COMMERCIAL TRANSACTIONS – VERSION 2 – PART 2

 

INSOLVENCY DOCUMENTATION

      i.         Personal bankruptcy of individuals

     ii.         Corporate insolvency- body corporates e.g. LLPs, partnerships, companies

 

Governed by the Insolvency Act of 2015.

Previously, law on personal bankruptcy was the Bankruptcy Act whereas corporate insolvency was governed by the Companies Act Cap 486.

 

Objectives of Insolvency Law: (Relevance)

·       To provide mechanisms under which companies and individuals with financial difficulties can be revived/ rehabilitated

·       To provide mechanisms for the realization of part or all of the company’s/ individual’s assets to satisfy their debts

·       For individuals or companies that can’t be rehabilitated, it provides a mechanism for the orderly distribution of their assets among the creditors

·       To provide mechanisms or alternatives to bankruptcy or liquidation

 

How are assets realized for the benefit of creditors? The overriding principle is the best outcome for creditors.

How do you make orderly distribution?

 

Insolvency Practitioners

Section 4 (1)- an insolvency practitioner in relation to a natural person is the bankruptcy trustee of the person’s property or under a trust deed made for the benefit of the person’s creditors or as a supervisor in a voluntary arrangement

Section 4 (2) -An insolvency practitioner to a company can be the liquidator, the supervisor of a voluntary arrangement under administration or voluntary arrangments

Section 5- an insolvency practitioner must be licensed/ registered and acting without such is commission of an offence liable to a fine

Section 6- qualifications for person to act as a practitioner i.e. education and experience; and being a member of the professional body (under Section 7)

 

 

PERSONAL BANKRUPTCY

Principle concepts in personal bankruptcy:

·       Deals with individual bankruptcy

·       Under the Act, personal bankruptcies are to be undertaken by a duly registered and authorized insolvency practitioner (Section 3-7)

The Act provides who can be an insolvency practitioner: Section 6

        Requisite academic qualification

        Recognized member of a professional body approved by the Minister

        Must be formally registered by the Official Receiver

Roles only undertaken by a qualified insolvency practitioner:

        Bankruptcy trustee

        Supervisor

        Liquidator

        Administrator

 

·       The Act provides the key actors in personal bankruptcy and their roles

      i.         The Debtor

     ii.         The Official Receiver- an office established by the Insolvency Act with powers to administer and oversee the implementation of the Act; administratively it is within the State Law Office

   iii.         Trustee in bankruptcy- an insolvency practitioner appointed by the Court, Creditors or Official Receiver to hold all the property of the bankrupt and to oversee the orderly implementation of the bankruptcy proceedings against the debtor

    iv.         Creditors- any person who owes a debt that can be proven against the debtor. There are various types:

        Unsecured creditors

        Secured creditors

        Creditors of preferential debts

      v.         The High Court- final arbiter of any matter under the Insolvency Act; any person aggrieved of any matter has recourse with the Court

 

 

Other parties in alternatives to bankruptcy:

        Supervisor- implements various proposals made by the debtor to settle his debt

        Administrator- person appointed when an administration order is made

 

Bankruptcyis both a legal and financial term. It is when a debtor is unable to pay his debts when they become due. However, for a person to be bankrupt there must be an order by the Court stating that he is unable to pay his debts. (Section 13)

 

 

Circumstances under which an application can be made for someone to be adjudged bankrupt (Ground)- the court is satisfied of the inability to pay debts and the debt is unsecured

 

Who may make application for debtor to be adjudged bankrupt: Section 15 (1)

      i.         Debtor may apply to court to adjudge him/ her bankrupt; Section 32

        If his debt is above the adjudged minimum of…

        If you have not previously been adjudged bankrupt

        A debtor who is under an alternative process to be adjudged bankrupt

        Debtor must be domiciled in Kenya; personally present in Kenya or three years preceding the date, has been ordinarily resident or carried business Kenya (Section 15 (3))

Section 32;

*The application by the debtor should be on the ground that the debtor is unable to pay and must be accompanied by a statement of the debtor’s financial position

*The debtor is required to publish a notice in a newspaper circulating where he ordinarily resides

*The court may not make bankruptcy order if; the total of applicants debts will be lower than the prescribed level, or if the bankrupt’s estate will be equal to or more than the prescribed minimum value; or during 5 years immediately before application the debtor has not been adjudged bankrupt or be in an alternative process; or it is appropriate to appoint an insolvency practitioner to report (Section 34)

 

     ii.         Creditors can apply when; Section 17

        Where they are owed a sum equal to or beyond the prescribed threshold

        They have given notice for that sum to be paid and the notice period (not less than 21 days) has lapsed

        Obtained judgment, served it on debtor, and after 21 days the decree has not been satisfied i.e. the debtor has not paid

        Creditor making application for bankruptcy order cant issue execution process against debtor to recover debt; if started, needs to halt it- Section 21

Section 25- the Court will not adjudge a debtor as bankrupt if the applicant has not satisfied requirements under Section 17; or if the debtor is able to pay the debts or it is just and equitable not to do so

 

 

   iii.         Trustee in bankruptcy when;

        If an act of second bankruptcy is committed when the order of first bankruptcy is still on e.g. a bankrupt living too lavishly

 

 

    iv.         A Supervisor

        In a voluntary arrangement that the debtor fulfills obligations, but the debtor is not complying with the conditions of the arrangement

 

     v.         Official Receiver

 

 

Conditions under which one may apply; sometimes it is more advantageous for a creditor to apply as opposed to other parties, etc.

 

 

Options available to Court on receiving an application to make a bankruptcy order: Section 16

        Dismiss application if it lacks merit or doesn’t meet requirements of the Act

        Can allow the application and make an order adjudging the debtor bankrupt

        Can adjourn/ stay the application in order for some procedural requirements to be complied with or for alternatives to be considered

        Such other order as the Court may deem fair, just and expedient in the circumstances

 

If Court finds prima facie that you are unable to pay your debts, it will make the bankruptcy order. This enables the bankruptcy process to be expedited.

Bankruptcy commences on the day and time a bankruptcy order is made by the Court- Section 41; Section 13

After order is made, the Registrar forwards a copy of the order to the Official Receiver- Section 43

After receiving order, the Official Receiver nominates a bankruptcy trustee- Section 44

Section 45– if a doubt as to when an act was done, there is a presumption that the act was done, or transaction entered into, after the bankruptcy

Section 46– after expiry of appeal period or if appeal is withdrawn, the bankruptcy order becomes binding on the bankrupt and all other persons

 

Section 49- After receiving bankruptcy order, the official receiver serves on the bankrupt a notice stating that the order has been made, requiring the bankrupt to lodge a statement of financial position within a specified time.

 

Consequences of a bankruptcy order: Section 13(2)

        If a trustee in bankruptcy has been appointed, the property vests in the trustee. If no trustee has been appointed or there is a vacancy, the property will vest in the Official Receiver to act as the interim trustee- Section 104

        One suffers all the disabilities at law e.g. applying and running for elected positions, can’t be director of a company, can’t enter into contracts, can’t institute suits in their own names etc.

        No civil proceedings can be continued or commenced against the bankrupt other than by getting a court order

        No creditor can proceed or begin any recovery process against the bankrupt once the bankruptcy order is made

        Bankrupt has an obligation to provide a true and accurate account of all his assets, income and liabilities and can only keep the income or assets as is permitted by the Act and by the trustee in bankruptcy provided, a bankrupt will be permitted to keep items of personal use

        Being adjudged bankrupt doesn’t disqualify one from being a partner in a firm, from employment (except as stated otherwise by Statute e.g. State Officers)

        The ability of bankrupts to enter into contract is only limited and not absolute

        Bankruptcy order does not extinguish debts, only protects one from creditors commencing recovery proceedings without leave of court

        The Official Receiver is entitled to recover assets that the person has transferred within two years immediately preceding the bankruptcy

 

Provisions allowed for bankrupt

Section 161- Bankrupt is entitled to retain certain assets such as his necessary tools of trade, necessary household furniture and personal effects of him and his dependants and a motor vehicle

Section 166- Trustee may make an allowance out of property of bankrupt for bankrupt and his dependants up to a limit of 100K or if a greater amount is prescribed, that amount.

 

Obligations of a bankrupt:

·       To fully cooperate and provide all necessary assistance to trustee; true, up to date and accurate statement of your financial affairs- Section 148

·       Bankrupt to give trustee information relating to income and expenditure and all accounts and necessary documents- Section 144; 146

·       Notify trustee of change in any personal details e.g. change in name, address, expenditure and income- Section 147

·       To disclose all property- Section 141

·       To fully help assist trustee for the realization of his assets and payment to creditors; make yourself available to trustee at all times- Section 140(1)

·       You should not leave the jurisdiction without approval of either trustee or court

·       Secure your assets and deliver the property to trustee on demand- Section 142

·       Personally attend meetings

 

Process of Bankruptcy:

        Service- once an order has been made, if not previously done, a copy of the bankruptcy order will be provided to the Official Receiver and debtor- Section 43

        If the order has appointed a trustee, the trustee must give public notice of the order and his appointment in the gazette and a newspaper of nationwide circulation- Section 38

        In cases where application is done other than by debtor himself, after receiving the notice from the Official Receiver, the debtor is required to prepare and provide to trustee a statement of his financial affairs in the prescribed form containing the prescribed information (must list all bankrupt’s assets, debts, details of creditors, securities held by creditors, to the best of his knowledge)- Section 50

The creditors will be entitled to inspect and take copies of the statement of the bankrupt’s financial position.

        The trustee to convene a first meeting of creditors by preparing a public notice, of the time, date and place of the meeting, that is published in a newspaper of general circulation that; “following from the bankruptcy order dated ____ given at ___ Court, notice is hereby given that all persons who are creditors to the debtor, as defined under the Act, will have a meeting on ___ at _____”)- Section 52

        Trustee must prepare a report on his comments on the financial statement and what he deems the best way to carry out the bankruptcy process- Section 54

        If the trustee does not convene meeting, the creditors can request its convening; then the trustee will convene one- Section 55

        Then the first meeting of creditors is held at which; Section 58

·       Registration of creditors- all creditors come and list what the debtor owes them, together with evidence;

·       Trustee can allow creditors to constitute themselves to different classes e.g. secured and unsecured or

·       Creditors can appoint a committee of creditors to oversee, on behalf of the creditors, that the trustee is properly carrying out his mandate

        Subsequent to the registration of creditors, the trustee will make available to the creditors, his report and recommendations

        Meeting of creditors or committee will be to consider the recommendations of the trustee

        Proof of debt to the satisfaction of the trustee; debtor is allowed to be present and to cross- examine the creditor’s claim; any person who is aggrieved by a debt disallowed by trustee can apply to Court

        Once debts are proved, there is public examination of the creditors. This is done under the authority of the Official Receiver if all parties agree or if not, in Court.

 

Section 168- The Trustee may serve on the persons listed, summons to appear before the Trustee or the court to be examined on oath in relation to the bankrupt’s conduct, affairs or property

The persons listed are- the bankrupt, the bankrupt’s spouse, creditors of the bankrupt, people in possession of bankrupt’s property and person who is able to provide relevant information on the bankrupt

Public examination before the Court (Section 177 & 178)- If the trustee or creditors require; a notice of the examination must be published in the Gazette, in two newspapers of circulation and a notice to each creditor giving details of the meeting

 

The purpose of the public examination is to:

·       Determine the true state of financial affairs of the bankrupt and to determine the cause of financial failure

Under the Act, bankruptcy can arise out of misfortune or under willful conduct of the bankrupt e.g. by reckless or extravagant living etc.

