity at a discount to raise capital to run the enterprise.

Receivable financing, on the other hand, is a subset of factoring. It occurs when a business raises money or finance based on or from its receivables by offering the receivables as security for a loan. It is a tool used by businesses to obtain quick access to short-term financing while mitigating the risks related to payment delays and default by buyers.

Kenya does not have a specific legal framework that regulates factoring and receivable financing. Parties to factoring and receivable financing transactions rely on general principles of contract law and the Moveable Property Security Rights Act (No.13 of 2017) (MPSRA). Section 2 of the MPSRA recognises receivables as intangible assets over which security may be created to obtain a loan.

In the case of Trans National Bank Limited v Swift Truckers Limited & 3 Others [2012] eKLR the Court held that a receivable financing transaction is based on the contractual relationship entered between two parties, namely the factor and the supplier. The contract terms are negotiated by the parties and spell out the rights, obligations and conduct of the parties in the factoring agreement.

Receivable financing stands out as being a mode of financing that is within reach of Small and Medium Sized Enterprises (SMEs). This is due to the low levels of credit scores required to access finance thus promoting financial inclusion. Further, receivable financing improves the flow of cash to assist with the operations within the supplier’s business while eliminating bad debt. It is estimated that a company may access up to 80% of the invoice value from factoring without having to wait for the final payment period for invoices.

Finally, receivable financing may serve as an avenue of lowering a company’s tax liability by converting a supplier’s debtors (which is an asset) into security for achieving financing. The servicing of the finance serves as an additional expense for the supplier, effectively lowering their net profit thereby incurring a lower tax liability.

With the impending financial crisis, businesses may consider receivable financing, factor financing and debt discounting as possible avenues of boosting their liquidity.

New Creditors to Offer Facilities

Corporate entities may consider engaging other credit offering non- financial institutions offering debt discounting services to sustain their financial buoyance

Re-negotiation of Debt Repayment Terms

Following the flexibility of loan terms that is forthcoming, borrowers can negotiate methods through which they can service their debts. Extended loan repayment periods, payment-in-kind, scraping of penalties, or the interest rates can all be negotiated to prevent default whilst maintaining liquidity. Indeed, the Central Bank of Kenya (CBK) vide notices dated on 18th Mach, 2020, on Emergency Measures To Mitigate The Adverse Economic Effects On Bank Borrowers From The Coronavirus Pandemic, formulated measures that were to apply for borrowers whose loan repayments were up to date as at 2nd March, 2020. Notably, banking institutions were directed to consider renegotiating the debt repayment terms for their borrowers. Borrowers whose loans and other credit facilities were not in arrears as at the beginning of March 2020 should take advantage of this directive and renegotiate the terms of repayment in a manner that best suits their financial position subject to the banks’ acceptance of the renegotiated terms.

Sale of Non-Strategic Assets

Businesses may also consider selling certain non-strategic assets. This could guarantee a prompt boost of their liquidity. They may also renegotiate with their lenders so that the proceeds of these sales of assets (even where such assets act as the collateral) can be reinvested in the company’s main business activities rather than into the servicing of the existing facilities. Alternatively, the gains from the sale may be channelled towards structuring sales or purchases through collection or payment in kind (shares, exchange of assets, etc.) which would limit the outflow of cash and maximize the value of the corporate entities and its future activities.

B. Government Measures

Tax Reliefs

As discussed in our recent Alerts on Tax Reliefs and the Tax Amendments Act, 2020 the Government has taken fiscal measures aimed at cushioning Kenyans against the adverse economic effects of the COVID-19 pandemic, laid out various tax reliefs that would aid businesses to mitigate against the harsh economic times. These measures have been incorporated in the Tax Laws (Amendments) Act, 2020, and would aid in preserving liquidity as a result of lowered tax obligations. They include among others: the reduction of VAT from 16% to 14%, the lowering of the Central Bank Rate from 8.25% to 7.25% and further reduced to 7% which would aid borrowers and lenders; the reduction of the Turnover Tax rates for SMEs from 3% to 1%; the reduction of Corporate Tax from 30% to 25%; and the expedited payment of verified VAT refunds.

Central Bank of Kenya Directives

In an address to the Nation on 25th March 2020, President Uhuru Kenyatta called for the lowering of the Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent which would provide additional liquidity of Kenya Shillings Thirty Five Billion (KES 35 Billion) to commercial banks. As a result, borrowers have access to liquid capital for their businesses. The CBK rate has also been lowered to facilitate the ease of access to capital by borrowers. See the CBK’s Additional Emergency Measures to Mitigate the Adverse Effects on The Banking Sector from The Coronavirus Pandemic dated 20th March, 2020.

There was also the temporary suspension of the listing with Credit Reference Bureaus (CRB) of any person, Micro Small and Medium Enterprises (MSMEs), and corporate entities whose loan account falls overdue or is in arrears. As a result, companies which would otherwise have not been creditworthy can remain afloat and solvent despite being generally high-risk borrowers.

Trading on the Capital Markets

The Capital Markets Authority (CMA) issued a Press Release dated the 3rd of April, 2020, by the Capital Markets Stakeholders on “Capital Market industry announces measures to mitigate the adverse effects of the Corona pandemic” announcing a raft of measures to mitigate the impact of the virus on trading and the continuity of business.

Some of the measures include the sanction of Annual General Meetings of listed companies and making the procurement of all relevant approval, audited financial statements and dividend policies to the CMA, NSE and the public available through prescribed channels; ensuring that trading on the NSE can be carried out through online, mobile platforms or trading systems that can be accessed virtually and allow for automated customer onboarding processes to reduce the need for physical verification of documents and in-person visits while facilitating access to the market by investors.

It is hoped that these measure will see the markets remain open and accessible so that businesses can trade on highly liquid markets. Corporate entities trading on the market can, therefore, take advantage of liquid markets to make high returns.


This alert is for informational purposes only and should not be taken as or construed to be legal advice.

If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng (jacob@oraro.co.ke), Nelly GitauLena Onchwari, Wanjala Opwora (wanjala@oraro.co.ke)  or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.

Options for Companies in Distress on Account of the COVID-19 Pandemic or Similar Events

Posted on May 6th, 2020

The COVID-19 pandemic has impacted numerous companies and businesses globally with the result that many are currently facing financial difficulties including possible insolvency, closure and/or an uncertain future. In these difficult circumstances, it is important that directors and business owners understand the options available to them with a view to either rescue and revive their business or dissolve them in an organised and legal manner.

