On 18th March, 2020 the President assented to the Business Laws (Amendment) Act, 2020 (the Act). The Act, which came into force on its date of assent, seeks to facilitate the ease of doing business in Kenya by amending various statutes. Below is a summary of the salient changes brought about by the Act, that affect specific sectors:
CONVEYANCING AND REAL ESTATE
Electronic Execution of Documents
The Act recognises the use of advanced electronic signatures and electronic signatures as a valid mode of execution of documents in Kenya. The recognition of electronic signatures is poised to improve the ease at which land transactions are carried out, especially in transactions where the parties are not in Kenya at the time of execution.
The Stamp Duty Act has equally been amended to provide that documents can be electronically stamped, extending the scope of the initial provision which only recognized stamping by a franking machine or an adhesive stamp.
The Registration of Documents Act (the RDA) has been amended to recognise electronic filing of documents. The Registrar of Documents is empowered to establish both the Principal Registry in Nairobi and the Coast Registry in electronic form. This is intended to ease the process of applying for registration of documents under the RDA, as one may not require to physically present a document for registration at either of the two Registries.
Abolishment of Land Rate and Land Rent Clearance Certificates
Previously, a person seeking to register an interest in land was required to provide proof of payment of land rates and land rent before registration is effected. An application for registration therefore had to be accompanied with Rates and Rent Clearance Certificates where rent and rates were payable.
The Act has deleted these provisions in entirety implying that it shall no longer be mandatory to produce Land Rent and Rates Clearance Certificates when applying for registration of an interest in land. Transferees therefore have to individually carry out their own due diligence and satisfy themselves that rent and rates have been paid in order to avoid assuming these liabilities.
It is however important to note that although Section 38 and 39 have been deleted from the Land Registration Act, Sections 55 (b) and 56 (4) which require production of a Rent Clearance Certificate and Consent to Lease or Charge prior to registration remain in force. It will, therefore, be necessary to address this disparity going forward, in order to clarify the applicable completion documents in property dealings.
EMPLOYMENT AND LABOUR
Waiver of Registration of Workplaces for new businesses
New businesses with less than one hundred (100) employees can now operate without registration of a workplace for a period of one year from the date of registration of the business. This provision is set to provide small and medium sized enterprises with more time to register their workplaces.
CORPORATE AND COMMERCIAL
Increased threshold for enforcing Squeeze-Out rights in mergers and takeovers
The stake that an acquiring party should purchase before enforcing a squeeze-out has been restored to ninety per cent (90%) from the current stake of fifty per cent (50%). The increase in the squeeze-out threshold seeks to restore the protection of the rights of minority shareholders, especially in listed companies.
Abolishment of the use of common seals in execution
The use of common seals in executing contracts by companies has been abolished. The adoption of this amendment broadens the scope for holding a company accountable for contracts as such contracts may be executed by any person acting under its authority, express or implied authority.
Treatment of bearer shares
Bearers of share warrants can now convert their warrants into registered shares. This provision is poised to recognize and protect the rights of bearers acquired before the coming into force of the Companies Act, 2015.
RESTRUCTURING AND INSOLVENCY
Additional factors to consider when lifting a moratorium in insolvency matters
The Act has included additional factors to consider when the courts seek to lift a moratorium in insolvency. These include, whether the value of the secured creditor’s claim exceeds the value of the encumbered asset, whether the secured creditor is not receiving protection for the diminution in the value of the encumbered asset, whether the encumbered asset is not needed for the reorganisation or sale of the company as a going concern and whether relief is required to protect or preserve the value of the assets such as perishable goods.. The inclusion of these factors is to take into account the different business exigencies of companies under administration.
Information requests by creditors
The Act gives creditors the right to request for information from the insolvency practitioner in respect of the insolvency process. The information rights will provide more transparency in relation to the insolvency process in Kenya.
Enforcement of the Building Code
The National Construction Authority (NCA) has been authorised to promulgate and enforce the Building Code in the construction industry. Consequently, any matters concerning compliance with the Building Code shall be under the purview of the NCA. The NCA will also have power to promulgate regulations relating to and to conduct mandatory inspections of the construction sites with a view to verify and confirm whether contractors are complying with the construction regulations.
Investment deductions, exemption of supplies for bulk storage of Standard Gauge Railway raw materials and market protectionism
Companies that incur a capital expenditure of at least Kenya Shillings Five Billion (KES 5,000,000,000) on construction of bulk storage and handling facilities with a minimum capacity of one hundred thousand metric tonnes in relation to the Standard Gauge Railway (SGR), will be entitled to investment deductions equal to one hundred and fifty per cent (150%) of the capital expenditure incurred from the year of first use of the facility.