If out of misfortune, the court can extend your bankruptcy period beyond the required 3 years.

·       Bankrupt not allowed to hide behind an advocate; must be personally present for examination

        In the course of public examination, creditors are required to vote on the proposal made by the trustee in bankruptcy. The voting is done by each class of creditors separately after which the proposal may pass or fail.

        If proposal fails, the trustee makes application to Court for realization and distribution of assets; Court makes order; if aggrieved you can appeal

        Realization and distribution of assets must be done in 3 years unless time is extended by the Court; once the trustee does whatever realization he can, he makes final report to Court he has realized to the extent possible all realizable assets and made proper distribution according to order and in his opinion can’t realize some assets; he makes a recommendation on what can be done about the unrealizable assets e.g. an investigation to be done on a particular asset

        At the final general meeting of the bankrupt’s creditors, they shall receive and consider the trustee’s reports of the administration of the bankrupt’s estate and determine whether the bankruptcy trustee should be released- Section 253

        The bankrupt is free to dispute the report

 

If a bankrupt dies after being adjudged bankrupt, the bankruptcy continues as if he were still alive- Section 57

 

Discharge of bankrupt from bankruptcy

 

 

After 3 years, bankruptcy proceedings are completed. All your debts are extinguished unless in the following circumstances where the debts will be revived:

·       Committing a second act of bankruptcy’

·      

·       If new evidence comes to light on concealment or making fraudulent representation 

 

Appointment of Trustee

Section 59- by the creditor’s meeting

Section 60- trustee may be appointed by the Official Receiver; if none appointed by the creditor’s meeting

Section 62- by the Court

The appointment only takes effect if the person accepts the appointment.

 

Duties/ Powers of a trustee during a bankruptcy: Section 63/1st Schedule

With approval of creditor’s committee:

        Power to carry on any business of bankrupt as necessary for beneficial liquidation of the company

        Power to bring or defend legal proceedings relating to the bankrupt’s property

        Power to disclaim onerous property i.e. the cost of realizing such property exceeds the benefit that may be gotten from them; once a trustee disclaims;

·       Any creditor can oppose such disclaiming by the trustee, or

·       The creditor can agree to take on that property, pay himself after deducting the costs

·       Debtor can oppose the disclaimer by the trustee provided that he takes on the property

        Power to accept consideration to be payable at a future date in a sale of bankrupt’s property

        Power to borrow money for realization of bankrupt’s estate and to furnish security in such a loan

        Power to make any compromise or arrangement beneficial to the creditors

 

General Powers without approval:

        Power to sell any part of the bankrupt’s property

        Power to give receipts discharging person paying of any obligations for money received by trustee

        Power to prove, rank, and draw dividend with respect to debts due to the bankrupt

        Power to deal with any property comprised in the estate to which bankrupt is entitled to as a tenant

Other powers

The trustee, may, under the Act;

        Hold any kind of property

        Enter into contracts

        Sue and be sued

        Enter into engagements binding on trustee in respect of the bankrupt’s estate

        Employ agents

        Execute powers of attorney, deeds and other documents

        And any other act necessary for exercising trustee’s powers

 

Duties of Trustee

The Trustee is answerable to creditors, Official Receiver and to the Court only

Ø  Final Statement of Receipts and Payments

Section 73– The Trustee is required to prepare and publish a financial statement of receipt and payments showing details of the payments and should be made available for inspection by the creditor or any other person having interest in it.

 

Ø  The trustee has an obligation to keep the creditors regularly updated on the bankruptcy process, directly at a meeting or to the committee

Ø  The trustee should file periodic reports to the Official Receiver and the Court on the bankruptcy process

 

Removal of bankruptcy trustee

Section 75- A trustee may only be removed by an order of the Court or a creditor’s meeting convened in accordance with the Act (if Official Receiver or Court approves or not less than ¼ of the creditors)

Grounds upon which a trustee may be removed from office

 

A Trustee may vacate office by giving a notice to the Court or if the relevant bankruptcy order appointing him is annulled or by death.

 

Secured creditors have the option to;

·       Elect to exclude themselves from the bankruptcy process and realize their assets or;

·       Can prove their debt under bankruptcy provided they have waived their security

 

Preferential debts– e.g. by employees as creditors

Section 108- The order of priority of preferential debtors is listed in the 2ndSchedule;

* First priority- remuneration of trustee or liquidator and fees incurred by them

* Second priority- wages and salaries of employees

Section 247- in the distribution of the bankrupt’s debts, the preferential debts have priority

 

Exemption on Property vesting in Trustee:

Property under execution before the order was made is exempted- Section 109

Section 112- on sale by judicial enforcement officer of a debtor’s property on which execution was levied, the purchaser acting in good faith, acquired good title as against the trustee

Section 114- A transaction between a person and a bankrupt is valid against the bankruptcy trustee if it was in good faith and for value and the transaction is completed without intervention by the bankruptcy trustee

 

 

Scenarios of Bankruptcy…

(ADD NOTES)

 

What the court looks at to determine the debtor is unable to pay:

Bankruptcy application by debtor:

– Ratio of assets and liabilities

– Future prospects

– Value of debtor’s estate

 

Bankruptcy application by creditor: Section 17 Insolvency Act

– Has to show that they have an outstanding liability e.g. if demand for payment is issued and after 21 days the demand hasn’t been met, compromised or discharged

– a decree from court has been served on the debtor and he has not satisfied it or discharged it within prescribed time

 

Test:

– the debt is above the prescribed bankruptcy level

– the debt owed is a liquidated amount and is unsecured/ can be determined in monetary value; where the debt is secured, the creditor has disclaimed the security

– no application is outstanding to set aside the demand in respect of the debt

– unable to pay or to have no reasonable prospect of being able to pay

– whether there are alternatives which can achieve a better outcome for the creditors

 

*

 

Circumstances where trustee/ official receiver can make application for bankruptcy order:

– trustee- in the case of a second bankruptcy

– supervisor for voluntary arrangement:

·        when debtor feels _ by the terms of a scheme of arrangement;

·       proposal by thee supervisor are rejected by the creditors, when debtor commits an act amounting to a second bankruptcy while under a voluntary arrangement;

·       when an order for voluntary arrangement is ordered by court, on application, it can vary, suspend, lift or cancel the order, if new info comes to light; supervisor can make application for bankruptcy

 

 

Bankruptcy Process:

– Filing an application for an order for bankruptcy by notice of motion and accompanying documents

– Debtor before lodging application should widely circulate notice to all creditors, in the official gazette; to give them a chance to be heard

– Creditor’s application need not have notice a priori.

– Once application is brought before Court, it can:

·       allow the application, make bankruptcy order and appoint interim trustee

·       adjourn the hearing/ stay of the application pending alternatives to bankruptcy

 

– Once order is given, bankruptcy commences. When a bankruptcy commences;

·       the order is required to be served upon the parties involved and the Official receiver

·       the trustee, if any, or the Official Receiver, is required to gazette the bankruptcy order and to publish it in newspapers of wide circulation; within 30 days of the order

·       the Official receiver requires the debtor to prepare a statement of financial position

·       trustee or Official receiver to convene first meeting of creditors so that they can: Division 8

ü  register their claims,

ü  to classify the creditors,

ü  decide whether to convene committee of creditors or to have creditors acting as a whole, and

ü  to confirm an interim trustee, and if none has been elected, to appoint one

·       trustee circulates his recommendations and analysis of the statements by debtor of his financial position, to creditors who have registered their claims

·       subsequent meetings will be as determined by the creditors; to consider pending or arising matters

 

Powers and Obligations of trustee during bankruptcy: Section 63

·       to oversee and confirm proof of debts by creditors, to his satisfaction

·       to realize and deal with the property of bankrupt e.g. can collect rent, sell the properties, lease them, or transfer them etc.

·       to require production of any document, information or record from the debtor or any other relevant person for the bankruptcy

 

Obligations:

·       Must implement and give effect to extent possible all instructions by creditors’ resolutions provided it is legal; trustee doesn’t take instruction from individual creditors

·       Duty to regularly report to the creditors; tabled before creditors at the meeting and must be filed with the Official Receiver

·       Fiduciary duty- must use his best skill and effort in realizing wishes of creditors; must balance interest of debtor and creditors

·       Must keep proper accounts- what is collected, spent, will be spent

 

Any member aggrieved by decisions of trustee has recourse to Court.

 

– Public examination of bankrupts;

·       It is not mandatory that all processes have public examination; insolvency law doesn’t intend to humiliate the bankrupt

·       But on the reasonable opinion of trustee or resolution of creditors, it is deemed necessary to have a public exam, the trustee will arrange it, e.g. if debtor has not been forthright in his disclosures

·       At a public exam, questioned by trustee, representative of OR and by creditors, debtor required to appear in person and give evidence on oath, as to his financial state of affairs

·       Purpose- to ascertain facts surrounding the bankrupt e.g. supporting info to prove or disprove a debt

 

– The Court can also hold a public exam, if the trustee and official receiver are unwilling to conduct one where the bankrupt has been uncooperative, refused to answer questions/ provide the info required; or on application of trustee, creditor or OR

 

– Once the debts have been proved to the satisfaction of trustee, or if any aggrieved have gone to court to add their names to the creditor list, they are listed according to order of preference provided by the Act;

·       Trustee pays himself

·       The government get taxes/ municipal rates

·       Employee emoluments

·       Paying creditors off

·       Any surplus is the property of the bankrupt

– A bankrupt can sue a trustee who did not get the best sale of his property for what could have been the potential value of his surplus

 

Special problems in Bankruptcy

– Onerous property- can’t be recovered, taken charge of or secured other than at great expense, effort or difficulty

A trustee can disclaim an onerous property; but creditors or debtor can object to this disclaimer by trustee

Where the debtor/ creditor objects, the debtor/ creditor can take initiative to recover that property; if successful, will be paid cost of recovery out of estate

Section 476- A liquidator may disclaim onerous property; which include unprofitable contracts or other property of the company that is unsellable or not readily sellable or may give rise to a liability to pay money or perform other onerous act

 

– Property acquired during bankruptcy- Section 104

This property vests in the bankruptcy trustee and the property rights are vested in the trustee

However, a bankrupt is under obligation to make disclosure on any material change in your circumstances

If bankrupt wants to get that property?… trustee can require bankrupt to increase his obligation in paying the debt; if aggrieved, the bankrupt can apply to court for a different order

 

– Joint bankruptcies- provided the debt is joint, an order of bankruptcy can be made against the debtors jointly

The joint bankruptcy can’t be discharged until the debt is fully paid

However, if a husband is adjudged bankrupt, it does not include the wife

 

– Bankruptcy contracts- all contracts bankrupt enter into before the bankruptcy order is valid and binding on the provision that any fraudulent or onerous contracts can be discharged. For a contract made after bankruptcy order …

Any third party who enters into contracts in good faith and without notice, with bankrupt is entitled to treat the contract as valid

Bankrupt only required to enter into contracts authorized by creditors, trustee, OR or committee of creditors

 

 