Directors and owners of businesses in distress ought to take care not to attract liability for wrongful trading. Liability for this might arise if they knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation. It should be noted however that trading whilst insolvent does not, in itself, constitute wrongful trading. Liability only arises if it can be shown that the company is worse off as a result of the continued trading.

Corporate insolvency in Kenya is governed by the Insolvency Act, 2015 (the Act). Under the Act, a company is deemed insolvent if:

  1. it has failed to pay a debt exceeding KES 100,000 after the lapse of 21 days from service of a written demand for payment;
  2. a decree, order or judgment entered against the company is returned unsatisfied in whole or in part;
  3. if the court is satisfied that the company is unable to pay its debt; or
  4. if the court is satisfied that the value of the company’s assets are less than its liabilities.

The main options available to insolvent companies or companies in distress under Kenyan law are administration, company voluntary arrangements and liquidation. Each of these processes have various advantages and disadvantages and it is necessary that directors and business owners clearly define the objectives they wish to achieve and carefully weigh which option is best suited to achieve these objectives.

Administration

Administration is a procedure used to reorganize a company or to realise its assets under the protection of a statutory 12 month moratorium which prevents creditors from taking action to enforce their claims against the company which may prevent the implementation of a strategy for the company’s rescue or asset realization.

The objectives of an administration are twofold, namely to allow an insolvent company to continue trading with protection from creditors through a moratorium and to achieve a better result for creditors than is likely if the company was to be liquidated.

An administration order will be issued if court is satisfied that the company is or is likely to become unable to pay its debts (upon satisfaction of the cash flow, balance sheet and net asset position tests), and that the administration order is reasonably likely to achieve the objective of administration.

An administrator is appointed by way of an administration order. He may, among other things, sell the company’s property, borrow or institute proceedings on behalf of the company. He must however seek the creditors approval for his proposals and has a duty to perform his functions as quickly and reasonably as is practicable. He is an authorized insolvency practitioner and considered an officer of the court, whether or not appointed by court.

An administration may be terminated on:

  1. the lapse of the statutory 12 months’ period if there was no prior application for the extension for the same;
  2. when its objectives have been achieved;
  3. when it moves from being an administration to either a creditors’ voluntary liquidation or a liquidation on an application by the administrator; or
  4. on an application by an administrator who reasonable believes that the objective of an administration will not be achieved or believes that the company should not have entered into an administration in the first place.

The advantages of an administration are numerous, for instance, an administrator owes his or duty to all the creditors and not to a single creditor. Administration also has the prime advantage of a statutory moratorium which prevents all creditors from bringing forward legal claims against the company while it undergoes administration. This may afford the company time and space to recover while ensuring that the goodwill and value of the business is preserved.

An administration process does not ordinarily interfere with the company’s employment or commercial contracts. Also, although administration may lead to liquidation of the company, the business itself may well be saved, in whole or in part, by sale to a third party.

The downside of an administration is that it very often leads to the eventual liquidation of the company and it may not be possible to secure the sale of the business. It also has the potential of being lengthy and costly. Further, it comes with negative publicity and exposes directors to claims in for misfeasance, fraudulent trading, wrongful trading, preferences, liability for transactions undertaken at an undervalue among others.

Company Voluntary Arrangement

A company voluntary arrangement (CVA) is a voluntary arrangement, compromise or scheme of arrangement between a company and its creditors that is lodged in court as a proposal to take effect as voluntary arrangement.  The CVA takes effect upon its approval by court and binds every creditor and member of the company.

A CVA is implemented under the supervision of an insolvency practitioner who assumes the role of a “supervisor” and becomes responsible for implementing the arrangement in the interests of the company and its creditors and monitoring compliance by the company with the terms of the CVA.

During the period during which the CVA is being considered, small eligible companies have the option of applying for and obtaining a moratorium which commences at the time when the application for the moratorium is lodged in court and ceases at the end of the day in which a meeting has been held to consider the implementation of a CVA, provided that the duration does not exceed 30 days.

CVAs can take many forms including but not limited to mergers and acquisition, share capital restructuring, debt for equity swaps, compromises, among others.

Some of the key advantages of CVAs include the fact that directors remain in control of the company. CVAs also tend to be more affordable than other formal insolvency procedures such as liquidation and administration. Further, a short-term moratorium is available to small companies while the CVA proposal is being considered. An administration may also be combined with a CVA which may avail the advantage of a statutory moratorium.

On the other hand, some of the disadvantages of CVAs are that unlike an administration process, they have no automatic statutory moratorium. Further, in the event that a CVA is combined with an administration, the insolvency costs increase thereby defeating the purpose of opting for the CVA in the first place. Secured creditors are also not bound by CVAs and may still appoint an administrator or liquidator. Finally, if a CVA fails and the company cannot meet its terms, it may be sued by creditors. It is therefore important to ensure that the terms of the CVA are feasible.

Liquidation

Liquidation is the legal process by which a company’s control is removed from directors and placed under a liquidator for purposes of collecting and realising its assets and distributing the same to the creditors in order of priority ranking and thereafter, in the event of any surplus, distributing it to the members. When such process takes places, the company is deemed to be dissolved.

A company may file for liquidation in order to avoid incurring liability for wrongful trading. The intention is to bring the company to an end. Once the liquidation order has been made, legal proceedings against the company may be instituted or continued only with the approval of the court.

There are two types of liquidation namely, a compulsory liquidation and a voluntary liquidation where compulsory liquidation is supervised by the High Court of Kenya while a voluntary liquidation is instigated by the members or creditors of the company. A compulsory liquidation will normally be initiated on the basis that the company is insolvent while a voluntary liquidation is normally initiated when the company is not insolvent.

A members’ voluntary liquidation is undertaken when a company is solvent. It is deemed to have commenced after the passing of the special resolution by the members of the company after which the company ceases to carry on its business, except in so far as may be necessary for its beneficial liquidation.

The directors of the company are required to produce a declaration of solvency which declares that the company will be able to pay all its debts within 12 months. Creditors play no part in members’ voluntary liquidation since the assumption is that their debts will be paid in full. The Registrar of Companies dissolves the company after 3 months from the date of receipt of the final accounts of the company by removing its name from the register of companies.

A creditors' voluntary liquidation is commenced by the directors convening a general meeting of members to pass a special resolution to wind-up the insolvent company (private companies may pass a written resolution with a 75% majority), appoint a liquidator and nominate up to 5 representatives in a liquidation committee. Thereafter, the directors must also convene a meeting of creditors, within 14 days.

