Insolvency Law in Kenya

Prepared by Riara Law School 2017 Candidates

Introduction
A. What is the difference between insolvency and bankruptcy?
Both insolvency and bankruptcy refers to a situation whereby a legal entitys liabilities exceed its
assets. Insolvency refers to a financial state where as bankruptcy is a distinct legal concept as a
matter of law.
Insolvency
Insolvency is defined as a financial condition or state when:
a.) A
legal entity or a persons liabilities (debts) exceeds their assets (balance sheet insolvency);
or
b.) W
hen a legal entity or person can no longer meet their debt obligations on time as they fall
due (cash-flow insolvency).
Upon becoming insolvent, the legal entity or person must take immediate action to rectify the
situation as soon as possible, in order to avoid possible bankruptcy i.e.
a.) b y generating cash
b.) b y minimizing overhead costs
c.) b y cutting bank on living expenses and settling
d.) b y renegotiating the terms of current debts or repayments.

Bankruptcy
Bankruptcy is defined as the result of a successful legal procedure that results from:
a.) A
n application to a relevant court by a legal entity or a person to have themselves voluntarily

declared bankrupt; or
b.) A
n application to the relevant court by a creditor of a legal entity or a person in order to have

that legal entity or person declared bankrupt; or

c.) A
special resolution which a legal entity files with the Registrar of Companies in order to be
declared bankrupt.
A state of insolvency can lead to bankruptcy. However, it is also possible that the state of
insolvency could be temporary and fixable. Thus, insolvency does not necessarily lead to
bankruptcy, but all bankrupt legal entities or persons are deemed to be insolvent.

B) What is the utility of the laws of insolvency in a society?

Insolvency law policies and regulations play an important role in the economy and in society.
They allow honest but unfortunate debtors to obtain a fresh start by relieving them from their
debt.
Insolvency law policies:
a.) A
llow resources to be quickly returned to productive use by enabling viable but financially

troubled companies to restructure instead of filing for bankruptcy.

b.) Provide a legislative framework for the liquidation of the assets of an insolvent individual,
corporation or partnership, and the distribution of the proceeds in a fair and orderly way among
the creditors.
c.) Provide for the appointment of a trustee to take charge of the assets, sell them and distribute
the proceeds.
d.) P
rovides ways for insolvent businesses or consumer debtors to avoid bankruptcy by

negotiating arrangements with their creditors for the compromise of their debts and the
reorganization of their financial affairs.
e.) Provide a legislative framework for the reorganization of insolvent corporate debtors. It
enables an insolvent company to seek a court order staying its creditors from taking action
against it while it negotiates an arrangement with them for the rescheduling or compromise of its
debts.
f.) P
rovide an alternative framework for the liquidation and distribution of an insolvent

corporation's assets among its creditors. It is the only legislative vehicle available for the
liquidation of major financial institutions, including banks, insurance companies and trust and
loan companies.
C. The basic principles of the law of insolvency are the pillars of the institution of this law.
What are these principles?
There are two primary objects of insolvency. The first is to vest all the property which the debtor
has at the commencement of the bankruptcy or acquires before his discharge in a trustee for
distribution amongst his creditors equitably according to their rights. The second is to release the
debtor from his liability to those creditors at the end of a specified period subject to his conduct
[1]
during the bankruptcy.

A principle is a fundamental truth or proposition that serves as the foundation for a system of
[2]
belief or behaviour or for a chain of reasoning which in this case stands in the support of an

institution such as insolvency. The basic principles underlying the law of insolvency to an
individual are as follows:
1. The debtor must surrender all his properties to the creditors.
2. The court is the arbitrator in all matters relating to insolvency.
3. Once discharged; a debtor is freed from his financial obligations and reverts to his former
status in society.