– Property that a bankrupt may retain- necessary tools of trade, necessary household furniture, personal effects of bankrupt and relatives and his dependents

For tools of trade, the value is determined by trustee

For household furniture and personal effects’ value is given by trustee

e.g. MV- 1M or greater amount fixed

 

(ADD NOTES)

 

Debtors:

– Duty to help realizing and securing assets

– Provide the required accurate statement of financial status)

– Where bankruptcy order is made, duty to file with official receiver

– Duty to inform trustee of any change in personal circumstances and information

– Duty to inform trustee of any movement outside the usual areas

 

Undischarged bankrupt can’t;

– without consent of trustee or court, enter into or carry out management of a business

– be employed by a relative of the bankrupt because of the risk of collusion

 

Transactions voidable at application of the trustee (irregular transactions)

– Insolvent transaction- bankrupt enters into within the prescribed period before he is adjudged bankrupt

– Insolvent charge- given within prescribed period before the bankruptcy order

– Insolvent gift- on anticipation of bankruptcy, some go on ‘gifting spree’; prescribed time within

– Transaction at under value- trustee can go back 2 years to see whether transactions were at under value

– Contribution of property by bankrupt to another person; can waive certain rights

 

 

Termination of bankruptcy:

– Discharge of the debts

– Automatically discharged after 3 years after bankrupt lodges statement of financial position, unless extended by court for good reason shown- Section 254

– Trustee/bankrupt applies to Court for early discharge (on what grounds?) Section 258

Debts can be reopened if ‘material concealments’ shown

 

Effect of discharge of bankrupt:

A bankrupt is released from all debts provable in the bankruptcy except;

·       Any debt incurred by fraud or breach of trust by bankrupt

·       Any debt for which bankrupt has obtained forbearance through fraud

·       Any judgment debt or amount payable by bankrupt under s150 (bankrupt required to contribute to debt) and s262 (power of court to refuse or grant discharge)

 

Bankruptcy offences:

Section 289;

– Bankrupt didn’t have capacity to borrow a debt and still borrowed

– if bankrupt materially contributed or increased extent of bankruptcy by gambling, engaging in rash & hazardous speculation, unjustifiable spending or by living extravagantly

Section 290; – conceals or removes from Ke any part of his property

Section 291– with intent to defraud, made an insolvent transaction, charge or gift

– leaving jurisdiction without leave- Section 296

– failure to attend meeting called by OR, trustee

– Making inaccurate financial statements

– refusing to provide info, record or doc required

– lying under oath during public exam

– offences in relation to obtaining consent of creditors through false representation- Section 295

– etc.

 

Penalties– fine, imprisonment and Court may extend period of bankruptcy (Section 297)

 

 

4 objectives of Insolvency Act as regards bankruptcy:

– to provide alternatives to personal bankruptcy that will enable the affairs of insolvent natural persons to be managed for the benefit of their creditors

– to provide for and to regulate the bankruptcy of natural persons

– to provide for orderly …

– to provide mechanism for redeemable cases so that debtor can be spared bankruptcy; for irredeemable cases, to provide mechanism for realization of assets and payment of creditors without destroying them

 

ALTERNATIVES TO BANKRUPTCY

The alternatives to bankruptcy for an insolvent debtor include; Section 14

        A voluntary arrangement

        Making a proposal to the creditors (under Division 2 of Part IV ???)

        Pay creditors in installments under a summary installment order (Division 3 Part IV)

        Enter the no asset procedure (Division 4 part IV)

 

Why would a Court allow alternatives?

 

Section 303- 361

      i.         Voluntary arrangements

Where a debtor makes a proposal for a compromise or scheme of arrangement with his creditors. It is available when there is a reasonable prospect that the debtor can pay a lesser amount than what is owed.

When are voluntary arrangements done?

·       Provides debtor chance to rehabilitate his affairs

·       Balance interests of debtor and creditor

Types;

a)     Voluntary arrangement through Ordinary Procedure- has a longer process and is with regard to higher debts (Section 304- 315)

An application to Court can be made if debtor intends to make a proposal to his creditors to satisfy his debts or a scheme of arrangement of his financial affairs; the debtor must provide a person to act as a supervisor of the voluntary arrangement

The application can be made by debtor, the bankruptcy trustee or the OR

While the interim order of the application is pending, the Court may prohibit distress being levied against the debtor and may stay any proceedings pending against the debtor

The Court will make an interim order if it satisfied that it would facilitate the consideration and implementation of the debtor’s proposal

As soon as possible after the interim order is made, the provisional supervisor shall submit to the Court a report stating whether in his opinion, the proposal has a reasonable prospect of being approved and implemented, if a meeting of the creditors should be convened to consider the proposal and when and where the meeting would be held

The debtor is required to assist the provisional supervisor in preparing the report by providing information on: the terms of the voluntary arrangement in the proposal and a statement of the debtor’s financial information

The provisional supervisor will be required to convene the creditor’s meeting whose main purpose would be to decide whether to approve the debtor’s proposal (with or without modifications; modifications can only be approved if the debtor consents to it)

At the meeting, a chairperson will be elected by the creditors, and they are divided into three groups for voting;- secured creditors, preferential creditors and unsecured creditors- s310

After conclusion of the meeting, the chairperson shall report the result of the meeting to the Court and give notice of the results to the creditors; if the proposal was not approved the court will discharge the interim order

If approved by a majority of the creditors from each group of creditors (in number and value), the debtor’s proposal (with or without modifications) takes effect as a voluntary arrangement on the date of approval by the Court or at a later date if specified otherwise

On approval and on taking effect as a voluntary arrangement, the proposal binds ever person who was entitled or would have been entitled to vote at the meeting; and the provisional supervisor becomes supervisor of the arrangement unless replaced.

The supervisor is responsible for the implementation of the voluntary arrangement and has such powers as are necessary to enable the responsibility to be carried out.

If the Court approves, and the debtor was an undischarged bankrupt, the may apply to the Court to annul the bankruptcy order, if necessary.

b)     Voluntary arrangement through Expedited Procedure- shorter process for lower value debts

The debtor, who is an undischarged bankrupt, makes a proposal to his creditors for a voluntary arrangement and the Official Receiver is the provisional supervisor in the proposal.

The debtor submits to the OR a document setting out terms of his proposal and a statement of his financial affairs. If the OR is satisfied that the proposal has a reasonable prospect of approval and implementation, he invited creditors to decide whether to approve it.

At the meeting, a chairperson will be elected by the creditors, and they are divided into three groups for voting;- secured creditors, preferential creditors and unsecured creditors.

No modifications are made to the proposal.

After the meeting, the OR shall report to the Court whether the proposed voluntary arrangement is approved or rejected. If OR reports to the Court that it was approved, the proposal takes effect as a voluntary arrangement, and it then binds the debtor and every creditor.

On submitting the report to Court, the OR may make an application to annul the bankruptcy order and the Court will do so unless there are compelling reasons not to do so.

However, on application by the debtor, creditors, trustee or OR, the Court may also revoke a voluntary arrangement that has effect on grounds that;

* it unfairly affects the interests of a creditor of the debtor or

* that a material irregularity occurred in relation to the arrangement by the OR (e.g. if a creditor was not made aware)

 

It is an offence if the debtor makes false representation for the purpose of obtaining creditor’s approval

 

     ii.         Summary Installment Order (s323- 342)

The debtor proposes to pay while insolvent over a longer period of time.. ***

A summary installment order is an order made by the OR directing the debtor to pay the debtor’s debts, in installments or in some other way, and, in full or to the extent that OR considers practicable circumstances of the case.

The payment of instalments under this order can be spread over a period not exceeding three years and if justified by special circumstances acceptable to the supervisor, five years.

 

Who may apply for a summary installment order? A debtor or a creditor with the debtor’s consent.

The application is made to the OR and must;

– be in the prescribed form

– state that the debtor proposes to pay creditors in full or the proportion of the outstanding debt that the debtor proposes to pay

– states name and address of debtor’s proposed supervisor and annex his written consent or if debtor claims a supervisor is not necessary, the debtor’s reasons for making that claim

– include details of the debtor and his property, details of the creditors and their claims, which claims are secured, which claims are guaranteed, the amount of the debtor’s earnings, the details of debtor’s employer and any other matter prescribed by the insolvency regulations

 

The OR may make a summary installment order if satisfied that;

– the debtor’s total unsecured debts do not exceed the amount prescribed by the regulations and

– the debtor is unable to immediately pay those debts

The OR may not make such order without giving debtor and creditors opportunity to make representations on the matter.

In addition to order for payment of debt in installments, OR may make other orders regarding the debtor’s future earnings, an order regarding the disposal of debtor’s possessions and giving appointed supervisor power to direct debtor’s employers to pay all or part of debtor’s earnings to the supervisor and to supervisor any payments out of the debtor’s income.

 

It is imperative to appoint a supervisor and if OR dispenses with appointment, the provisions apply as if debtor is the supervisor and OR is supervisor to the extent of ensuring the debtor’s compliance with the terms of the order.

The supervisor is required to give notice of the summary instalment order to every creditor known to him or who has proved a debt against the debtor.

The OR may give notice to the supervisor to provide any documents relating to the debtor’s property under the supervisor’s control.

If the supervisor fails to supervise the debtor’s compliance adequately, the OR may replace him.

If the debtor fails to pay in the installments, the OR may cancel the summary installments order.

It is an offence for a debtor to obtain credit of 100K or more while the summary installment order has effect; he is liable to a fine or imprisonment or both.

 

A summary installment order ceases to be current if it has been discharged or all the installments have been paid according to the order.

 

   iii.         No Asset Procedure (Section 343- 361)

Where net assets of debtor as well as the debts are at or below the prescribed minimum. The prescribed minimum is Kshs. 100,000.

It is a shorter procedure because the debtor really has no money.

No trustee is appointed.

 

Conditions: s345

– a debtor has no realizable assets

– must not have been previously admitted to a no asset procedure

– not have been adjudged bankrupt

– has no other means of payment of those debts

– total debts are not less than 100K and not more than 4M

 

It lapses after 1 year and is subject to extension by the Receiver for 35 days. It is a once in a lifetime procedure.

 

OR will not admit debtor to this procedure if; s346

– debtor concealed assets to defraud creditors

– engaged in conduct which is offence under Act

– incurred debts knowing he has no means of paying them

– creditor intends to apply for the debtor to be adjudged bankrupt; and if adjudged bankrupt, creditor would materially be better than if admitted to no asset procedure

 

A debtor who has applied for entry to the no asset procedure shall not obtain credit of more than 10K without informing the credit provider that he has applied for the procedure; otherwise it is an offence

 

After receiving application from debtor, the OR sends a summary of debtor’s assets and liabilities to each known creditor.

A debtor is admitted to the no asset procedure when OR sends him a notice in the prescribed form.

After admitting the debtor, the OR shall notify the creditors and publish a notice in the prescribed manner. The creditors, may not, after the debtor has been admitted, begin or continue any step to recover or enforce a debt from the debtor. However, debts under the Matrimonial Property Act, the Children Act and amounts owed in respect of a loan to secure the education of a dependent child of the debtor, remain enforceable.

The OR must establish and maintain a public register of persons admitted to the no- asset procedure and discharged from that procedure.