The advantage of a liquidation is that it brings matters to an end for a struggling business in a legal and organised manner. It also removes the responsibility from the company’s directors and transfers it to a qualified insolvency practitioner who makes decisions for the directors. It has the effect of permitting employees to claim terminal or redundancy dues from the relevant government fund and lifts the pressure of court judgement and debt recovery claims.

On the other hand, some of the major disadvantages of liquidation include the fact that on the appointment of a liquidator, all the powers of the directors cease. Further, the business can no longer trade, employees lose their jobs and creditors and suppliers may lose money which might make is difficult for the directors to start a similar business. In addition, the business’ reputation, licenses and assets may be lost on liquidation.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact Noella Lubano (noella@oraro.co.ke), Eva Mukami (eva@oraro.co.ke), Jessica Detho (jessica@oraro.co.ke)  or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect your business.

Contractual Distancing: To What Extent are Pandemics Covered in Insurance Policies?

Posted on April 30th, 2020

A pandemic is a disease that spreads over a wide geographic area across international boundaries and affects an exceptionally high portion of the population. Typically, a pandemic emerges without warning, with the population having no or limited natural immunity against it. A pandemic spreads fast, and there is no vaccine or cure available against it, at its start.

The novel Coronavirus (COVID-19) is a pandemic that emerged in December 2019 in Wuhan, China and has rapidly spread across the world, affecting populations the world over. As at the time of writing this alert some four (4) months since the first COVID-19 case was recorded, the total number of infections across the globe stands at over three million one hundred and fifty thousand (3,150,000) with approximately two hundred and eighteen thousand (218,000) deaths – staggering numbers. The pandemic has also had a deleterious effect on world economies, with many governments having imposed country-wide lockdowns and quarantines in a bid to contain the spread of the disease, thereby bringing a countless number of businesses to a halt.

Insurance business boils down to a hedge against unforeseeable loss caused by specified risks, with the insurance company paying the policyholder in the event of the risk and loss occurring. As a business model insurance works when the risk is relatively small and spread across a large number of policyholders. The actuarial science behind the pricing of insurance policies dictates that the losses must be contained to a relatively small number of policyholders, failing which the model becomes unsustainable. Therefore, when losses are widespread and claims literally “fly off” the actuarial charts – insurers are likely to tighten up, claims are likely to be rejected, and disputes are likely to arise between insurers and policyholders over the cover.

In this alert we consider the extent to which pandemics such as COVID-19 are covered in insurance policies. The policies considered are health, life, business and employer’s liability.

 

Health Insurance

In most health insurance policies, pandemics and epidemics are expressly excluded from coverage. As cover under an insurance policy only extends to those risks that have been specified in the policy, an express exclusion means that a policyholder cannot bring a claim when they suffer from a disease that has been declared a pandemic or epidemic. There are also common exclusions in health insurance policies by which “chronic” diseases are excluded from cover, where chronic is described to include a disease for which there is no known cure, (such as COVID-19).

The rationale behind the express exclusion of pandemic or epidemic diseases is that the cost of treatment would be too high for most insurers to bear due to the large number of people affected.

Nonetheless, it is important to consider the specific wording of the policy to determine if indeed pandemics are excluded from coverage either expressly, or because they might fit into the definition of a chronic disease, which might be excluded.

 

Life Insurance

As is self-evident in the name, the risk covered under life insurance policies is death, and thus the consideration in life insurance policies is whether deaths resulting from COVID-19 complications would be covered under.

Life insurance policies usually include exclusions to the effect that an insurer will not pay out a claim where the insured party dies by suicide, specified diseases, or while engaging in dangerous acts specified under the policy. Therefore, subject to the specific wording of the policy, if the insured dies due to a pandemic, the insurer would be required to pay out the claim, unless the policy excludes the same.

 

Business Insurance

Given the uncertainties that come with conducting any type of business, business owners usually take out insurance to cover certain perils that the business may be exposed to. Some businesses take out “all-risk” or “umbrella” policies to cover a number of risks in one policy. For example, one policy can cover the immovable and movable property of the business, business interruption, legal liability, loss of money, loss of documents and employer’s liability.

Again, whether such a cover would include losses that the business would incur in case of a pandemic depends on the specific wording of the policy. Generally, such covers exclude claims arising from the actions of the government. Therefore, it is arguable that losses arising due to government ordered quarantine, lockdown or curfews in containing COVID-19 would not be covered. In any case, if the insured claims that a pandemic is covered in the policy, it would be upon them to prove this, in consonance with the principle that he who alleges must prove. Apart from this legal principle, some insurance policies specifically provide similarly worded clauses so as to specify the burden to be borne in case of a dispute.

Some businesses opt to take out different policies covering different perils. For example, a business could have a fire policy, employer’s liability insurance, and insurance covering damage to its merchandise. The specific wording of each policy would have to be read carefully to determine whether it provides coverage for losses incurred during a pandemic.

Some insurance policies in this category tend to exclude consequential loss, which is incurred due to the insured’s inability to use the business property or equipment. This can be the case due to government-imposed curfews and shutdowns in an effort to control the spread of a pandemic. Where consequential loss is involved, it is important to consider the specific wording of the policy to determine if it covers the losses incurred.

It is also a curious question as to whether the doctrines of force majeure and frustration which might be invoked to avoid liability under contracts if the circumstances allow, would be applicable to insurance policies, particularly in scenarios where the circumstances giving rise to the force majeure and frustration for example, business disruption due to a pandemic such as COVID-19, comprise the very risk or peril insured against.

 

Employer’s Work Liability Insurance

The Work Injury Benefits Act, 2007 requires employers to take out and maintain an insurance policy to cover their employees for work related injuries or diseases “arising out of or in the course of employment”. The cover is intended to cover both diseases specified under the Second Schedule of the Act, and other non-specified diseases, provided that they arise out of or in the course of employment. As pandemics are not excluded, employees who contract COVID-19 in the course of employment would be covered. The challenge however would be in proving that the disease was in fact contracted whilst “in the course of employment”. This would be especially difficult to prove, given the widespread nature of the pandemic.

 

Conclusion

The extent to which an insurance policy covers pandemics would ultimately depend on the exact wording in the insurance policy. Specific advice from counsel would thus be recommended and most appropriate in considering the extent of the cover. It also ought to be borne in mind that unless otherwise specified, the burden of proof as to whether a pandemic is covered under an insurance policy is ordinarily borne by the policyholder.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact John Mbaluto (john@oraro.co.ke) or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.