Professor Goode suggested the following as principles of corporate insolvency law:

1. Insolvency law recognizes rights accrued under the general law prior to liquidation
2. Only the assets of the debtor company are available for the creditors
3. Security interests and other real rights created prior to the insolvency proceeding are
unaffected by the winding up
4. The liquidator takes the assets subject to all limitations and defences
5. The pursuit of personal rights against the company is converted into a right to prove for a
dividend in the liquidation
6. On liquidation the company ceases to be the beneficial owner of its assets
7. No creditor has any interest in specie in the companys assets or realizations
8. Liquidations accelerates creditors rights to payment
9. Unsecured creditors rank pari passu
10. Liquidations accelerates creditors rights to payment
D. How are the principles of the law of insolvency manifested in Kenyas Insolvency Act
2015?
This section of the essay will cover personal insolvency principles in relation to the Insolvency
Act 2015. The debtor must surrender all his properties to the creditors; is seen in section 140 (1)
of the Act which states that, a bankrupt shall, to the best of their ability assist in the realisation of
the bankrupts property and the distribution of the proceeds among the creditors. Section 141 and
142 support this principle. Secondly, Once discharged; a debtor is freed from his financial
obligations and reverts to his former status in society is contested by section 263 which provides
that the court may prohibit the bankrupt from engaging in business after discharge. However
section 267 (1) provides that a bankrupt may be released of debt on discharge.lastly, the court is
the arbitrator in all matters relating to insolvency is a principle seen throughout the Act.

F. What are the objectives of the Kenya's Insolvency Act 2015?

The Insolvency Act under section 3 outlines the objects of the Act. The act provides for both
insolvent natural persons and incorporated and unincorporated bodies. The objectives stated are :
a) T
o establish and provide a framework for efficient and equitable administration of the estate

of the insolvent parties to ensure fairness prevails between the interests of the parties and
creditors.
b) I n the case of insolvent natural persons and unincorporated entities with a redeemable
financial position, the insolvency Act aims at:
i.
enabling the entities/persons to continue operating as usual so as to enable them

to pay their debts to the creditors in full or to their satisfaction

ii.
achieving a better outcome for the creditors which will make the chances of the

creditors being paid more higher rather than just declaring the entities bankrupt .
c) I n the case of insolvent companies and other bodies corporate with a redeemable financial
position, the insolvency Act aims at:
i.
enabling the entities continue with business so that they can meet their financial

obligations to the creditors in full or to the creditor's satisfaction

 ii.
achieve a better outcome for the creditors instead of declaring the companies

bankrupt
d) I n the case of insolvent unincorporated entities and companies/bodies corporate with an
irredeemable financial position, the Insolvency Act aims at providing an orderly system for
declaring the entities bankrupt so as to ensure administration and equal division of their estates
for the creditor's benefit.
e) R
egarding insolvent companies and bodies corporate with an irredeemable financial

position, the Insolvency act provides for an orderly system for liquidating the affairs of the
companies and efficient administration and distribution of assets available for the benefit of the
creditor
G. Exhaustively discuss the insolvency practitioners recognised by the Insolvency Act.
An insolvency practitioner is someone who is licensed and authorised to act in relation to an
insolvent individual, partnership or company.[3] The insolvency practitioner can help to rescue a
company or unincorporated entity id it has a redeemable financial position. In the case of an
irredeemable position, s/ he acts as the liquidator by administering and distributing the business
entity's assets to the creditors . This is a new position brought about by Part 2 of the Insolvency
Act 2015. This section of the Insolvency Act divides the practitioners into two categories due to
the introduction of the incorporated entities in the Insolvency Act.
I.
Insolvency practitioners in relation to natural persons

a) B
ankruptcy trustee or Interim trustee

This trustee is named to move your case through the bankruptcy process until its complete. The
bankruptcy trustee manages the property of the debtor
b) P
ermanent or interim trustee