 

Termination of the no- asset procedure;

– if the debtor is discharged at the end of twelve months after admission date; a discharge does not release a business partner of the discharged debtor, a co- trustee of the discharged debtor, or any person who was jointly bound in a contract with the debtor or a guarantor of the discharged debtor

– if OR is satisfied that the debtor was wrongly admitted to the procedure or misled the OR, or the debtor’s financial circumstances have changed sufficiently to enable him to repay his debts

– if the debtor applies for his own bankruptcy

– a creditor applies for the debtor to be adjudged bankrupt

 

Effect of termination;

– the debtor’s debts become enforceable again (doesn’t apply after discharge)

– debtor becomes liable to pay any penalties and interest that accrued

CORPORATE INSOLVENCY

 

Concerned with the orderly realization of the assets of a body corporate in case the company is insolvent.

Insolvency is a legal term. A Co is deemed insolvent only where a court makes an order finding it insolvent.

This is evidenced by the financial status of a Company.

 

A Court will look into the following before making an order for liquidation (Grounds):

– Whether the company is insolvent. It looks at:

* Whether a company is unable to pay its debts when they becomes due (cash flow test- how much cash is coming in and how much is leaving) e.g. Uchumi has a lot of assets but no cash flow- cannot survive as a retailer, has to change its co

* Net asset position test- if it is proved that the aggregate of its assets is much lower than the total of its liability e.g. Kenya Airways has good cash flow but that is matched by very high liabilities- KQ restructuring to spread the tenure of its liabilities by some becoming long term (asset restructure)- Section 384

All body corporate have different considerations

* The professional opinion of its directors/ solvency statement test- looking at the business prospects, can the directors state that the Co will be capable of paying its debts when they become due?

* Whether a demand or decree/judgment to pay has been made on a body corporate and it has not disputed, been compromised or no application to set aside within prescribed time, the Co can be deemed insolvent

 

– When it is not possible to continue business of Co due to deadlock, oppressive behavior etc.

– When on application of AG, it is in public interest to liquidate Co e.g. company engaging in business contrary to public policy, national security, public morality etc.

– Registrar General, after carrying out investigation can make application to court on Co being dysfunctional or it is advisable for Co to be liquidated

 

 

Who can apply for liquidation order?

– Voluntary liquidation by Creditors- can apply but is required to meet certain threshold of money body corporate owes him; creditors can meet the threshold individually or through a group

* Show that they are owed

* Creditor must prove application hasn’t been brought in bad faith; e.g. pressurizing company to pay

* Show that a demand was issued and it was not met

*Co has no reasonable prospect of paying; there should be no other ways of recovering debts e.g. auctioneers

 

– Company itself through the Directors

* Where the co is insolvent, directors can make application (insolvency test)

* Where objects of co have been extinguished

* Where Co hasn’t conducted business within prescribed period

* Number falls below the minimum

 

– Voluntary liquidation by members

* For any reason provided a special resolution has been passed to that effect

* Minority can apply for liquidation in case of oppression or being excluded from the management and control therein

* If they are a minority and Co is being run or engaged in business that is unlawful, improper or contrary to public policy

Only available to minority because majority is expected to use voting power to correct any anomaly in the running of the business

 

– Registrar

If obligations under Co Act are breached, Registrar can apply for liquidation

* Co not trading in its name

* Co failing to hold its statutory meetings within prescribed times

* etc.

 

– A.G– on ground of public interest

 

What Court does in application for liquidation of a Co:

– May allow the application and make liquidation order; thereafter appoint interim liquidator

– Dismiss application

– Adjourn hearing of application

– Such other orders as it deems fair and just

 

What court looks into when faced with application?

– Whether grounds made in application have been proved

– Status and prospects of the Co

– Availability of alternative remedies

 

Regulated sector companies are liquidated under their own sector laws; exempt from Insolvency Act e.g. Banks under Banking Act, Insurance firms under Insurance Act

 

Liquidation under voluntary arrangements- Section 393

Started by the Company (directors) or its members

– The process starts when a special resolution is passed by the members to voluntary liquidate. This is only available for cases where;

·       the company is formed for a particular purpose and the objective was completed;

·       for a particular period of time and the period has ended;

·       members of co have fallen below prescribed minimum

 

– The resolution must be notified to members. The notice that the Co intends to pass a special resolution must be given to all creditors and contributories of the Co as well.

Within 14 days after passing the resolution, a notice is done in publication once in the Gazette, one in at least two newspapers of wide circulation, sending to the registered address of creditors and the company’s website if any- Section 394

A Co is deemed to be under liquidation on the date the resolution is passed.

 

Section 398- if there is a proposal to liquidate voluntarily, the directors may at the director’s meeting make a statutory declaration that they have made inquiry into the company’s affairs and they have opinion that the company can pay its debts in full within a specific period but such declaration must be made within 5 weeks of the passing of resolution of liquidation

 

 

Consequences/ Effect of the resolution being passed/ Co being deemed to be under liquidation:

·       Section 395- the voluntary liquidation commences when the resolution is passed

·       Co will be managed and controlled by liquidator (qualified insolvency practitioner can be appointed on a permanent or provisionary basis)

Powers of directors cannot be exercised except by approval of the appointed liquidator

·       There can be no transfer of shares or change in share capital of a Co under liquidation; any such transaction is void (Section 397)

·       A company cannot hold any general meeting except as convened by liquidator 

·       Co ceases any business other than that which is necessary to achieve objective of the liquidation (Section 396); it cannot take on new or extraordinary business; (must consider 4 objectives of insolvency- realize assets, settle debts, achieve good outcome for creditors, and where business can be revived, revive it)

·       Liquidation doesn’t stop suits for or against the Co; suits against the Co will be defended/ made by the liquidator; and can only be continued with approval of court

·       Contracts don’t terminate at liquidation; liquidator must continue performing obligations under the contract to the extent possible in the objectives of the liquidation

 

 

Steps after passing resolution:

1.     Make a return of the resolution with the Official Receiver and the Registrar of Companies (changes status of the company e.g. all correspondence must have the words ‘under liquidation’ in the letter head)

2.     Section 399- the company in a general meeting appoints a liquidator; on appointment of a qualified insolvency practitioner as the liquidator, the powers of the directors cease

3.     The appointed provisional liquidator must publish notice that Co members have passed a resolution for voluntary liquidation of the Co and he has been appointed- published in gazette and widely circulating newspaper in the area in which the company acts

4.     The liquidator requires directors of Co to prepare a statement of financial affairs as at the date at which the Co passed the resolution for voluntary liquidation- this enables the liquidator to make a determination on how to realize the assets and pay off creditors (statement must be up to date accurate and complete in all affairs and must be prepared by the Directors)

5.     Liquidator is to make a decision as to whether to convene a first meeting of creditors; can decide not to if not necessary after looking at the statement of financial affairs of the company e.g. if the Co has minimal to no creditors

Any creditor who feels aggrieved by decision not to convene a meeting can request the liquidator to call a first meeting and if he refuses, he can make an application to court compelling him

If the liquidator decides to convene a meeting;

– he can call separate meetings of preferential creditors, secured creditors, and unsecured creditors

– after creditor meeting, he should also call a meeting of contributories

6.     Concurrently to the above, the Directors will be required to prepare a solvency statement- states that the directors in their reasonable opinion think that the Co, in its current business position, is able and willing to pay its debts when they become due within the next 12 months

If directors can’t make this statement during the resolution passing, it becomes a voluntary liquidation by creditors instead of a voluntary liquidation by members=

1st meeting agenda;

* to determine whether the ongoing liquidation should continue as a voluntary liquidation by creditors instead of a voluntary liquidation by members (overseen by creditors and not members)

* do creditors want to act as a group or whether they want to appoint a committee of creditors (not more than 5)

* whether to confirm the provisional liquidator or to appoint someone else

* other housekeeping issues

 

7.     The liquidator reviews the statements and makes a proposal to creditors on how the liquidation is to be carried out- dependent on whether there are creditors; his recommendations to be circulated to members, creditors and contributories

Contributories- individuals with substantial interest in the company

 

8.     Where necessary, liquidator can call creditors and contributories to vote and approve his proposals.

 

Other concerns in liquidation:

        Settlement of contributories; who are contributories and how much they should contribute; power lies with HC. However, liquidator can settle with approval of high court

Section 385- liability as contributories of present and former members; if they were members before 12 months of liquidation order, if existing members are unable satisfy the debt; if company limited by shares, contribution on unpaid shares and or amount guaranteed, whichever is relevant.

        Proof of debt to the liquidator by providing such evidence as is necessary

        Priority of debts during repayment- provided for in the 2nd Scheduleof Insolvency Act

1- Cost of liquidation- costs of selling the assets, the liquidator’s remuneration and all costs incidental to the liquidation procedure

2- Preferential debts – salaries, allowances, benefits to employees, taxes etc.

3- Secured creditors

4- Unsecured creditors

5- Members or Contributories- if any surplus remains

 

If not enough money is not available within the same group, they can be paid to the prescribed limit within the Act (e.g. only paid up to 4 months salary) OR as a manner of first come first served

Pro rated basis- if anything remains within the same priority group; everyone paid, and whatever remains is divided amongst the members of the group

 

Final meeting before dissolution

Section 402- After liquidation of company’s affairs is complete, the liquidator prepares an account of liquidation showing how it was conducted and shall convene a general meeting of the company to lay before it the account and give explanation of it

Within 7 days after meeting, liquidator lodges with Registrar a copy of the account, with a return on details of the holding of the meeting

 

Appointment of Liquidator

– A suitable insolvency practitioner to act as a liquidator is proposed in the notice proposing the passing of the resolution to liquidate the company voluntarily; two or three names are provided

– Where no one has been appointed as a liquidator or there is a vacancy in the office of liquidator e.g. through death or incapacity, the Official Receiver acts as the interim liquidator

– Subsequently, the liquidator can be confirmed in office/ appointed

– If there is a deadlock, the members proposing a liquidator that creditors oppose, an application to Court can determine but it usually goes with creditor’s appointee as it looks at the interest of creditors

 

– Liquidator once appointed is deemed an officer of the Court; required to be honest and serve the ends of justice; cannot leave the office unless formally discharged by the Official Receiver

 

The Powers of liquidator provided in Schedule 3  of the Insolvency Act

Should be exercised in fulfilling objectives of insolvency

After settling contributories;

·       Can convene general meeting of Co, creditors and contributories to lay before them the final report of liquidation; where the liquidation extends before 12 months, he is required to convene AGM within 3 months after the 12 months in order to update the members; creditors will determine when they want to have their meeting

·       Other powers

 

 

Liquidation ends when;

– All assets are realized, all debts are settled and all surplus distributed

– Liquidator is of opinion that there is nothing else to feasibly realize

Section 402

·       Liquidator must then convene before all members, creditors, contributors separately, on the statement of accounts, how much realized, how much settled, how he distributed surplus etc.

·       If they are satisfied with the accounting report, they pass a resolution adopting the report and its recommendations

·       Liquidator then entitled to …

·       If they are not satisfied, liquidator can apply to Official Receiver or court to discharge him; once discharged,

·       If debts are paid or no more debts, and the Co is not being revived, a creditor, member or contributory can apply to registrar of Co to dissolve the company

·       During liquidation, business or Co can be transferred to another person under this Act

·       Give a notice in the gazette that the Co will be dissolved

 

Documents required:

·       Notice to convene meeting to pass resolution of voluntary liquidation,

Notice to contain- agenda, date, time

If special resolution- set out the text on the notice; what intends to be passed e.g. it is for voluntary liquidation, proposed name of liquidator etc.