COVID-19: A Data Protection Perspective and A Key Decision by The UK Supreme Court

Posted on April 21st, 2020

The COVID-19 pandemic raises data protection issues as most organizations begin to grapple with the data protection ramifications with regard to personal data that might relate to the pandemic e.g. travel history, proximity or contact with infected individuals, underlying health conditions or vulnerability, etc. Indeed, one of the proposed ways to check the spread of the disease is through the use of a mobile phone app that would alert one of close proximity or contact with an infected person. For such an app to work, it would undoubtedly require the availability and use of people’s personal health data which falls within the definition of “sensitive personal data” under the Data Protection Act, 2019 (DPA) and care ought to be taken before processing such data and risk running afoul of the DPA, with potential penal consequence.

Section 44 of the DPA prohibits the processing of sensitive personal data unless the same is processed in line with the data protection principles set out under section 25 of the DPA which include data collection for legitimate purposes and limited to the extent necessary. Under section 46 (1) of the DPA, processing of personal data relating to the health of an individual is restricted to healthcare providers or persons under obligation of professional secrecy under law. However, section 46 (2) (a) of the DPA, then provides that the condition under section 46 (1) is met if the processing “is necessary for reasons of public interest in the area of public health”. It is therefore arguable that organizations that possess or collect personal data may be allowed to process such data if it is deemed necessary “for reasons of public interest in the area of public health” relating to COVID-19.

That notwithstanding, organizations ought to take necessary precautions so as to abide by the data processing principles set out under section 25 of the DPA, and where in doubt, appropriate guidance may be sought from the Data Commissioner, given that the DPA is fairly new legislation in Kenya (having come into force on 25th November 2019) while the COVID-19 pandemic is itself a public health crisis of unprecedented proportions.

Speaking of compliance with data protection laws, a key decision was recently handed down by the United Kingdom’s Supreme Court regarding an employer’s vicarious liability in respect of breaches of the United Kingdom’s Data Protection Act, 2018 (the UK DPA) in the case of  WM Morrison Supermarkets plc vs Various Claimants (2020) UKSC 12. The decision was in respect of a challenge by Morrisons on the Court of Appeal’s decision by which the supermarket chain was found vicariously liable for data breaches committed by its former employee which had satisfied the “close connection test” The Court of Appeal also rejected the argument advanced by Morrisons that since vicarious liability in respect of data breaches by an employee was not expressly included in the UK DPA, an employer should not be vicariously liable for such breaches.

The UK Supreme Court considered the two issues afresh and applied the close connection test with reference to a long line of established precedent on vicarious liability. The Court considered the fact that the actions of Morrisons’ former employee had not been pursued in furtherance of his employer’s business and that he was on a “a frolic of his own”. The Court of Appeal’s application of the close connection test was found to have been faulty, as what ought to have been considered was the entire sequence of events and whether an individual was acting in his capacity as an employee and in furtherance of his employer’s objectives before arriving at a positive finding of vicarious liability.

On the issue as to whether vicarious liability is excluded under the UK DPA, the Court held that the statutory liability of a data controller under the UK DPA, including the liability for the conduct of its employee, is based on lack of reasonable care, whereas vicarious liability is not based on fault. The Court went on to state that there is nothing anomalous about the contrast between the fault-based liability of the primary wrongdoer under the UK DPA and the strict vicarious liability of his employer. In reaching this conclusion, the Court drew an analogy between the fault-based liability of an employee for negligence and the resultant strict vicarious liability of his employer with the resulting determination that the UKDPA does not exclude vicarious liability for data breaches by an employee.

While the decision was ultimately in Morrisons’ favour, the case turned largely on the application of the close connection test which was both fact dependent and context specific with regard to that particular case.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact John Mbaluto (john@oraro.co.ke), Gibran Darr (gibran@oraro.co.ke) or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.

Keeping the Wheels of Justice Turning During the COVID-19 Pandemic

Posted on April 17th, 2020

Following the announcement of the first confirmed COVID-19 case in Kenya on 13th March 2020, the National Council on the Administration of Justice (NCAJ) promptly issued directions scaling down the operations of Courts countrywide aimed at finding a balance between keeping the wheels of justice turning whilst safeguarding the health of both the judicial staff and the general public in the face of the prevailing pandemic. The general effect of the directions which have been amended from time to time has been a significant slowdown of litigation practice. Whereas the past month of litigation practice has been challenging, our firm has been able to navigate these unchartered waters and we take this opportunity to share some of our experiences in the litigation circles.

The initial directives from NCAJ on 15th March 2020 saw massive scaling down of Court activities throughout the country for two weeks effective 16th March 2020. During this period, all appeals, hearings, mentions and execution proceedings in criminal and civil cases in all Courts were suspended. The only filings accepted at the Court registries were those under certificate of urgency and time bound pleadings. With time, further directions were given on the electronic filing (e-filing) of pleadings.

Our first encounter with e-filing was in the Court of Appeal where we filed a Notice of Appeal and a letter to the Deputy Registrar bespeaking typed proceedings from the lower Court. The process entailed preparing the documents in the usual manner and thereafter scanning and sending the documents to an email address provided by the Judiciary. In this instance we were advised to send the documents to efilingkenya@gmail.com. After sending the scanned documents to the said email, we received an email confirming the assessed filing fees and proceeded to pay the amount through the M-Pesa Pay Bill Number provided by the Court registry. Upon confirmation of payment, a physical receipt was generated for collection by our clerk. During this period the process still necessitated attendance to the Court registry.

Subsequently, there was further scaling down of operations at the Court registries with absolutely no physical attendance at the Court registries. Contact details for the various Divisions and Court stations around the country were circulated for communication with the relevant Deputy Registrars for directions on e-filing. It was directed that all documents should be scanned and sent to the appropriate email addresses of the Deputy Registrars and Executive Officers (as the case may be) and once that was  done, the court would then advise on the mode of payment and how proof of payment would be communicated. During this period, we were able to file applications under certificate of urgency and time bound pleadings in the various Courts including the Court of Appeal where we filed an application for stay of execution.