Additionally, taxable supplies procured locally or imported for the construction of bulk storage in support of the SGR operations are exempted from paying import declaration fees.
Further, a twenty five per cent (25%) tax has been imposed on imported glass bottles under the Excise Duty Act.
The adoption of these amendments is intended to boost businesses for local manufacturers and ultimately grow Kenyan brands.
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 Pamella Ager (email@example.com), Nelly Gitau, Jacob Ochieng (firstname.lastname@example.org), Lena Onchwari, Naeem Hirani or your usual contact at our firm, for legal advice relating to the Business Laws (Amendment) Act, 2020 and how the same might affect your business.
Our Partners Pamella Ager and Nelly Gitau participated in the 6th annual East African Property Investment Summit, that took place on 10-11 April, 2019 at the Radisson Blu Hotel - Nairobi. Themed “Driving Affordability & Opportunity Through the Property Value Chain”, the conference offered a platform for the regions’ leading developers, investors and public sector stakeholders to exchange insights, debate, network and close deals through an intensive and collaborative two-day agenda.
Pamella and Nelly practice in the conveyancing and real estate practice group of the firm and have significant experience working on some of the country’s most notable real estate projects. For more information about the event, click here
November 13, 2018
For the fourth consecutive year, leading legal directory – IFLR 1000, recognised Oraro & Company Advocates as a top-tier firm in its recently released 2019 rankings. The firm was commended as “…very professional and diligent in providing its legal services and undertaking the work. They have competent lawyers who proactively respond to their clients. The law firm is also sensitive to clients’ needs and they go out of their way to understand the clients’ needs and provide the advice and service required.”
Solidifying its 2018 ranking as a tier 2 firm in both Project Development (Infrastructure) and Project Development (Mining), Oraro & Company Advocates was yet again recognised as a tier 2 firm in both practice areas. For the very first time the firm was ranked in Project Development (Power) as a tier 3 firm, evidence of notable transactions it has handled in the Energy sector in Kenya. The directory also acknowledged that the firm was active in Mergers & Acquisitions.
Three of the firm’s partners were also recognised for their expertise including George Oraro SC who was ranked as a highly regarded lawyer in Project Development and M&A and lauded as “…a very competent and knowledgeable advocate with a deep understanding and application of the law.” Also coming in as a highly regarded lawyer was Pamella Ager who was identified for her expertise in Banking and M&A.
Nelly Gitau joined the highly regarded lawyer rankings this year in Banking (Real Estate) from a rising star in IFLR 2017 and 2018 respectively. Well-respected for her expertise in Arbitration and Insolvency, Noella Lubano, a Partner in the firm was singled out as having “…extensive [insolvency] experience, is client focused and provides high quality legal services. She is accessible, responsive and sensitive to clients’ needs.”
In response to the rankings, the Managing Partner – Chacha Odera remarked that “These rankings signify our continuous efforts as a firm to go over and above what our clients expect and I am particularly pleased with Nelly Gitau’s recognition as a highly regarded lawyer in Banking (Real Estate) from a rising star.”
Established 42 years ago by George Oraro SC (one of Kenya’s top litigators), Oraro & Company Advocates is a top-tier, full-service Kenyan law firm providing specialist legal services both locally and regionally in Arbitration, Banking & Finance, Conveyancing & Real Estate, Corporate & Commercial, Dispute Resolution, Employment & Labour, Infrastructure, Projects & PPP, Restructuring & Insolvency and Tax. The firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 and its partnership includes well-recognised advocates who are regarded for their expertise in their respective areas as well as their significant contribution to Kenyan jurisprudence.
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
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:-
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.
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.
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.
The Finance Act, 2018 assented to on 21st September, 2018, amended the Central Bank of Kenya (CBK) Act, 1966 to regulate Mortgage Finance Business (the business). The amendments include having new definitions and introduction of new powers to the CBK
These amendments came into effect on 1st October , 2018.