·       Directors’ Statement of financial affairs- Insolvency Act states what is required; describe the Co, what are its assets

·       Directors’ Solvency statement- statement of opinion; certify that from the books of account, the CO is a going concern and will be able to pay its debts when and if they become due

**Statements issued after the meeting**- after the resolution to liquidate has been passed

·       Notice convening first meeting of creditors and the agenda

·       Returns to Registrar, OR…

 

 

* know how to prepare the above

* dissolve Co, kindly advise on requirements and process + draft instruments (20marks)

 

Creditor’s Voluntary Liquidation

– Can be initiated by creditors- members of Co must concur

– Voluntary liquidation by members is converted to be creditor’s liquidation- Section 404

 

Process: Section 406(1)

1.     Notice by creditor’s to Co

2.     Directors required to convene meeting of creditors, members or contributories to vote on the matter

3.     Send notices to creditors not less than 7 days before the day on which the meeting is to be held and ensure it is published in the Gazette, once in at least two newspapers circulating in the are and on the company’s website

4.     After meeting convened;

*members can dispute and the creditors then have option of going to court so that process is converted into a court supervised liquidation or *members and contributories can agree with creditors that in the circumstance that the co ought to be liquidated- the liquidation will start from the day the resolution is passed by the members

5.     The directors required to prepare statement of financial position and to lay that statement before the creditors meeting

6.     Creditors required to propose a provisional insolvency practitioner to act as liquidator before confirmation by full body of creditors- Section 408

7.     On appointment of liquidator, all powers of directors cease- Section 411

8.     Once resolution passed, procedure for creditors’ voluntary liquidation is similar to process of members’ voluntary liquidation

Section 414- After liquidation of company’s affairs is complete, the liquidator prepares an account of liquidation showing how it was conducted and shall convene a general meeting o the company to lay before it the account and give explanation of it

Within 30 days after preparing account, the liquidator convenes a general meeting of the creditors to enable those attend to consider the account

Within 7 days after meeting, liquidator lodges with Registrar a copy of the account, with a return on details of the holding of the meeting

 

Distribution of property

Section 415- On liquidation, the company’s property in the voluntary liquidation is applied to satisfy company’s liabilities and is thereafter distributed among members according to rights and interests in the company

 

Why voluntary liquidation?

– It is cheaper and faster than the court supervised liquidation; a liquidation can be done in one month or less as opposed to being subject to a court’s diary yet all the effects of liquidation are the same

– Co and creditors are in control of the process

 

 

Liquidation by the Court- Part VI Insolvency Act

Section 423- only the HC has jurisdiction to supervise the liquidation of companies

 

Circumstances in which company may be liquidated by Court:

Section 424- If;

·       The company has passed special resolution that it be liquidated by court

·       If a public company but upon original incorporation;

– the Co was not issued with trading certificate

– more than 12 months has elapsed since it was registered

·       Co has suspended business for a period of more than 12 months

·       Except for private company, number of members is reduced to below two

·       Co unable to pay its debts

·       When moratorium ends under Section 645

·       If Court opines that it is just and expedient that Co be liquidated

·       There is a deadlock

 

Section 505- power of the court to make orders against officers of company and others found to have participated in fraudulent trading by company in liquidation

The liquidator makes application to Court if he forms the view that the business was carried out with intent to defraud creditors or any other person and believes that the persons participated in the business with the knowledge that the business was being carried out in that manner

The Court may decide to order these persons to make such contributions to the company’s assets; it is also an offence and the court can order disqualifying the persons for 15 years from;

-being directors

-acting as liquidators

– acting as supervisors

– or being connected with any formation or management of a company or LLP

 

 

Who can apply to Court for liquidation order? Section 425 (1)

·       Members of Co or Directors

Usually, they can use their voting power if the company is being mismanaged, to remove the directors or can give them specific directions

They have other internal alternative actions before settling on liquidation.

Certain grounds unavailable to members e.g. cannot apply on the ground of public interest etc.

 

 

 

·       Creditors

Must be qualified creditors i.e. creditor or group of creditors owed beyond the prescribed minimum

Court must be satisfied to this fact, no application has been made to set aside the debt/ the debt isn’t being disputed

 

·       Contributories

Only if the number of members is reduced to below two or the relevant shares were originally allotted to or held by the contributory for at least six months during the eighteen months preceding commencement of the liquidation

 

·       Provisional liquidator of the company

·       If the company is in voluntary liquidation, the liquidator

·       Official Receiver

Only where a Co is already undergoing voluntary liquidation; it is not being done properly and Court can better supervise the process

 

·       Supervisor in a voluntary arrangement by the Co

If terms of voluntary arrangement are not being adhered to; can apply to court

 

·       Administrator under administration order by the Court

Only to the extent that in their reasonable view, the administration is not likely to succeed

 

·       Attorney General- Section 425(6)

*Section 424 (1) (b)- if a public company has not been issued with trading certificate and more than 12 months have elapsed since date of incorporation

*Section 426- liquidation of company on grounds of public interest

– Can get a report from Registrar of Companies that a certain co needs to be liquidated

– From a report from the Capital Markets Authority

– From information provided by the Registrar

– As a result o the company or its directors having been convicted of an offence involving fraudulent conduct

– Can get a tip that the Co is being run illegally ETC

* Cannot make application on the ground that the Co is not able to pay its debts

 

Section 428- (l) At any time after the making of a liquidation application, and before a liquidation order has been made, the company, or any creditor or contributory, may-

 (a) if legal proceedings against the company are pending in the Court-apply to the Court for the proceedings to be stayed

 

Effect of Liquidation

Section 429- In a liquidation ordered by the Court-

(a) any disposition of the company’s property; and

(b) any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the liquidation is void, unless the Court otherwise orders.

 

Section 430- If a company is being liquidated by the Court, any attachment, sequestration, distress or execution instigated against the assets of the company after the commencement of the liquidation is void

 

Section 432(2)- When a liquidation order has been made or a provisional liquidator has been appointed, legal proceedings against the company may be begun or continued only with the approval of the Court and subject to such conditions as the Court considers appropriate.

 

Section 433(1)- If Court makes a liquidation order or appoints a provisional liquidator, the OR may require the prescribed persons to submit a statement of affairs which include;

– particulars of company assets, debts, liabilities

– names and addresses of company’s creditors

– securities held by any of these creditors

– dates when securities were given

– any other info required by O.R

 

Section 444- liquidator to assume control of company’s property when liquidation order is made

Section 445- the Court may on application of the liquidator, direct property belonging to the company to vest in the liquidator; the liquidator may be directed by court to begin or defend or continue any legal proceedings relating to that property

 

Settlement of list of contributories

Section 448- After making liquidation order, the Court will;

·       Settle a list of contributories, with power to rectify register of members

·       Take all practicable steps to have assets collected and applied to discharge liabilities

 

Section 450- after making liquidation order but before or after ascertaining assets, the Court may;

·       Make calls on contributories for payment to satisfy the company’s debts and for adjustment of the rights of contributories amongst themselves

·       Make order for payment of any calls made

 

Section 454- the Court may adjust rights of contributories among themselves and distribute surplus amongst persons entitled to it

 

Functions of liquidator in Court process

Section 443- Liquidator should;

·       Ensure assets of company are realized and distributed to creditors

·       If there is surplus, distribute to the persons entitled to it

 

Final meeting

Section 446- in case of company being liquidated by the Court, the liquidator being satisfied the liquidation is complete, shall convene a final general meeting of the company’s creditors

 

 

 * Read Schedule 2, 3, 4 and 5

Schedule 3

Powers of Liquidator in Liquidation

Part 1- powers exercisable with approval

·       Power to pay any class of creditors in full

·       To make any compromise or arrangement with creditors

·       To compromise on terms agreed and on questions relating to assets or liquidation of the company; and to take security for discharge of it

·       To borrow money for beneficial realization of company’s assets

·       Power to bring legal proceedings

 

Part 2- powers exercisable without approval (voluntary or with approval in liquidation by court)

·       Power to bring or defend any action or legal proceedings on behalf of company

·       Power to carry on business of company as is necessary for behalf

 

Part 3- powers exercisable without approval in every kind of liquidation

·       Power to sell company property by public auction or private contract with power to transfer the whole of it

·       Power to execute and act on behalf the company

·        Power to prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against the contributory’s estate, and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent, and rateably with the other separate creditors.

·       power to draw and accept any bill of exchange or promissory note on behalf of the company

·       power to appoint an agent to do any business liquidator is unable to do personally

·       power to take all other beneficial action to the liquidation


·       Court is guided by the following in determining applications;

– Is there an alternative remedy to the liquidation?

– Are the applicants acting unreasonably by applying for liquidation instead of pursuing the alternative remedy

***TATU City, Nakumatt case 2017, 2018 decisions- look at whether the only remedy available is for liquidation***

 

Court can:

– grant application

– dismiss it

– adjourn hearing of application

– can make interim order

– order for alternative remedy

– any such order as it may deem fit

 

Process of application to Court:

Insolvency Regulations- by motion, supported by evidence (affidavit setting out grounds upon which application is being made, affidavit supported by annextures)

*In the matter of the Insolvency Act

* In the matter of the name of company

 

 

-SERVICE- Once liquidation order is made and liquidator appointed, the order must be served on the Official Receiver, on the Company, the Registrar of Companies within 14 days

 

-There should be notice in gazette and publication in widely circulating newspapers by liquidator on the fact that a liquidation order has been made and he has been appointed as provisional liquidator

– Provisional liquidator to require directors to prepare statement of financial affairs as at the date of liquidation order (no requirement for solvency statement as this has already been determined by the court during the application);

– liquidator convenes meeting of creditors to make deision on whether they want a committee or not, whether they want to confirm liqidator or not etc.

-liquidator distributes this statement to the creditors and contributories

– In a liquidation by court, liquidator must convene the meeting; doesn’t have a choice

 

Additional steps required:

– Investigation by official receiver to determine the cause of failure of the Co and makes a report

Importance of this investigation-

*helps establish the contributories e.g. if Co over-lent without approval to the majority shareholder and his family

* to find out liability of directors/ officers/ members leading to criminal processes e.g. fraudulent directors- report made to DPP

* determining who are the true creditors; how much and to whom the debt will be settled- lifts the veil

 

– Settlement of contributories- done by liquidator on authority by the High Court

 

– Examination by liquidator and by the Court of any person on a matter relevant to the liquidation- As an officer of Court, liquidator allowed by Insolvency Act to summon, require and take production of evidence by any person under oath e.g. affidavit

E.g. members, directors, officers of Co e.g. accountants, employees, Company Secretary, Registrar

 

If liquidator makes proposal for creditors, circulates it, to convene a meeting to vote on it, and it can be approved by creditors for implementation, can approve with amendments, they can reject the proposal, liquidator can ask that he prepares a revised proposal

 

Where the disagreement cannot be breached, any of the parties can apply to court.

– Creditors can make application to reject proposal and to discharge the liquidator

– Liquidator can apply to court to confirm the revised proposal that he has and Court will make final decision

 

If majority of creditors approve proposal, it is binding on all creditors, whether they voted for it or not, whether they were present or not.