We further had an interesting experience of participating in a hearing at the Chief Magistrate’s Court. The Plaintiff served us through email with an application under certificate of urgency together with the extracted orders relating to a contentious burial dispute. Upon receipt of the documents we drafted a notice entering appearance and response on behalf of our client (through scanning and sending the documents to the Court’s email address) and served the same upon the other parties via email. It was necessary to have each document clearly identified in capital letters and scanned separately. Upon receipt of the documents, the Court registry assessed the documents before sending out the amount of filing fees to be paid. We then paid the amount advised via an M-Pesa Pay Bill Number after which the confirmation message was sent. Once it was confirmed that payment had been received, the documents were processed and sent to the litigants. On the hearing date, we sought clarification on whether the hearing would be in open Court or via video-link. We were informed that due to the limited electronic resources available to the Chief Magistrate’s Court, the hearing of the application would be in open Court but with strict observance of the directives issued by the Government.

The Court session began with all parties being ushered into the Court room by the Court assistant who ensured that each Counsel and respective clients had worn protective masks and had either sanitized their hands or had latex gloves on. After this brief inspection, the Court assistant pointed everyone to their sitting positions and allocated everyone a spot at least one (1) meter apart from each other. Advocates were allocated the front benches while clients were allocated the rear benches. The general public was not allowed to sit in during the Court session. The Court room selected was spacious and with very good ventilation.

Once everyone was seated, the Court assistant informed the Magistrate who came in duly masked and gloved. In the course of the hearing, confirmation of e-filing and e-service was done by confirming the same from a laptop availed to the Magistrate and the Court assistant. The litigants had physical copies of the documents which had been availed to the Magistrate, who referred to the documents as the litigants followed proceedings.

The advocates observed at least one (1) meter’s distance while delivering their oral arguments. Whilst addressing Court, each advocate kept his mask on despite it muffling out the sound which made it difficult to hear what one was saying. After the conclusion of the hearing, order was observed as parties made their way out of the Court room. Parties were thereafter ushered out of the Court precinct to avoid crowding. Although the Ruling was promptly prepared and sent via email, parties still insisted on appearing in Court for the delivery of the Ruling, during which the same ‘rules’ were observed.

Whereas there have been Rulings and Judgment delivered via email and hearings conducted via Zoom, the Judiciary is still trying to put in place further measures to provide services using technology, however the process should be complementary between the Judiciary, advocates and litigants, so as not to leave out any stakeholders. We have also noted most of the e-filings and hearings via video-link have been largely in Nairobi and there is room for expansion to other stations.

NCAJ has recently issued the latest update vide a communique of 16th April 2020 which will see Court operations upscaled effective 21st April 2020. Some of the implications of these latest resolutions will see operations and services in all Court registries upscaled and are therefore set to be accessible to Court users but in a manner that is in compliance with the guidelines of the Ministry of Health on combating COVID-19. With respect to civil matters, hearings will be upscaled with effect from 22nd April 2020 and guidelines on how the hearings and appeals are to be conducted will be put in place in accordance with the guidelines of the Ministry of Health. This is a clear indication that going forward, parties will be able to institute Court proceedings and progress pending cases, even in instances where there is no urgency, with effect from 22nd April 2020. Further guidelines on how matters which were taken out between 16th March 2020 and 22nd April 2020, will be dealt with are to be put in place by the respective Heads of Divisions and various Court stations.

It is expected that going forward, all pending Judgments and Rulings will now be delivered in open Court upon notice to the parties as opposed to the electronic delivery via email or video-link as was previously the case. This indicates that there is likely to be controlled Court appearance by litigants and/or their advocates. Further, orders will now be extracted by the Court registries and released to the litigants or their advocates within twenty-four (24) hours of their making. The suspension of execution of civil orders, decrees and eviction orders made before 16th March 2020, remains in force until 22nd April 2020.

We will keep you updated on any developments with respect to the implementation of the latest directives issued by the NCAJ.


This alert is for informational purposes only and should not be taken as or construed to be legal advice.

If you have any queries or need clarifications, please do not hesitate to contact Georgina Ogalo-Omondi (georgina@oraro.co.ke), Daniel Okoth (daniel@oraro.co.ke), Meshack Kwaka (meshack@oraro.co.ke), Quinter Okuta (quinter@oraro.co.ke) or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.

Commercial Transactions – Invoking Force Majeure and Frustration in Contracts

Posted on April 14th, 2020

On 11th March 2020, the World Health Organisation (WHO) declared COVID-19 a pandemic, which is defined as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people”.

Since then, the economic threat posed by the novel coronavirus has rapidly turned from a looming threat to a reality. Governments, Central Banks and the private sector are putting in place plans to respond to effects of the virus. However uncertain the times ahead may be, companies nonetheless need to consider how the spread of the virus may affect the conduct of their underlying business and their contractual obligations.

Effect On Contracts

Some of the effects of the COVID-19 outbreak are obvious, such as travel restrictions, quarantines and shortages of medical equipment. However, their immediate impact on contractual obligations, such as the ability to pay, deploy resources on time and meet service levels as agreed, may be less obvious. Most contracts that require ongoing performance are, in principle, absolute: that is, a party affected by the COVID-19 outbreak will be required to perform its obligations and will be potentially liable to its counterparty for a failure to do so. There are, however, two key exceptions to the rule: force majeure; and the common law doctrine of frustration.

A.FORCE MAJEURE

A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract. If successfully invoked, the clause would excuse a party’s performance of its obligation under the contract, thereby avoiding a breach. It could also lead to termination if the event survives for a long period of time. However, this is a factual question and is largely dependent on the wording of the clause in the contract.

Acts Within the Scope

The first thing to check in a contract is whether or not it contains a force majeure clause, as the same will not be implied. Moreover, the applicability of a force majeure clause is largely dependent on the specific drafting. For instance, where the term “pandemic” does not form an express part of the clause, there may be a blanket-clause which covers all events “beyond the reasonable control of the parties”, which may be applicable to consequence emanating from COVID-19.

It appears probable that WHO’s classification of COVID-19 as a “pandemic” means it will be within the scope of clauses that include the words “pandemic” or even “epidemic”. However, certain other aspects of this crisis, such as the increase in government-decreed lock downs aimed at slowing the pandemic’s spread may also fall within the scope of the clause.

Impossible to Perfom

If a force majeure clause provides that the relevant triggering event must ‘prevent’ performance, the relevant party must demonstrate that performance is legally or physically impossible, but not just difficult or unprofitable – See Tennants (Lancashire) Ltd v G.S. Wilson & Co Ltd [1917] AC 495. A change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed is not regarded as a force majeure event – See Thames Valley Power Limited v Total Gas & Power Limited [2005] EWHC 2208.

