INSOLVENCY LAW NOTES (Summary Notes)

 Insolvency

BANKRUPTCY

• Debtors application 

• Creditors application

• Discharge from bankruptcy

• Alternatives

• Voluntary arrangement 
• Instalment order
• No asset procedure

CORPORATE INSOLVENCY

• Liquidation

• Members Voluntary Liquidation 
• Creditors Voluntary Liquidation 
• Liquidation by the Court

• Alternatives

• Administration
• Company Voluntary Arrangement

•The Insolvency the UK Insolvency Act   2015  in Kenya borrows heavily  from Act of 1986.

•With its adoption of the Insolvency Act 2015 Kenya has become the 40th State in the world to have enacted legislation based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency.

•The following are the highlights of the act

• It enables persons and entities to continue to operate as going concerns so that ultimately they may be able to meet their financial obligations to their creditors in full or at least to the satisfaction of those creditors
• The act also provides for management of the debtors alternative procedures affairs for the benefit of to insolvency e.g the creditors
• The act also provides for and unincorporated bodies Liquidation procedures for incorporated (whether solvent or otherwise)
•  It also provides provisions for alternatives to liquidation like administration
•  Another aim is to whole than would adjudged bankrupt achieve be the a better outcome for case if those persons the creditors as a and entities were
•  Rehabilitating the debtor is also targeted at honest but unfortunate debtors.
• There is also a provision for cross-border insolvency.

The Insolvency Practitioner

Bankruptcy

• Acts as the bankruptcy trustee or interim trustee in respect of the person’s property or as permanent or interim trustee in the sequestration of the person’s estate
• A trustee under a deed
• as supervisor of a voluntary arrangement

Companies

• Acts as the liquidator, provisional liquidator, administrator of the company; • a supervisor of a voluntary arrangement
• a supervisor of a voluntary arrangement

 

• A person who, not being the holder of an authorisation, purports to act as an insolvency practitioner in relation to a company or a natural person commits an offence and is on conviction liable to a fine not exceeding five million shillings. Sec 5 of the Insolvency Act 2015

Qualifications

• holds a degree from a university recognized in Kenya;
• has at least five years' relevant professional experience as a member of a professional body recognized under section 7 of the Act;
• has at least two years' experience in insolvency practice before commencement of the Act;
• has worked under the apprenticeship of an insolvency practitioner for at least four years
• satisfies the requirements of Chapter 6 of the Constitution.
• An advocate who has worked for the Official Receiver for not less than two years automatically qualifies to Act as an Insolvency Practitioner.

Bankruptcy

•Originally the law governing the insolvency regime in respect of enacted in the year 1938, modelled after the English 1914 Bankruptcy

•debtor adjudging the debtor bankrupt on- es an order in respect of a

(a)accordance with section 17 - 31 of the Insolvency Act 2015; made in 

(b)on the application of the debtor made in accordance with section 32

 

•The creditor's application for bankruptcy order shall be in form of a petition in Form 3 set out in the First Schedule and shall be accompanied by the following documents—

• verifying affidavit which shall be in Form 4 set out in the First Schedule;
• proof of the debt which shall be in Form 5 set out in the First Schedule; and
• the application for appointment of trustee which shall be Form 9 of the First schedule.

•The petition shall be preceded by a statutory demand and shall be in Form 6 set out in the First Schedule.

> An application for a bankruptcy order by the debtor may be made by way of a bankruptcy petition and shall be in Form 10 set make application for out in the First Schedule.

The petition shall be accompanied by the following documents -

• an affidavit to the petition which shall be in Form 8 set out in the First Schedule;
• statement of debtors financial position which shall be called a "statement of affairs",  and shall, be in Form 11 set out in  the First Schedule; and 
• application for appointment of trustee which shall be in Form 9 of the First Schedule

•Once an application for bankruptcy is made then an interim trustee is appointed to take over the matters of the debtor

•The next stage is the appointment of a trustee( could be the Official Receiver or an Insolvency Practitioner)

•The purpose of a trustee is to manage the debtors affairs.

•The bankrupts property after declaration of bankruptcy vests in the trustee and the same will apply to any subsequent acquisition or passing of property into the bankrupts estate.