The role of a permanent trustee is in the sequestration of the person's estate. Sequestration is the
court procedure for the administration of the affairs of an insolvent individual by a trustee in the
interests of his creditors. An interim trustee is appointed first and their main role is to preserve
the debtor's estate until the appointment of a permanent trustee whose function is to compile the
assets and distribute them among creditors in the prescribed order of priority.[4]
c) T
rustee under deed
A trust deed is the situation whereby a person borrows a loan and transfers legal title of the
property to be held as security to a trustee and he therefore bears the equitable title to the
property. The trustee bearing the legal title is known as the trustee under deed. The trustee under
deed. The trustee is empowered to sell and dispose of all the assets if the borrower does not pay
back the loan.
d) S
upervisor of voluntary arrangement

A voluntary arrangement is an alternative to bankruptcy and this is where the debtor makes a
proposal to the creditors to come up with a scheme of arrangement of the financial affairs of the
debtors in order to satisfy the debts. The supervisor in this case is the person who will manage
the financial affairs and perform the functions allocated to him as a result of the approval of the
arrangement by the creditors and debtors under the arrangement.
II.
Insolvency practitioners in relation to companies

a) T
he Liquidator

A liquidator has been described as an officer appointed when a company goes into liquidation
who has the general responsibility of collecting all of the companys assets and settling all claims
against it before putting the company into dissolution. The Insolvency Act describes the function
[5]
of the liquidator as that of .. liquidating the company's affairs and distributing its assets.

The liquidator may be appointed by either the company at a general meeting or by the creditors
[6]
to the company at a creditors meeting held to notify of the intention to liquidate.

It is important to note that on appointment of the liquidator, the companys directors lose their
powers. This is so as to allow the liquidator full reign on his exercise of the companys assets
without interference. On completion of the process, the liquidator is required to give a full
account of the liquidation showing how it has been conducted and how the company's property
[7]
has been disposed of, to a general meeting of the company.

b) T
he Provisional Liquidator
This is an officer who is appointed on a provisional basis on the petitioning of the court for the
liquidation of a company. He / She is appointed to safeguard the assets and businesses of the
[8]
company and maintain the status quo pending the hearing of the application. The functions of

the provisional Liquidator are determined by the court.

c) A
dministrator of the Company

First and Foremost, when a company is under administration, it is being maintained as a going
concern in order to achieve a better outcome for the company's creditors as a whole than would
[9]
likely to be the case if the company were liquidated (without first being under administration)

It therefore follows that an administrator is an officer of the court, appointed by the court, by the
holder of a floating charge or by the company directors. The duty of the administrator is to
[10]
manage the company's affairs and property.

d) A
Supervisor Of A Voluntary Arrangement
A Voluntary Arrangement is an agreement between a debtor and a creditor(s) of full or partial
payment for a period of time. Such an arrangement can be made by both natural persons and
directors of a company with their respective creditors. This arrangement is made in the place of a
debtor being adjudged bankrupt or company being liquidated.
Therefore the Supervisor is an officer tasked with the duty of oversight of the arrangement. This
begins by the supervisor looking over the report by the proposer of the arrangement and
convening meetings between the debtor or company directors and creditors for approval of the
arrangement by the creditors.
In the case of a company, once a proposal takes effect as a voluntary arrangement, the supervisor
becomes responsible for .implementing the arrangement in the interests of the company and
[11]
its creditors and monitoring compliance by the company with the terms of the arrangement.

The same would apply for a natural person.

H. Are there other institutions, apart from insolvency practitioners, whose role is
entrenched in the provisions of the Insolvency Act? Who are they? Please outline each and
their respective roles.
Aside from the insolvency practitioners mentioned above, there are other persons or offices also
involved in the process.
The Official Receiver
This is an officer of the court who serves under various capacities. These include but are not
limited to:
Holding property for individuals adjudged bankrupt where there is no bankruptcy trustee
Acting as first liquidator when a court makes a liquidation order against a company.
Nominating a qualified person to be bankruptcy trustee in respect of the debtor's
[12]
property.

Acting as supervisor in a voluntary arrangement by a debtor

Judicial enforcement officer

This is a bailiff or other officer of a court who is charged with carrying out a process involving
[13]
the execution or enforcement of an order or judgment of the court.

This officer may undertake orders involving the possession, seizure, sale or attachment of a
debtors property.