In addition, the force majeure event must be the only effective cause of default by a party under a contract relying on a force majeure provision as was held in Seadrill Ghana v Tullow Ghana [2018] EWHC 1640 (Comm). Moreover, the ‘supervening event’ will excuse performance of only those obligations which are affected by the outbreak of COVID-19. Therefore, in contracts with divisible performance obligations, a supervening event like COVID-19 could cause only partial impossibility or impracticability and the party’s unaffected performance obligations will not be excused.

Mitigation

The party claiming relief is usually under a duty to show that it has taken reasonable steps to avoid the effects of the force majeure event, and that there are no alternate means for performing under the contract.

The Court of Appeal in Channel Island Ferries Limited v Sealink UK Limited [1988] 1 Lloyd’s Report 323 held that any clause referring to events “beyond the control of the relevant party” could only provide relief if the affected party had taken all reasonable steps to avoid its operation or mitigate its results.

It is, therefore, important for companies to document the impacts of COVID-19 on their businesses, as well as steps taken to mitigate those impacts, as these could form a viable record for a potential force majeure claim.

Notice Provisions

In addition, if a contract has a force majeure clause, it is likely that it will contain notice provisions, which notice provisions should be carefully followed so as to mitigate the losses that may be occasioned upon the other party. Some contracts, especially construction contracts, include a “time bar” clause that requires notice to be provided within a specific period from when the affected party first became aware of the force majeure event, failure of which will result in a loss of entitlement to claim.

Effect of a Force Majeure Clause

Generally, the effect of a force majeure clause includes some or all of the following:

    1. Suspension – for the most part, affected obligations do not go away and are simply suspended for the duration of time that the force majeure event continues, unless parties agree otherwise.
    2. Non – liability – once the force majeure clause is triggered, the non-performing party’s liability for non-performance or delay is removed (usually for the duration of time that the force majeure event continues).
    3. Right to terminate – in some cases, suspension of obligations may be unsatisfactory if it becomes commercially unfeasible for the parties to resume performance of the contract once the force majeure event ceases.
Practical Considerations

Before suspending performance in reliance upon a force majeure clause, parties should review their contractual agreements and consider:

    1. The scope of the applicable force majeure clause and whether a pandemic falls within the scope.
    2. The notice requirements and whether they have been triggered.
    3. Whether mitigation steps should be taken, and if so, the reasonable time for the same.
    4. The potential consequences of a breach under the contract.
    5. How the force majeure clause reads with any indemnity clauses under the contract.
B. FRUSTRATION

In the absence of an express force majeure clause, the common law doctrine of frustration may apply. The doctrine of frustration, as established in Taylor v Caldwell (1863) 3 B&S 826, allows a contract to be automatically discharged when a frustrating event occurs so that parties are no longer bound to perform their obligations.

It was perfectly illustrated in the Kenyan case of Five Forty Aviation Limited v Erwan Lowe [2019] eKLR where the Court stated:

the doctrine of frustration operates to excuse further performance where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some fundamental thing or state of things will continue to exist, or that some particular person will continue to be available, or that some future event which forms the foundation of the contract will take place, and before breach performance becomes impossible or only possible in a very different way to that contemplated without default of either party and owing to a fundamental change of circumstances beyond the control and original contemplation of the parties.”

The doctrine of frustration (or discharge, as it is sometimes referred to) is generally thought to provide a solution to the problems of loss allocation which arise when performance is prevented by supervening events. Therefore, in the event of a contract being frustrated (and therefore terminated) by the onset of COVID-19 and the resultant inability to perform contractual obligations, the operation of the doctrine automatically allocates risk and loss following from the said termination.

Test For Frustration

Over time, the courts have adapted the test in Taylor v Caldwell and developed a broader test for frustration. Generally speaking, a frustrating event is an event which:

    1. Occurs after the contract has been formed.
    2. Is so fundamental as to be regarded by the law both as striking at the root of the contract and entirely beyond what was contemplated by the parties when they entered the contract.
    3. Is not due to the fault of either party.
    4. Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.
Effect of Frustration

The doctrine of frustration automatically terminates the contract in question and the parties will no longer be bound by their obligations thereunder. Moreover, the drastic consequences of contractual frustration mean that the threshold for proving frustration is much higher than that for most force majeure provisions since it must be shown that the obligations impacted by the event or circumstance are fundamental to the contract.

Limitations

Where there is an express provision in the contract addressing a particular act or supervening event, such an act or event cannot be relied upon when invoking the doctrine of frustration. A clause in the contract which is intended to deal with the event which has occurred will normally preclude the application of the doctrine of frustration as frustration is concerned with unforeseen, supervening events, and not events which have been anticipated and are provided for within the contract itself.

It is likely that the doctrine of frustration will not be available if the contract contains an express force majeure provision, since the said provision will be deemed to be the agreed allocation of risk between the parties.


This alert is for informational purposes only and should not be taken to be or construed as a legal opinion.

If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng, Partner (jacob@oraro.co.ke), Milly Mbedi, Senior Associate (milly@oraro.co.ke) or your usual contact at our firm, for legal advice on how COVID-19 might affect your business.

Further Directives Issued by the Lands and Companies Registries in Relation to COVID-19

Posted on April 6th, 2020

Further to the earlier directives issued by the Ministry of Lands and the Office of the Attorney General, further guidelines have been issued with respect to the operations of the Lands and Companies Registries in the midst of the COVID-19 pandemic. Below is a summary of the further guidelines:-

          1. Ministry of Lands and Physical Planning

Following the closure  of the Lands Registry, the Cabinet Secretary of the Ministry of Lands and Physical Planning issued a further notice declaring that the period between 17th March 2020 to 13th April 2020 (both days inclusive) shall not be factored in when computing the timelines prescribed for registration of instruments under the Land Registration Act (the Act).

This effectively means that the timelines prescribed for registration of various documents under the Act stopped running from 17th March 2020 and shall continue to run from 14th April 2020. Given that the situation in the country has not improved, it is likely that the closure of the Lands Registries might subsist for a longer period than that envisaged under the notice. Therefore, there is a likelihood that further directive will be issued extending this period. We will continue to monitor the situation as it develops and note to keep you updated.

          2. Office of the Attorney General and Department of Justice

The Office of the Attorney General and Department of Justice - Business Registration Service (BRS) also issued a further notice on 26th March 2020 clarifying the critical and essential services that continue to be provided despite the physical closure of the Registry. The services are as follows:

a) The online services on brs.ecitizen.go.ke

b) Registration of businesses

c) Registration of Debentures and Charges

d) Enquiries relating to insolvency matters

e) Support to investigative agencies

f) Persons seeking other services other than those listed above are advised to contact BRS through their

official emails.