Increased CBK powers
With the introduction of new sections, CBK will now have power to license and supervise the business. This includes:
The insurance sector in Kenya is another sector that has recorded substantial growth and development; it is among the most developed in Sub-Saharan Africa. It is therefore not surprising that the Government has seen the need to amend certain provisions in the IA through the Act to foster more growth and to ensure that the regulatory framework is in line with the developments in the global insurance sector. Evidently, the amendments to the IA that the Government seeks to give more regulatory authority to the Insurance Regulatory Authority(IRA) and not the Minister of Finance(now known as the Cabinet Secretary for National Treasury(see below)). Some of the other amendments to the IA are highlighted below:
Capital adequacy ratio
The IA has been amended by an introduction of the definition of the term “capital adequacy ratio”. The term refers to a measure of the available capital in relation to the required capital and is applied in the margin of solvency requirement prescribed by the IRA.
Minimum capital requirements and holding by Kenyan citizens
The minimum capital requirements specified in the Schedule could previously be amended by order of the Minister but this function has now been transferred to the IRA. Under the amendments, the IRA has the discretion to issue a directive requiring the insurer to increase its paid-up capital to an amount higher than the minimum specified in the Insurance Regulations 2015(the Regulations) or a directive increasing the minimum capital adequacy requirement applicable to an insurer to a higher sum than that specified in the Regulations.
Minimum admitted assets in Kenya
The minimum admitted assets specified in the Second Schedule of the Act could previously be amended by an order of the Minister. This function has now been transferred to the IRA. It is noteworthy, that this order is not subject to parliamentary approval prior to the amendment.
Application for registration
In addition to the documents currently required to be presented by an insurer for registration, the insurer is also now required to provide an investment plan for the following period of not less than three years.
Solvency margin requirements
There is no longer a distinction in the solvency margin requirements of an insurer carrying out general insurance business and an insurer carrying out long term insurance business. Both are now required to keep total admitted assets of not less than the total admitted liabilities and the capital adequacy ratio, as may be determined by the IRA. In addition, the IRA has the discretion to prescribe the method of determining admitted assets and liabilities.
Minister vs. Cabinet Secretary
The word “Minister” as used in section 47 of the Act on assets to be in the name of insurer has been removed and substituted with the phrase “Cabinet Secretary”.
Investment of assets
Previously, the Act provided that the assets of the insurer shall be invested in Kenya, in such a manner as the insurer thinks fit. The amendment now provides that the assets will be invested in accordance with the provisions of such investment guidelines as may be issued by the IRA; thereby limiting the discretion of the insurers.
The extensive provisions with respect to specified investments have been repealed; there is now no difference in the investment specification for insurers carrying out general insurance business or long term insurance business. Every insurer is now required to invest its assets in accordance with the investment guidelines, issued under the amended provisions with respect to investment assets.
Intermediaries, risk managers, motor assessors, insurance investigator.etc – Application for registration
Where a person registers as an agent, they are no longer required to provide a document under the hand of the principal officer of the insurer i.e for whom the person proposes to act for certifying that the person has been appointed as an agent by the insurer. This is through an agreement or appointment letter. Also, that the insurer is satisfied that the applicant has the knowledge and experience necessary to act as an agent. The IA now only requires that a registered agent seek to be appointed by an insurer before transacting business on their behalf.
Minimum capital requirements
The entire Second Schedule with respect to minimum capital requirements has been substituted with new provisions. These requirements not only increase the required monetary value but also introduce additional components, such as risk-based capital or a percentage of net-earned premiums or liabilities. The Schedule’s requirements are that:
Any insurer registered before commencement of the Schedule is to comply with these requirements by 30th June 2018
Undoubtedly, the most significant change in business legislation in the last year has been the new Companies Act, 2015 (the Act). The Act is set to among other things, streamline business practice in Kenya as well as enhance corporate governance. Borrowed heavily from the UK’s Companies Act of 2006, the voluminous act consists of thousands of sections. It is noteworthy that only Section 2 of the Act came into operation on the date of gazettement (15th September, 2015), the remaining sections were to be operationalised in a phased out manner by way of gazzettement.
The first phase of the Act was operationalised with effect from 6th November, 2015 vide Legal Notice No. 233 of 2015 published on the same date. Consequently, the following provisions of the Act came into operation then:
a) Parts 1 to 14, 23, 31, 32, 38, 40, 42
b) The First Schedule
c) The Second Schedule
d) The Sixth Schedule
Published on 18th November 2015, Legal Notice No. 239 of 2015 introduces the Companies (General) Regulations, 2015 (the Regulations) made by the Attorney-General in exercise of the powers conferred by Section 1022 of the Act. These regulations came into operation on 2nd December, 2015 and they provide for additional requirements as required by the Act and the necessary forms and fees for the services offered by the Companies Registry.