•The Bankrupt is then to lodge statement of his financial position with bankruptcy trustee(Sec 50). This is to ascertain the true financial position of the debtor. It is an offence under the Act to hide any pertinent information during the public examination

•Here the Creditors get other interested parties to inspect the financial statements as well as including unsecured creditors

• After the public examination a meeting can be convened by the official receiver or the creditors to chart a way forward in relation to the outstanding creditors

• Once the debts of a bankrupt individual or of the company are ascertained, they will be paid out to creditors. 

• The Second Schedule to the Act sets out preferential debts in order of their priority as follows:

First priority claims

• These include the costs of the bankruptcy process i.e.

1. The bankruptcy trustee’s/liquidator’s/administrator’s remuneration;
2. Reasonable costs incurred during the court proceedings; and
3. Costs incurred by the creditor to preserve the bankrupt’s assets.

• This is provided for under section 247 of the Act (for bankrupts), section 473 (for companies in liquidation) and section 615 (for companies under administration).

Second priority claims

Include the following:  

i. Wages and salaries payable to employees of the bankrupt during the four months before the commencement of bankruptcy. Each employee is entitled to a maximum of Kshs. 200,000. (including holiday pay and compensation for redundancy and for loss of employment before, or because of the bankruptcy/liquidation)

ii. Statutory deductions from employees (e.g. PAYE, NSSF, NHIF).

iii. Amounts that are preferential claims under section 175(2) and (3) of the Act, which are for services relating to the bankrupt’s business records and has a lien over such documents (having not been paid). Advocates and accountants would fall in this category. The maximum amount payable is capped at Kshs. 200,000.

iv. Other amounts required by other written law (especially those paid by the buyer to a seller on account of the purchase price of goods).

Third priority claims

Third priority claims are the taxes payable by the bankrupt such as income tax, customs duty and excise duty which are unpaid.

• Claims  having  the  same  priority  rank  equally among themselves and are payable in full, unless the  property  of  the  bankrupt is insufficient to meet them whereupon they shall be paid out in equal proportions to the creditors. 
• After the payment of the debts, any surplus is to be applied in paying outstanding interest on debts since the commencement of the bankruptcy.

Discharge from Bankruptcy

• S. 254.(l) A bankrupt is automatically discharged from bankruptcy three years after the bankrupt lodged a statement of the bankrupt's financial position in accordance with section 50, but may apply to be discharged earlier.

•Automatic discharge was not found in Cap 53. One had to go to court to get a discharge order and sometimes the court would hold that the bankrupt order remain in force thus tying many down in their ability to recover.

•Similarly a creditor can apply to court to cancel the discharge 

•A Trustee can also object to discharge

 

Look at

•Assets a bankrupt can retain Sec 161-167 •Final Meeting of creditors Sec 253

•Bankruptcy offences Sec 289-302 i.e anything that would aggravate the circumstances of the bankrupt, or selling of assets or not keeping proper records. These offences have been enhanced and clearly enumerated unlike in cap 53

•Duties of the Bankrupt Sec 140-148

•Powers of the Bankruptcy trustee - power to summon and examine,

•Restrictions during Bankruptcy Sec 149 - 160

 

Alternatives to Bankruptcy

•The Insolvency Act 2015 by the introduction of Part IV thereof makes provisions for alternative procedures to bankruptcy, instead of the usual foreclosure mechanism and distribution of the assets of a non-performing debtor.

•The administration procedure facilitates the rescue of a company or the better realization and application of its assets. Here an insolvent company is allowed  to continue trading with protection from its creditors through a statutory moratorium.

•Thus corporate rehabilitation for failed enterprises by the administrators comes into play. In this regard a debtor can enter into a proposal for financial restructuring subject to the agreement of creditors.

•Voluntary arrangements- a "supervisor" in relation to a voluntary arrangement, means the person who is for the time being performing the functions imposed as a result of the approval of the arrangement by the creditors of the debtor; 

•The supervisor is responsible for implementing and supervising a voluntary arrangement

•A summary instalment order (Sec 323) is an order made by the Official Receiver directing the debtor to pay the debtor's debts- 

(a) in instalments or in some other way; and 

(b) in full or to the extent that the Official Receiver considers practicable in the particular circumstances of the case.