We will keep you updated on any developments with respect to any further directives that might be issued by the Office of the Attorney General and Department of Justice during this period.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact Nelly Gitau, Partner or Tesrah Wamache, Associate or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.

Weathering the Storm: Steps an Employer Can Take to Mitigate the Effects of the COVID-19

Posted on April 1st, 2020

The emergence of the COVID-19 pandemic has created unprecedented instability in the employment sector with employers currently faced with the difficult balancing act of ensuring business continuity and sustainability while at the same time ensuring the safety and well-being of employees.

Many businesses are undergoing massive financial challenges during this period and are being forced to take drastic measures such as termination of employment by declaring redundancies, in a bid to remain afloat. Declaring redundancy is a drastic and last-line measure, and an employer should consider other measures which might serve to keep the business in operation and keep the staff component intact, before resorting to declaring redundancies. Whichever measure one takes, employers are encouraged to abide by the present legal frameworks governing the employment regime in Kenya which are heavily weighted towards the protection of fair labour practices in accordance with Article 41 of the Constitution.

Below is a discussion on the measures an employer can put in place to mitigate the effects of the COVID-19 pandemic:

a) Annual leave

Section 28 of the Employment Act, 2007 (the Act) provides for paid annual leave for not less than twenty-one (21) working days for every twelve (12) consecutive months of service.

The question that arises is whether an employer can compel an employee to go on annual leave during this period especially for employees who cannot work remotely. This can be effected with the consent of the employee.

b) Unpaid leave

An employment relationship is governed by the general principles of contract law as much as it is regulated by the Constitution and statute. There are no statutory or constitutional provisions on unpaid leave. It is, however, possible to have such provisions included in contracts of employment and/or an employer’s internal policies.

Section 10(5) of the Act requires consultation with the employee before any change or amendment of the terms of employment. These changes must thereafter be captured in writing and the employee notified of the same. Where the contract of employment and/or employer’s internal policies do not provide for unpaid leave, an employer may send an employee on unpaid leave upon consultation with the employee and the employee consenting to the same. This must be made expressly in writing.

c) Sick leave

Section 30 of the Act provides for sick leave of not less than seven (7) days with full pay and thereafter seven (7) days with half pay. The Regulation of Wages (General) Order provides that an employee is entitled to a maximum of thirty (30) days sick leave with full pay and thereafter to a maximum of fifteen (15) days sick leave with half pay in each period on twelve (12) months consecutive service.

The courts have held that employers should apply the provisions in the Order since they are more advantageous to employees than those in the Act.

If employees fall sick during this period, they are entitled to sick leave in line with the foregoing provisions or any internal policies the employer might have and that may have more advantageous terms on sick leave.

d) Reduction in working hours

As a mechanism to deal with lower demand in production during this period, an employer may consider a reduction in working hours for employees. This will require employees to only work for specified shorter periods with duties spread out across the workforce as a sustainability measure. Like any other alteration to the employment contract, the same should be done in consultation with and written consent by the employee.

Furthermore, on 25th March 2020, the President through a presidential address on state interventions to cushion Kenyans against economic effects of COVID-19 issued a directive on the coming into force of a daily curfew from 7 p.m. to 5 a.m. from 27th March 2020. The directive exempted those offering specified essential services, and the same was formally gazetted through Legal Notice No. 36 issued under the Public Order Act (Cap 56).

Following skirmishes which broke out between law enforcement officers and members of the public on the first few days of the curfew, it was further directed that employers should release their employees from work earlier than usual, so that those who use public transport are able to beat rush-hour traffic and get home in good time.

Therefore, employers might be forced to adjust the working hours and have more flexible working arrangements for their employees who do not offer essential services to ensure that they are in a position to adhere to the curfew.

Any measures to facilitate the above must be in consultation with the employee.

e) Reduction in remuneration

Across both the public and private sector various organisations are using pay-cuts as an alternative to declaring redundancies. Some of the pay-cuts are voluntary and others have been proposals at various rates through certain levels or grades of employment. As with any other change in the terms of employment, a reduction in remuneration can only be done upon consultation with an employee and obtaining his or her consent on the same. Again, this must be done in writing.

If parties consult and agree to salary cuts or unpaid leave, the employee will not be able to recover such underpaid on unpaid salaries when normal business operations resume, unless it is a specific term in the agreement.

f) Working from home

Employers can have their employees working from home or working remotely if it is possible, except where those employees are working in critical and essential services. Employees who cannot work remotely can take annual leave during this period. However, the consent of the employees should be sought.

g) Working in shifts

Employers can employ a shift system to reduce the number of employees who are in the workplace at any given time. With a reduced number of staff present in the office during any given shift, this will also go towards ensuring compliance with the directives on social distancing in the workplace.

h) Redundancies

Some employers may be forced to declare some employees redundant if circumstances become unsustainably dire. In such eventuality, employers will be required to strictly adhere to the provisions of redundancy under the Act, which include issuing a mandatory notice of intention to terminate employment on account of redundancy and consultation with the employees before ultimately terminating employment. Both these mandatory processes take no less than one (1) month and in certain cases may take up to three (3) months based on terms of employment and Collective Bargaining Agreement (if any). More importantly, under the Act, it is clear that employees have to be paid all dues owing to them before the redundancy can be deemed to have taken effect, thus serious financial consideration must be taken before taking this route. This might prove difficult to employers due to the prevailing financial times.

i) Insolvency

The COVID-19 pandemic has significantly affected business operations across the world resulting in cases where an employer is unable to meet its financial obligations to its employees and therefore gets into an insolvency situation. The options available in such circumstances are provided for in the Act and the Insolvency Act No. 18 of 2015 (the Insolvency Act).

The Act provides under sections 43 and 45 that for termination of an employment relationship to be fair and lawful the employer must prove that the reasons for the same are fair and valid. The current slumped business environment would constitute valid and fair reasons for termination of an employment relationship if the employer is able to show that it is unable to meet its financial obligations as a result of the COVID-19 pandemic.

Section 66 of the Act provides that where an employee or his representative makes an application to the Minister in writing and the Minister is satisfied among other reasons that the employer is insolvent, then the Minister shall, subject to the provisions of section 69 of the Act, pay the employee out of the National Social Security Fund the amount which in the opinion of the Minister the employee is entitled to in respect to the debt.