Provisions of the Regulations that relate to components of the Act that did not come into operation by 2nd December, 2015 shall come into operation on the day on which the corresponding provisions of the Act come into operation.
For a detailed analysis of the Companies Act, 2015 click here
The Insolvency Act, 2015 (the Act) was assented into law on 11th September 2015 and some of its provisions came into effect on the 30th of November by way of Legal Notice No. 244 of 2015. Some of these provisions include Parts I, III and V, the First Schedule and the Second Schedule. Any provision that is not brought into force through gazzetment within nine months after the publication of the Act shall automatically come into force on the expiry of that period. The Act also gives the Cabinet Secretary power to make regulations that may be necessary to transition from the Bankruptcy Act and Cap 486 to the Act.
Unlike 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. This includes, in the case of companies, the introduction of rights to conduct restructurings and bankruptcy work-outs under an administration process.
Winding-up of companies was previously provided for under Part VI of the Companies Act (Cap 486), while the insolvency of natural persons was covered in the Bankruptcy Act of Kenya (No. 32 of 1930). It is important to note that the transitional provisions of the Act provide that despite the repeal of Cap 486), the Bankruptcy Act and section 89 of the Succession Act (collectively, the “Repealed Acts”), the relevant provisions of these Repealed Acts will continue to apply to any ‘past events’. The rationale being that these past events relate to specific actions taken under the repealed legislation and include, for example, the passing by a company of a special resolution prior to the commencement of the Act, resolving that the company be wound up.
The new Act, is of even more significance to investors in light of recent happenings on the NSE, where oil and gas logistics firm Atlas Development & Support Services (also listed on the London Stock Exchange), recently announced that it will be closing its Kenyan subsidiaries (Ardan Logistics, Ardan Medical Services and Ardan Civil Engineering). Some of the firms’ creditors have sought the government’s intervention in the face of reports that the firm owes its creditors around KES 400 million (approximately USD 4 million). The firm’s creditors have until February 12th to prove their claims. The company also announced plans to focus more on its investment activities in Ethiopia, where it recently acquired a bottle making company - East Africa Packaging Holdings Limited.
Following the enactment of the Insolvency Act, 2015 (No. 18 of 2015); by way of Legal Notice No.1 of 2016, the following provisions of the Act came into operation as of 18th January 2016:
Parts I, III and V, the First Schedule and the Second Schedule were brought into operation as of 30th November 2015 through Legal Notice No. 224 of 2015. In essence, the only provisions of the Act that remain to be operationalised are Part IV, Part XIII and the Fifth Schedule.
The Act has been hailed for its remarkable attempt to overhaul insolvency provisions under the Bankruptcy Act (Cap 53), Companies Act (Cap 489) and Section 89 of the Law of Succession Act (Cap 160). Some of the notable changes include the legal-rescue of insolvent businesses rather than winding them up by providing several alternatives such as rescheduling of debt to lengthen the repayment period instead of commencing bankruptcy proceedings in court. Subsequent to the Insolvency Act, natural insolvent persons could remain “bankrupt” forever. Now as a matter of law, a debtor will automatically be discharged from their debt after three years.
In conclusion, as it had been previously stated, the Insolvency Act consolidates the laws with respect to insolvency. This is in a bid to not only provide for and regulation of 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.
Share buybacks refer to the repurchasing of shares by the company that issued them. Until recently, the concept of share buybacks in Kenya was foreign. However, the coming into force of the Companies Act, 2015 (the Companies Act) introduced the concept to Kenya.
In a typical share buyback transaction, a company buys back its shares and then cancels them and the amount of the company’s issued share capital is diminished by the nominal value of the cancelled shares. This effectively leaves the remaining shareholders with larger stakes in the company.
There are several reasons why a company may repurchase its own shares. A common reason is that the company may have some extra money to spend. One of the ways a company can apply surplus funds is to purchase its own shares.
Another reason why a company may repurchase its own shares is to take advantage of undervaluation. If a stock is dramatically undervalued, the issuing company can repurchase some of its shares at this reduced price and then re-issue them at a later date once the market has corrected, thereby increasing its equity capital without issuing any additional shares.
Yet another reason for which share buybacks may be used, is to facilitate the exit of a member through the disposal of his shares, with the company purchasing the exiting member’s shares.