 

– In all court supervised liquidations, the liquidator is under obligation to give effect to wishes of the creditors for their benefit (passed at creditor’s committee or as a group)

 

Obligations under voluntary liquidations apply here, the last three steps are the same

 

 

Removal and vacation of office in the case of voluntary liquidation

Section 467(2)- A liquidator may be removed from office only by court order or;

– in the case of member’s voluntary liquidation, by a GM of the company convened for that special purpose or

– in creditor’s voluntary liquidation by a GM convened for that purpose

 

A liquidator automatically vacates office if the liquidator ceases to hold an authorization to act as an insolvency practitioner.

A liquidator may resign office by lodging a notice of resignation with the Registrar

 

A liquidator vacates office as soon as he lodges with Registrar notice that the final meeting(s) has been held and the decision thereof (if any)

 

***

 

Dissolution of companies after liquidation

S. 494(3) At the end of three months from the registration of the liquidators’ final account and return by the registrar, the company is dissolved in case of voluntary liquidation.

S. 495. (1) when an order for the liquidation of a company has been made by the Court and the Official Receiver is the liquidator of the company, the Official Receiver may apply to the Registrar for the early dissolution of the company.

(5) As soon as practicable after receiving the Official Receiver’s application, the Registrar shall register it.

(6) At the end of the three months from and including the date of the registration of the application the company is dissolved.

 

S. 497. (l) where the registrar have received a notice that is-

(a) served for the purposes of section 468(9); or

(b) from the Official Receiver that the liquidation of a company by the Court is complete,  shall register it.

(3) At the end of the three months from and including date of registration of the notice, the company is dissolved, and its name officially withdrawn from the register of companies.

 

Offenses Related to Liquidation

1.Statutory Offenses

Section 498 provides that an officer or former officer of the company commits an offence if, within the 12 months immediately preceding the commencement of the liquidation of the company, the officer or former officer:

a)  concealed any part of the company’s property to the value of KES 50,000 or more; or concealed any debt due to or from the company; 


b)  fraudulently removed any part of the company’s property to the value of KES 50,000 or more; 


c)  concealed, destroyed, mutilated or falsified any document affecting or relating to the company’s affairs or 
property; 


d)  made any false entry in any document affecting or relating to the company’s affairs or property; 


e)  fraudulently parted with, altered or made any omission in any document affecting or relating to the company’s 
affairs or property; or 


f)  pawned, pledged or disposed of any property of the company that has been obtained on credit and has not been 
paid for. 


 

Section 499 provides that an officer or former officer of the company commits an offence if the officer or former officer:

a) has made or caused to be made a gift or transfer of, or charge on, or has caused or connived at the levying of execution against, the company’s property; or

b) has concealed or removed any part of the company’s property since, or within the 2 months preceding, the date of any unsatisfied judgment or order for the payment of money obtained against the company.

Section 501 makes it an offense to falsify documents in relation to company in liquidation.


Section 502 makes it an offense to make a material omission from statements relating to financial position of company in

liquidation


Section 503 provides that it is an offence to make false representations to creditors of a company in liquidation.

 

 2.Fraudulent Preference

This is a charge, mortgage, conveyance delivery of goods act relating to company property made by or on behalf of the company within 6 months of commencement of the winding up. Such a transaction is deemed void, however it must be evident that it was entered into voluntarily, when the company was insolvent, to prefer a particular creditor over another.

 

3.Misfeasance

This is a wrongful act of omission committed or omitted by a person charged with a specific responsibility. In the words of Lord Esher in Re: B Johnson (Builder) Company Ltd,

“There is no such distinct wrongful act known to the law as misfeasance”

According to the judge, a misfeasance is an act of omission committed or omitted in violation of the principles of common law or equity. It is neither a crime nor a tort and does not include acts or omissions of negligence.

Misfeasance proceedings may be instituted against promoters, directors, liquidators, auditor etc. and the principal remedy to the company is damages. For example, the Court has the jurisdiction in winding up to assess the damages payable by officers of the company including the liquidator for any misfeasance committed. Examples of misfeasance include:

       Payment of dividends out of capital. 


       Making of improper payment to promoters by directors. 


       Making of secret profit by directors or promoters. 


       Making fraudulent preferences. 


       Selling a company property at undervalue. 


       Applying the company’s assets in ultra vires or illegal transactions. 


In Reliance Wholesale Company Ltd V Mills the company owed its directors £7,500 and the amount was repayable as and when it becomes available. On one occasion, the director found signed cheques at the company’s office he filled £5,500 in one of them but in a subsequent conversation with the other director he was instructed not to cash it, but he did. The company thereafter went into liquidation and the liquidator applied to have the amount returned on the ground that the director was guilty of or misfeasance. The Court agreed and ordered the director to account for the same.

 

 

Liquidation of unregistered companies

What is an unregistered company?

Section 512- any association and any company, other than a company registered under the Companies Act; an unregistered company cannot be liquidated voluntarily

 

Circumstances in which unregistered company can be liquidated- Section 514

– if the company is dissolved or has ceased to carry on business or is carrying on business only for purpose of liquidating its affairs

– if company is unable to pay its debts i.e.

a)if there is a creditor the company owes more than 75,000 and;

* the creditor served on the business a written demand to pay the amount due and the company has failed to pay within 21 days of the demand

* the creditor has notified the company through demand of intention to sue and the company has failed to pay, obtain stay of proceedings within 21 days of the demand

b) or execution of a judgment, decree or order obtained in Court has commenced but it is returned unsatisfied or it is proved to Court that it is unable to pay

– if Court is of opinion that it is just and equitable to liquidate

 

Dissolved companies incorporated outside Kenya may be liquidated- Section 515

 

 

 

The contributories in liquidation of unregistered company- Section 516

The contributories include any person liable;

– to pay or contribute payment of any debt or liability of the company

– to pay or contribute to payment of any amount for adjustment of rights of members among themselves or

– to pay or contribute to payment of expenses of liquidating company

 

Court has power to stay proceedings- Section 517

The Court has power to restrain legal proceedings against a company after making of an application for liquidation

S518- if liquidation order is made, legal proceedings are stayed and may not be began except by approval of court


 

Alternatives to Liquidation & When they are available

a)     Administration under Insolvency Act

b)     Reconstruction under Companies Act

-Mergers           

-Acquisition- Transfer or Takeover

-Recapitalization- restructuring share capital

c)     Scheme of Arrangement as a voluntary arrangement- both Acts

d)     Compromise as a voluntary arrangement- both Acts

 

1.     ADMINISTRATION

Because liquidation is too drastic, the Insolvency Act 2015 provides ways in which companies may be rehabilitated. A qualified person (insolvency practitioner) takes over control and management of Co to achieve objects of administration.

– Look at whether proposed administrator has experience and capacity to rehabilitate the company

– Court looks at whether the proposed administration meets objects of administration under the Act; if it cannot, liquidation may be the better option.

 

Administration objects: Section 522

– To maintain the Co as a going concern (able to meet its obligations when and if they become due as it operates)- if Chase Bank was a non-banking institution it would be able to fall under administration (only problem it had was panic; it had assets, goodwill etc.)

– To realize the assets of the Co for purposes of the creditors and benefits of members

– To achieve a better outcome for creditors- look at Nakumatt case (Co is in terrible state and is insolvent; the only good path is to put it under administration to achieve a better outcome for the creditors; they might not get anything but the alternative is worse)

 

 

 

 

 

Who can apply to Court? Section 532

– Any creditor who holds a qualifying floating charge over the company’s assets

– The Co or its directors can apply for the Co to be placed under administration e.g. due to deadlock or dysfunction

– Any liquidator can apply for administration order if he thinks the Co may not be better served by administration as opposed to liquidation

– Official receiver can also apply for an administration order

– Contributories

 

Division 3

The application for an admin order is made to court. When seized by the application, it considers the evidence presented to determine whether the objects of administration will be achieved.

Applicant must satisfy the court that;

– Circumstances have arisen that may lead to an application for liquidation (grounds of liquidation present i.e. the company is or is likely to become unable to pay its debts)

– What would the administration achieve? Will an administrator actually turn around the company? That the administration order is likely to achieve objects of administration

– What is the cause of failure of the business? Helps in determining whether administration is the proper solution

If the Court is satisfied, it will grant the order.

 

Section 533- power of the court on hearing application:

It may;

– make the administration order sought i.e. an order appointing a person as the administrator and providing administration of the company by that person

– dismiss the application

– adjourn the hearing conditionally or unconditionally

– make interim order

– treat application as a liquidation application and make a liquidation order

– make any other order it considers appropriate

 

Starting point for admin is a proposal sent e.g. by directors to the creditors

– Must prepare administration proposal- set out current business situation, what admin will achieve, how long it will last, who should be appointed

– circulate notice of intention to apply to court for administration order; is a warning to the creditors

– creditors can take pre-emptive action e.g. … look at Nakumatt case

– Filing of application and hearing

– Court can make interim orders or any other order as it deems fit

 

Once court makes admin order and appoints an administrator, some consequences as seen in liquidation will apply e.g. director’s exercise powers with approval and under authority of administrator

– HOWEVER, operation of company to continue as normal- fulfilling its obligations etc… just under authority of administrator

 

– Moratorium- a Co under which an admin order has been made may apply to court for an order of moratorium (protective order protecting co from claims for period not exceeding 12 months unless extended by court)- Section 559

Unlike under Insurance/ Banking Act where moratorium is blanket; you must specify what the protection will be against e.g. Nakumatt was asking for protection from the landlords, which helped it unlock the stores and take its stock

 

– An Admin Order provides independent and qualified expertise to revive the Co and gives it the opportunity to be protected by an order of moratorium

– No application for liquidation of Co can be made while there is an administration order except by the official receiver, administrator or any other person with leave of court- Section 557

 

Who can appoint an administrator? Section 523

Can be appointed;

– by administration order of the Court- Division 3

– by the holder of a floating charge in respect of a company’s property (should be created by a document empowering the holder of the charge to appoint an administrator of the company)- Section 534

On appointing an administrator, a notice of appointment must be lodged at the court including statutory declaration of power to appoint administrator and a statement of that appointed administrator’s consent, and opinion that the purpose of administration is likely to be achieved

Upon satisfying the above requirements, the administrator’s appointment takes effect

 

– by the company or its directors- Section 541

Secction 544;

– if application for liquidation which has not yet been disposed of

– if application for administration which has not yet been disposed of

– if administrative receiver of company is in office

 

Administrator exercises almost similar powers to the liquidator + obligations;

– required upon appointment, on basis of statement prepared by directors, to circulate admin proposal to members and creditors

– required to hold regular update meetings with creditors and give effect to their wishes

– make periodic returns to Official Receiver and Court on the progress of administration

-Section 524- to perform functions as quickly and efficiently as reasonably practicable

 

Limitations of admin powers

– cannot transfer, charging or alienating assets; required to make company revive, not to kill company; beyond a certain maximum, he must seek authority from the members & creditors or leave the court; prevents assets stripping of the company

– administration is not perpetual; is time bound (reasonable time provided in Act decided by Court) but court can extend period if good cause is shown

 

 

If administrator succeeds, and the Co is restructured, the administrator is discharged on application by the creditors, company (members or directors) or by administrator himself

 

If objects have not been fulfilled, liquidation is applied for.

 

 

 

Other provisions relating to administration:

Section 528- an administrator cannot be appointed if the company is already under administration

Section 529- an administrator may not be appointed in respect of companies that are banks, finance and insurance companies.