• No asset procedure (sec 343) 

(a) the debtor has no realizable assets; 

(b) the debtor has not previously been admitted to the no-asset procedure; 

(c) the debtor has not previously been adjudged 

(d) the debtor has total debts that are not less than one hundred thousand shillings and not more than four million shillings; and 

(e) the debtor does not have the means to repay any amount towards those debts.

Notices in Bankruptcy

• Under Section 9. (1) of the regulations, A notice relating to a bankruptcy shall identify the bankrupts  address in which the bankrupt has resided in the proceeding period of twelve months before the issuance of the bankruptcy order; 

• the principal trading address, if different from the bankrupt's residential address; 

• the bankrupt's date of birth; 

• the bankrupt's occupation; 

• any other name by which the bankrupt has been known; 

• and any name or style ,other than the bankrupt' own name, under which- the bankrupt carried on business; and  how any debt owed to a creditor was incurred. 

Corporate Insolvency

•  A company becomes insolvent if it does not have enough assets to cover its debts and/or it cannot pay its debts on the due dates

• Liquidation

• Members Voluntary Liquidation
• Creditors Voluntary Liquidation
• Liquidation by the Court

• Administration

• Company Voluntary Arrangement

Liquidation

•Members Voluntary Liquidation

•This can occur when the specific object of forming the company has expired and the company in a general meeting has passed a resolution providing for its voluntary liquidation .

•Sec 394 provides that a notice of the resolution shall be published within 14 days after the passing of the resolution in the:

• •In the Kenya Gazette
• •Once in at least two papers of national circulation •On the companies website
• •Additionally notice has to be given to any holder of a floating charge. 

• Additionally notice has to be given to any holder of a floating charge. 

• On or after the commencement of liquidation a company shall cease to carry out any business, except as may be beneficial to the liquidation

• Members in a members one or more liquidators,

• Members in a members voluntary liquidation the company shall appoint one or more liquidators, This must be a qualified IP practitioner Sec 399

• Any transfer of shares or changes in the directorship or shareholding

• Liquidator manages the process of liquidation

• Upon appointment of the liquidator all powers of the directors cease

• Ensures meetings are held with the creditors so as to have an agreeable formula as to the liquidation

• There is also a provision to convert the members voluntary liquidation to a creditors liquidation

• Look at Creditors Voluntary Liquidation Sec 405

•Liquidation by the court Sec 423

• Only the High Court has jurisdiction to supervise the liquidation of Companies (Sec 424)  

* Section 425 provides the circumstances a company may be liquidated by the Court

• The liquidator has various powers in the act to ensure that the liquidation process is carried out effectively sec 460 -470

• The end result at the culmination of the Liquidation process is that the company stands dissolved

 Administration of Insolvent companies

•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 realize the property of the company in order to make a distribution to one or more secured or preferential creditors

•An administrator is appointed to mange the affairs and property of the company in the context provided for under the Act,

•Appointment of administrators can be 

• •By an administration order of the court 
• •By the holder of a floating charge
• •By the company or its directors

•Additionally an application can be made to the court for an administration order in respect of the company by

• •The company itself 
• •The directors
• •Any other person of a class prescribed by the insolvency regulations e.g Holder of a floating charge

•While a company is under administration

• •A resolution for the liquidation of the company may not be made
• •The court may not make an order for the liquidation of the company 

•Administration automatically ends after 12 months Sec 593 however this can be extended

 

Company Voluntary Arrangements

 • 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.

• There is a moratoria on debt payments when company directors propose voluntary arrangement

• 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.

• 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

• Supervisors this is a person appointed to supervise the voluntary arrangement: He/she can convene and chair meetings with the creditors(See sec 134 of the Regulations on the conduct of meetings)

• Under sec 631 certain persons can challenge the decisions at the meetings in voluntary agreements

 Cross Border Insolvency Part 13

• With the adoption of the Insolvency Act 2015 Kenya has become the 40th State in the world to have enacted legislation based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. 

• Section 720

• Purpose is to provide

• Corporation between the courts and other competent authorities of Kenya and foreign states
• Fair and administration of cross border insolvencies
• Application of  reliefs from foreign proceedings: application made to court (Sec 17 of the Fifth Schedule)
• Court of ensure protection of local creditors
• Co-operation with foreign Representatives e,g communication of notices
• Provision for concurrent Proceedings

• Look at Companies not eligible for administration (sec 640)