The company should take into account the following preliminary considerations before carrying out a share buyback:
In order to give effect to a share buyback, a company must enter into a contract with the shareholder(s) whose shares are to be purchased. It is usually a simple agreement providing for the company to purchase the shares or it can be a contract under which the company may become entitled or obliged to purchase the shares in the future subject to certain conditions being met. It need not be a stand-alone contract and can be incorporated into the company’s articles as a standing authority to buyback.
The terms of the contract should be approved by a special resolution of the company either before the contract is entered into or the contract should state that no shares will be purchased until its terms have been approved by resolution of the shareholders. After the share buyback, the company must lodge a return of purchase with the Registrar of Companies (the Registrar) and after the shares are cancelled a notice of the same must be also lodged with the Registrar together with a Statement of Capital.
The Companies Act has introduced provisions that allow companies limited by shares, whether private or public and companies limited by guarantee with a share capital to purchase their own shares (including redeemable shares) subject to any restrictions or prohibitions in its articles and the provisions of the Act on purchase of its own shares by a company.
Under the Companies Act, a limited company may not purchase its own shares if as a result of the purchase there would no longer be any issued shares of the company other than redeemable shares or shares held as treasury shares. Secondly, a limited company may not purchase its own shares unless they are fully paid and lastly a limited company may purchase its own shares only out of distributable profits of the company or the proceeds of a fresh issue of shares made for the purpose of financing the purchase. A private limited company may however purchase its own shares out of capital.
Types of Share Buybacks
The power of a limited company to purchase its own shares may be exercised in three (3) ways: by an off-market purchase; by a market purchase; by a contingent purchase contract.
(i) Off-market purchases
An off-market purchase is defined as one which is not effected on an approved securities exchange, or one which is so effected but the shares are not subject to a marketing arrangement on the exchange. Principally, therefore, purchases by private and nonlisted public companies and over-the-counter purchases by listed companies are “off-market” purchases.
(ii) Market Purchases
Alternatively, a company may purchase its own shares by a market purchase. A purchase is a market purchase if it is made on an approved securities exchange and the shares are not subject to a marketing arrangement on the exchange. This means that market purchases do not apply to private limited companies.
(iii) Contingent purchase contracts
A contingent purchase contract is a contract entered into by a company and relating to shares in the company, that does not amount to a contract to purchase the shares but under which the company may (subject to any conditions) become entitled or obliged to purchase the shares.
The simplest example of a contingent purchase contract is a “put” option given by a company to one of its own shareholders under whichthe company will become obligated to acquire a certain number of shares from him at an agreed price if the shareholder exercises the option. Similarly, a “call” option taken by a company will be a contingent purchase contract, since it entitles the company to require the other party to transfer a certain number of shares in the company at an agreed price, if the company chooses to call on him to do so.
Share buybacks reduce the number of shares available in the market. This has the potential of increasing earnings per share on the remaining shares, benefiting shareholders. Buybacks can also serve to increase share prices by simply reducing the supply of available shares in the market and as per the demand theory, a lower supply can cause an increase in price in some cases.
Share buybacks can also be used to boost shareholder confidence in the company as the shareholder will view the purchase of undervalued shares by the company as a sign of confidence by the company. Also, when a company’s share price has suffered a significant fall in the market, a buyback can be a good way for a company to cushion its shareholders. Buying back stock can also be an easy way to make a business look more attractive to investors. By reducing the number of outstanding shares, a company’s earnings per share ratio is automatically increased.
For years it was thought that share buybacks were a positive thing for shareholders. However, there are some downsides to buybacks as well. The impact of buybacks on earnings per share can give an artificial lift to the stock and mask financial problems that would be revealed by a closer look at the company’s ratios. Some have said that companies use buybacks as a way to allow executives to take advantage of stock option programs while not diluting earnings per share. Share buybacks can also create a short-term bump in the share price that some say allows insiders to profit, while other investors might buy in after they see the prices move higher.
A buyback of shares from a shareholder will trigger capital gains tax at the rate of five per cent (5%) on the gain. The capital gains tax is payable by the shareholder. The company on the other hand will also be liable to pay stamp duty at the rate of one per cent (1%) on the share purchase price when buying back the shares.
The Companies Act has elaborately set out the different ways, a limited company can exercise its power to purchase its own shares and set out the procedure for the same. It should however be noted that the share buyback scheme is novel in Kenya and that there are presently no regulations that govern share buyback transactions, neither have prescribed forms been issued. Be that as it may, the share buyback concept is a welcome development in Kenya, as it is a tool whose benefits far outweigh the disadvantages.
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