Section 620- An act of the administrator of a company is valid even if the administrator’s appointment or qualification is subsequently found to be defective.

 

 

Obligations of Directors to administrator and to Co during administration***

The administrator acts as the agent of the company in fulfilling duties and exercising powers.

4th Schedule

 

Section 577- 589– the Administrator has the power and duties;

* to remove and appoint directors of a company

* to convene meetings of members and creditors of the company

* to seek directions rom the court regarding his powers

* ensure effective and efficient management of affairs and property of the company

* to distribute company’s assets to creditors

* to make special payments in certain likely to assist achievement of purpose of administration

 

Section 590- protection for secured and preferential creditors

 

Section 599- procedure for moving from administration to creditor’s voluntary liquidation

If the administrator believes that the total amount each secured creditor is likely to receive has been paid to them or set aside for them; and if there are any unsecured creditors (that a distribution will be made to them)

Notice that this section applies shall be lodged with Registrar for registration and shall be sent to each creditor

After this, the administrator’s appointment ceases and the company goes into liquidation.

 

Section 600- procedure for moving from administration to dissolution

If administrator believes that the company has no property allowing distribution to creditors, he should lodge a notice of this with the Registrar and send a copy to all creditors he is aware of.

The appointment of the administrator ends once the notice is registered.

After the end of three months from the date of registration of the notice, the company is dissolved.

It is an offence if the administrator does not act in line with this section.

 

 

If admin doesn’t conduct himself according to Act and is in breach, remedies are:

a) Section 591- an administrator’s conduct of administration can be challenged I Court by a creditor or member of the company claiming the administrator is acted/ acting in a way that is

* detrimentally affecting the interests of the applicant (whether alone or in common with others)

* not quick or efficient as is reasonably practicable

The court may make order granting the relief or dismissing the application

The order granted may do the following;

– regulate administrator’s performance or exercise of administrator’s functions or powers

– require administrator to do or not do a specified act

– require creditor’s meeting to be held for specific purpose

– end appointment of administrator

– make provisions of a consequential nature

 

b) Section 592- the Court has power to examine conduct of the administrator and an examination may be held on application by the;

– the OR

– administrator of the company

– liquidator (if any) of the company

– creditor of company

– contributory of company

This application can only be made if it alleges that person purporting to be the administrator has;

* misapplied or retained money or property of company

* become accountable for money or property of company

* breached a fiduciary duty in relation to the company or

* been guilty of a misfeasance

After examination, the Court may order the administration or person purporting to be administrator to;

* repay, restore or account for money or property

* pay interest

* contribute an amount to the company’s property as compensation for breach of duty or misfesance

 

Termination of administration

a) Automatic end to administration– at the end of 12 months from and including the date on which the order took effect

BUT, on application to the court, the order may be extended for a specified period and by consent (between creditors), for a period not exceeding 6 months

The admin order may only be extended once

The administrator must lodge such extension order from the court with the Registrar for registration

 

b) On application by administrator

Section 595

– if administrator believes that;

*the objective of the administration cannot be achieved

*that the company should not have entered the administration

*that the administration purpose has been sufficiently achieved in relation to the company

– if creditor’s meeting requires administrator to make such application

On application, the Court may make order terminating the administrator’s appointment or dismiss the application or make interim order

 

c) On application of creditor

If a creditor of the company alleges an improper motive by the administrator.

 

d) by the Court

If;

– a liquidation order is made for a company under administration, the court will make order to terminate the appointment of administrator (it may also direct administrator appointment to continue to have effect)

 

e) If the company goes into voluntary liquidation by creditor or to dissolution

2.     VOLUNTARY ARRANGEMENTS

Proposals made by company’s directors or an arrangement with the creditors; can be a compromise or a scheme of arrangement.- Section 625

In making such a proposal, the directors shall provide for appointment of an insolvency practitioner to supervise implementation of the voluntary arrangement.

Voluntary arrangements are exact same in company law and insolvency; can be implemented under both Acts.

Section 626- The provisional supervisor within 30 days must submit to court a notice of the proposal and a report stating that

-in the supervisor’s opinion, the proposal has reasonable prospect of being approved and implemented

-in his opinion, whether meetings of the company and of the creditors should be convened to consider the proposal

-if the meetings should be convened, when and where they should be held

This applies if the provisional supervisor in the proposal is not the liquidator or administrator, and the directors don’t propose to obtain a moratorium

 

a)     Compromise

Co makes proposal to pay a lesser sum in full satisfaction of its debts.

 

 

b)    Scheme of Arrangement

Co makes proposal to satisfy its debts by way of

* installments

* by acquisition

* exchange of shares

* by takeover

* etc

 

Share capital of an organization; any form co directors feel has a chance of success

Proposal is made by Company directors to the creditors

 

 

– Directors to prepare proposal and circulate to all Co members, creditors and contributories

– Propose the appointment of a person supervising the voluntary arrangement; a supervisor who is an insolvency practitioner- S625

– Convene a meeting of the creditors, contributories, and the members

– Classification of creditors and confirmation of the supervisor

 

Roles of supervisor:

– prepare a report for creditors and filed in court and official receiver; to highlight whether in his opinion, the proposal has any chance of being successful (meaning it is acceptable and can be implemented)- S626

– the proposal presented for voting before the creditors; if they agree to proposal having read the report, then it is adopted and is binding on all creditors and the company; if they reject the proposal, the Co directors may be required to prepare a revised proposal incorporating amendments so that it can be considered; or application for liquidation or administration can be an option

  provisional supervisor should convene meeting of company and of its creditors-S627

During this meeting the chairperson to divide the meeting into three groups for voting purposes to consider a director’s proposal i.e. secured creditors, preferential creditors and unsecured creditors

– Section 629- approval of proposal for voluntary arrangement

The proposal is considered approved by a majority of the company members at the meeting of the company and a majority of the creditors present at the meeting of creditors or if approved by a majority of the creditors only

 

Section 630- An approved proposal is to take effect as a voluntary arrangement to be binding on the company and its creditors after the date it is approved by a court order

After taking effect, the provisional supervisor becomes the supervisor of the arrangement

 

Section 633- when a proposal is approved, the supervisor becomes responsible for implementing the arrangement in the interests of the company and its creditors

 

Offences related to voluntary arrangements

Section 632- Offences by officers of companies- making a false representation or omits any information, to get approval from members or creditors of a company to a proposal  is an offence

Section 634- If it appears to the supervisor that any past or present officer fo the company committed an offence in connection with a moratorium or voluntary arrangement for which the person would be criminally liable, the supervisor may report the matter to the DPP providing him with information and access to information and facilities on the matter

 

 

Moratorium

Section 638- Companies that comply with regulations provided in the insolvency regulations are eligible to obtain a moratorium

Section 639- Ineligible companies including;

– banking and insurance companies

– public private partnership project companies

– companies with large outstanding liabilities

– company under administration

– company under liquidation

– company in which a voluntary arrangement already has effect

– company in respect of which a provisional liquidator is appointed

– company which already had a moratorium during 12 months ending with the lodgment date and a voluntary arrangement

 

Obtaining a moratorium

Section 643- If directors of an eligible company wish to make a proposal for a voluntary arrangement, they shall take the required steps to obtain a moratorium. They shall;

– prepare a document setting out terms of the proposal and a statement of the company’s financial position containing particulars of creditors, debts and other liabilities as well as assets

– appoint a provisional supervisor who consents

The directors submit the proposal and statement to the provisional supervisor for comment and consideration.

The provisional supervisor submits his opinion on whether the statement;

– has a reasonable prospect of being approved and implemented

– the company is likely to have sufficient funds during the moratorium to enable the company to carry out its business and

– meetings of the company and its creditors should be convened with a view to considering and approving the proposal

 

Section 644- the directors shall lodge the following with the court;

– the proposal and statement of financial position

– a statement that the company is eligible for moratorium

– statement from the provisional supervisor of consent to act as supervisor

– a statement of the supervisor’s opinion that there is prospect of the proposal being approved on convening a meeting and that the company can carry on business

– statement providing other info with respect to the company’s financial position

 

Section 645- the moratorium will take effect after the above documents are lodged with the Court. It ends at the day when the creditors and members meetings are first held to consider the proposal.

 

Section 646- when a moratorium takes effect, the directors of the company shall immediately give notice to the provisional supervisor (otherwise it is an offence)

 

Section 647- the provisional supervisor has the duty to;

– publish in the gazette, two newspapers and on the company’s website, and

– give notice to the creditors that the moratorium has taken effect

– and lodge a copy of the notice with the Registrar for registration

It is an offence if the supervisor does not comply with this requirement

 

Section 648- the provisional supervisor has the duty to give a notification of the end of a moratorium i.e. by publishing once in the gazette and at least once in at least two newspapers in the area and notifying the creditors and lodging a copy of the notice with the Registrar for registration

Effect of a moratorium

Section 649- if a moratorium is in effect;

– an application for liquidation of the company may not be made

– a meeting of the company may be convened or requisitioned only with the consent of the provisional supervisor or the court

– a resolution for liquidation of the company has no effect

– the court may not make an order for liquidation of the company

– an application for an administrator to be appoints may not be made

  an administrator of the company may not be appointed

– a landlord or other person to whom rent is payable may exercise the right of forfeiture only with the approval of the court (with such conditions as it imposes)

– steps taken to enforce security over the company’s property or repossession of goods in company’s possession may only be made with the approval of the court (with such conditions as it imposes)

 

Section 651- security given by a company at a time when the moratorium has effect can be enforced only if reasonable grounds exist for believing the enforcement of the security would benefit the company

 

Section 652- a company entering into a transaction without following the provisions below doesn’t render the transaction void or make it unenforceable against the company;

– a company in moratorium shall ensure every invoice, correspondence or website from the company contains provisional supervisor’s name and statement that there is a moratorium

– a company in moratorium may not obtain credit exceeding twenty five thousand shillings from a person not informed of the moratorium (otherwise it is an offence by the officer of the company)

– a company in moratorium may only dispose of its property only if it will benefit the company and it has been approved by the supervisor or moratorium committee (otherwise it is an offence by officer of the company)

– may only pay off debts and other liabilities if it is good for the company and approved by supervisor/ moratorium committee

 

Kenyan law has now adopted the Global Standards- UN Convention on Cross Border Insolvency***

– cross border insolvency provides some unique issues

– brings about the principle of reciprocity in cross border insolvency

 

 


COMMERCIAL AGREEMENTS

Objectives

·       Nature of commercial agreements

·       Rationale

·       Roles of the advisor

·       Rules of construction

 

Specific Types

·       M&A

·       Joint venture

·       IP agreements

·       International commercial agreements

·       Construction contracts

·       Major service

 

Nature– any exchange of goods and services for monetary value- commercial

Distinguish from moral,  religious etc.

 

Significance of good drafting

·       Commercial relationships need certainty especially of obligations

·       Saves money

·       Material adverse change; grounds to be excused from a contract

·       Enables easy implementing of the agreement

·       Ensures the agreement is valid i.e. complying with all requirements under the Law of Contract Act and all other applicable laws have been complied with

·       Unlikely to be contested

 

Requirements for good drafting

·       Use of good language

·       Understanding intention of the parties

·       Structure in substance and form e.g. every main clause title must be capitalized and underlined

·       Use of precedence;

– helps in drafting

– ensure you amend it to fit your specific agreement

 

Rules of Construction

1.     Strict construction rule

The courts will give effect to the expressed intention of the parties. You will not be excused on account of hardship, bad bargain, unconscionable contracts etc.