Section 68 of the Act then sets out the debts which apply when an employer is insolvent, and these include:

  1. Any arrears of wages in respect of one (1) or more months, but not more than six (6) months or part thereof
  2. An amount equivalent to the period of notice that the employer would be required to give to the employee in case of termination in accordance to the Act
  3. Any pay in lieu of annual leave days earned by the employee but not taken

Section 69 of the Act to which section 66 is subject to limits the total amount payable to an employee in respect of any debt in case of insolvency to KES. 10,000 or one half of the monthly remuneration whichever is greater in respect of any one month payable.

The Insolvency Act caters to payment of wages by the employer in an insolvency situation. The Second Schedule of the Insolvency Act sets out the order of priority of debts where the secured creditors get first priority and dues payable to employees are second priority claims as set out at paragraph 2 thereof “all wages or salaries payable to employees in respect of services provided to the bankrupt or company during the four months before the commencement of the bankruptcy or liquidation” to the extent that they remain unpaid.

Paragraph 3 (2) of the Second Schedule to the Insolvency Act then limits the amount payable to any one employee to not more than KES 200,000 as at the commencement of the bankruptcy or liquidation, as the case may be.

Therefore, employees claiming unpaid benefits will be ranked as second priority claims if the claim is merited and accrues before or because of the commencement of the insolvency proceedings and any payments made to the employees by the employer are limited to four (4) months before the commencement of the insolvency proceedings and further limited to not more than KES 200,000 in relation to an amount payable to any one (1) employee.

j) Compliance with directives by Government

On 14th March 2020, the Ministry of Labour through the Directorate of Occupational Safety and Health Services issued an advisory following the COVID-19 outbreak. The directive states that employers should formulate policies on infection control plans that should guide the organization. The directive outlines that such a policy should include:

  • Steps that the organization will take in the promotion and practice of hygiene
  • Modalities of holding meetings and travel control mechanisms both business travel and commute to and from work for the employees
  • Safe food handling in the workplace
  • Possible mechanisms of working from home
  • Channels of reporting any suspected COVID-19 cases

From the above, it is clear that more obligations are placed on employers in the health sector as they are expected to provide their employees with effective personal protective equipment, the maintenance of the protective gear and training of the employees. However, it is key that every employer takes the necessary step of coming up with a relevant policy as outlined above and they may consult the Directorate of Occupational, Safety and Health Services on the same.

The Ministry of Health has been at the forefront in issuing directives that apply to all citizens within the country. The directives are not specifically directed to employers or employees however they are complementary of the directives issued by the Ministry of Labour and Social Protection. Therefore, employers have an obligation to ensure that they are up to date with the directives and the same is implemented in the workplace.

Working together during the storm

Employers are encouraged to work towards remaining in operation during these uncertain times, to the extent possible. This may be achieved through co-operation with government guidelines aimed at reducing the spread of COVID-19 and in consultation and consent with employees on workable amendments to the terms and conditions of employment. Together, the storm can be weathered.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact Chacha Odera, Managing Partner, Georgina Ogalo-Omondi, Partner, Sandra Kavagi, Associate, Anne Kadima, Associate, Rosemary Sossion, Associate, or your usual contact at our firm for legal advice relating to the COVID-19 pandemic and how the same might affect you.

Legal & Tax Perspective of the Presidential Tax Directive – COVID-19

Posted on March 30th, 2020

With the outbreak of the Coronavirus pandemic come widespread economic challenges affecting the world at large with no country spared. Kenya on its part has seen a decline in economic and business activities following the announcement of the Coronavirus cases in Kenya. In the result, the security of employment and businesses of many Kenyans is uncertain. An even greater challenge faced by companies is the inability to fulfil contractual obligations and more importantly be in compliance with statutory obligations.

It is on this premise that the President in an effort to mitigate the adverse economic effects of the Coronavirus pandemic, directed the National Treasury to implement certain tax reliefs (as set out below) aimed at increasing liquidity in the country.

Pay As You Earn (PAYE)

The President has directed a one hundred percent (100%) Tax Relief for persons earning gross monthly income of up to KES 24,000 and reduction of the highest PAYE rate from thirty percent (30%) to twenty five percent (25%).

This is a good move in ensuring that a taxpayer who earns salary goes home with more disposable income. This will help sustain the common mwananchi in the coming hard times. This directive will however only come into force pursuant to a tax amendment bill being tabled in parliament and the same being enacted.

Value Added Tax (VAT)

The President further directed an immediate reduction of the standard VAT rate from sixteen percent (16%) to fourteen percent (14%), effective 1st April, 2020. The Cabinet Secretary in exercise of his powers under section 6 of the VAT Act has issued Legal Notice Number 35 of 2020 dated 26th March 2020 in terms of the aforesaid directive, which is pending approval by Parliament.

The Kenya Revenue Authority (KRA) was also directed to expedite the payment of all verified VAT refund claims amounting to KES 10 Billion within three (3) weeks or in the alternative to allow for offsetting of Withholding VAT, in order to improve cash flows for businesses in the economy. We must emphasise this VAT Refund Claim only applies to claims that have been verified by KRA and does not extend to contested claims.

Turnover Tax (TOT)

Reduction of the TOT rate from the current three percent (3%) to one percent (1%) for all Micro, Small and Medium Enterprises (MSMEs). The TOT was reintroduced by the Finance Act, 2019. This will provide a major reprieve to taxpayers - entities whose turnover is less than KES 5 Million in a year of income.

Export Processing Zone (EPZ) Enterprises

Further to Presidential directives, the Cabinet Secretary for National Treasury and Planning, on 20th March, 2020, had issued a notice to the Commissioner General of KRA asking that it lifts restrictions of twenty percent (20%) of the total annual production of the EPZs for sale into the domestic market to one hundred percent (100%) with an undertaking that the government pays the dues and taxes to KRA given that there is no legal provision exempting goods from EPZs sold locally from taxes.

The tax and dues payable by taxpayers in the EPZs are charged under the 13th Schedule of the Income Tax Act and the EPZ Act, 1990.  This Presidential directive will allow entities in the EPZs to supply locally all their products in Kenya.

While the move is welcomed and the idea of the government paying taxes and dues on behalf of tax payers to KRA may be economically sound, the same goes against the basic agency principle of ‘a principal being estopped from purchasing its own goods from its agent’. However, it must be noted that this is a temporary measure, pending parliamentary amendments to the law to allow for exemption of EPZs.


This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Lena Onchwari (lena@oraro.co.ke) and Wanjala Opwora(wanjala@oraro.co.ke) or your usual contact at our firm, for legal advice.

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