Exceptions;

Ø  Unless contract can be set aside on grounds of invalidity on legal grounds e.g. incapacity

Ø  Contracts regulated by statute, the court will use the intention/requirements of the statute e.g. Consumer Protection Act, Motor Vehicle Repair Acts, Contracts governed by the Banking Act, Insurance Act

 

2.     Obligations to be confined within the agreement

Impermissible to make references to other documents or use oral terms to vary written terms. Interpreted according to provisions in the contract.

 

3.     Contra preferentum rule

The contract will be interpreted, if there is any ambiguity causing hardship, as against the party which drafted it.

 

4.     Time is not of the essence unless expressly stated

If time is of the essence, you must state it in the contract.

 

Lawyers must get professional indemnity to be protected against suits arising from drafting issues/ mistakes.

 

Common considerations in construction of contracts

– does the other party have authority to contract?

– what exactly is the commitment in the contract?

– what happens if things do not work out?

– does the contract meet the legal requirements?

 

Drafting tips:

a)     Have a drafting plan

Enables you to identify the things you must include e.g. who are the parties?

Think about the approvals and consents required for the validity and effectiveness of the contract

In planning, consider what could go wrong e.g. in a construction contracting; it could be delays, etc.

 

b)     Identify and list the tools aiding you in drafting

They include statute, regulations, texts, online resources, precedence

c)     Drafting process

Any well-drafted agreement, must include the following steps;

-generation of the first draft

-internal review process of the draft

-external review including mark ups

-revised draft

– client should be given opportunity to review and explain all terms of the contract to the client to his satisfaction

-final draft

 

Fonts

All contracts must be in the standard professional font i.e. Times New Roman, Calibri, Ariel and Book Antiqua.

Every contract drafted must have consistent font all through; exceptions are the schedules and annexes.

Arrange your paragraphs.

 

Your contract must be complete in all material respects- factually and legally. This means it must contain all essential clauses that make it valid and binding including;

ü  Correct description of parties showing their capacity and authority to contract

ü  Recital clause- shows the parties intention to be bound

ü  Contract must provide for the subject matter and its purpose

ü  Consideration clause

ü  Performance of obligations by both parties

ü  What amounts to breach

ü  Remedies

ü  Properly and appropriately executed; for those required to be under seal, they must be sealed

ü  Attestation, if necessary

 

Title- you can use contract or agreement.

 

Draw a consideration clause in the following scenario

Juma, a recent graduate, from university has been asked by Mr Ahmed, his uncle, to act as a supervisor in his electronic shop. The agreement between them provides that if Juma can increase sales by 50% that year, the uncle will give him 20% shareholding in the electronic shop.

 

Consideration

Mr Ahmed, the employer, agrees to allocate 20% of the total ownership shareholding in the electronics shop to Mr Juma, the employee, in consideration of Mr Juma increasing the current sales rate by 20% in the year 2018.

 

a) Service Contracts

Include the following;

– consultancy agreements

– agreement for provision of services e.g. agreement for provision of technical services, engineering services, architectural services

– training and apprenticeship contracts

 

b) Business Organisation Contracts

Relate to business structures;

– shareholder agreement

– share purchase agreements

– transfer of business agreements

– agreements relating to Mergers and/or Acquisitions

– transfer of assets agreements

– partnership agreements

– joint venture agreements

 

c) Construction contracts

– engineering contracts

– works and services agreements

– EPC

 

d) IP Contracts

– transfer agreements

– assignment agreements

– license agreements

– other related agreements

 

Agreements relating to Mergers and Acquisitions

M&A transactions are implemented in a variety of ways;

a) by transfer and acquisition of shares

b) by a swap between different entities 

c) by transfer of assets and liabilities

d) by a combination of any/ all of the three above

 

In the title, it could be written as follows;

“Agreement with respect to acquisition of 67.75% of ordinary shares in UAP by Old Mutual Kenya Limited”                                              

“Agreement with respect to transfer of long term life business from UAP to Old Mutual Kenya Limited”

“Agreement with respect to transfer of shares to UAP by Old Mutual”

How the agreement is structured informs how it is titled and how it is drafted.

 

In M&A, there is the main agreement supported by ancillary agreements.

The agreement could be on acquisition of 67.5% shares; but supported by agreement on policies, take up of liabilities etc.

As a lawyer, you need to be clear on the various structuring options.

An approach is made from either side by officers, or directors of the need to carry out the M&A. After the parties agree on the M&A, the need to agree on the structure of the M&A through a Heads of Terms Agreement/ Term Sheet.

 

Consideration in the Term Sheet

Should be driven by what the parties want/ require

i) legal and regulatory requirements

ii) relative strengths and business positions or market positions of the companies involved i.e. business reasons

iii) operational decisions e.g. how to restructure to achieve operational synergy

iv) financial considerations i.e. what is the cheapest, most efficient way to carry out the M&A; other costs such as charges, taxes and fees

v) viability in implementation of the structure

 

The first step is putting together the Heads of Terms Agreement.

 

The second step is to ensure the deal is viable, therefore you must carry out a proper due diligence process.

This will include;

ü  Financial

ü  Operational/ technical

ü  Legal

Due diligence depends on the type of agreement. As lawyers, we only carry out legal due diligence, which focuses on what can and cannot be done under the legal regime.

 

Next, consider any potential legal problems that will hinder the transaction.

Identify the approvals and consents under the processes required in the transaction.

 

Things to consider in due diligence

 

Disclosure

 

 

Parties to an M&A Term Agreement:

·       The vendor/the parent company of the vendor- the person who has legal title or authority to transfer the assets

·       The acquirer- Special Purpose Vehicle formed by the parent company wanting to acquire stake; entity that acquires shares under considerations

·       The target company- the company whose shares are being transferred; obligations to implement the deed

·       The parent company of the acquirer- to act as guarantor of the obligation to acquire

 

Example; UAP Assurance and Old Mutual company

 

The deal will involve the vendors, acquirers, target company and parent of acquirer

 

Due Diligence

Prepare a checklist of the required documents and send to the other party

The other party sends information required for the purposes of due diligence

It can be done in the following ways;

·       Establish a physical database

·       Establish an electronic database

·       Access to third party sources

 

The outcome of the due diligence review will be DD report. It must answer;

– can the transaction be done?

– what are the legal issues identified?

– what is the process of carrying out the transaction, if possible?

 

A DD must be targeted.

The outcome of a DD report is to;

·       Finalise on the structure of the deal

·        

 

 

The next step is drafting of the Merger Agrement. The draft can be prepared by either party.

Notification;

·       to inform shareholders and get approval from shareholders

·       to the competition authority to acquire an approval or exemption

 

Provisions in agreement to merge:

 

a)     You must consider a conditions precedent. These are the terms to be performed before certain obligations can be effective; include;

– getting approval from shareholders and directors

– approval from the relevant regulators

– approval from the market regulator i.e. competition authority

 

b)     Provision transactions structure

c)     Provision on consideration/ price

The price can be provided through a formula on how it can be determined; e.g. 25/- per share for up to 50M ordinary shares

d)     Provision on completion mechanisms

Location on where completion will be done.

1st stage- acquisition of shares

2nd stage- transfer of business

3rd stage- branding e.g. when the companies merge what will they be known as

4thstage-  liabilities and transfer

 

e)     Representation/ Warranties/ Indemnities

Mergers are long term thus the parties must have representations.

Remedied by the indemnity clause

Varied/ limited by the disclosure letter

Disclosure letter- presented by the vendors/ acquirer to provide certain specific exclusions to the merger scheme agreement

As person receiving ..

A disclosure letter is not mandatory unless acting for the vendor

 

f)      Confidentiality clause

Should be iron clad and reasonable

Publicity can only be allowed if it is allowed by parties

 

g)     General clauses

– Notice

– Governing law

– ADR

– survival

 

h)     Execution by all parties

 

The first six clauses differentiate most mergers and acquisitions from other contracts.

 


 

JOINT VENTURE AGREEMENTS

Joint venture is a contractual agreement involving two or more parties, involving body corporates for a specific objective over a specified certain period of time

Joint ventures enable parties to achieve synergies

 

Undertake the projects (capital and expertise), joint ventures are common

Tech innovations, legal compliance, tax

 

Key factors in a joint venture

1.     Management

2.     Role of the parties

3.     Sharing of liabilities

4.     Ability of the joint venture to achieve its objectives

5.     Compliance with the law e.g. tax

6.     Revenue share

7.     Questions as to IP and law that will be dealt with

8.     Governing law

9.     Dispute resolution

10.  Termination and consequences thereof

11.  Risk management i.e. death, liquidation etc.

12.  Confidentiality

13.  Flexibilities in the joint venture

14.  Interest of the parties

15.  Timeframe for implementation

16.  Consequences of breach

 

A joint venture must;

·       Be able to properly identify the parties

It can be in many forms;

*Special Purpose Vehicle (SPV)

*Partnership

*An unincorporated contractual arrangement

 

 

CLAUSES

a)     Parties-

b)     Describe the business/ project

c)     Timelines

d)     Contribution of the parties

e)     Governance and Management

f)      The term- depends on implementation plan

g)     Accounting and reporting- how are they to be kept; what period (e.g. annually or quarterly) and how will they be made available

h)     Intellectual property provisions-

      i.         IP that parties come with- the general rule (that can be varied) is that it remains as their separate properties during and after the JV

     ii.         IP that is produced in the course of the joint venture- it is jointly owned

   iii.         IP that parties have been developed as a consequence of the JV but separately by the parties- divide it in a way the parties will be agreeable to

 

i)      Confidentiality- all info material to and disclosed due to the agreement, must not remain confidential

j)      Governing law

k)     Notices etc.

 

 

INTERNATIONAL COMMERCIAL AGREEMENTS

What makes an agreement international?

Contract entered into by parties who are subject to different jurisdictions/ governing laws.

 

Concerns

·       Language

·       Currency

·       Mode of payment

·       Delivery

·       Standards, quality

·       Indemnification

 

International trade;

 

Treaties, Agreements, Protocols have been developed to provide guidance on the interpretation, negotiation and development of international contracts. They must be considered when developing international contracts.

Developed by OECD, EU and other regional bodies, UN, International Chamber of Commerce etc.

 

Incoterms, developed by ICC e.g. Cost Insurance and Freight

 

International custom has also developed e.g. in maritime trade

 

National laws are also taken into account.

 

Provisions:

a)     Identify the parties

b)     Subject matter- be very specific on the competing jurisdictions involved e.g. this contract of purchase of 600 new built laptops currently located in the Peoples Republic of China and it is intended that this contract subject matter be shipped and delivered to the Republic of Kenya

c)     Incorporated terms e.g. “this contract incorporates the following provisions of incoterms…”

d)     Performance- on delivery and how to allocate risks on performance e.g. risk will not pass until there is delivery at the port

e)     Standards and specifications

      i.         Can be expressly provided in the schedule to the agreement, you can provide the s&s of the subject matter of the contract

     ii.         Can provide to adopt a given standard developed by a respectable international body e.g. ISO; in engineering, there standards can be gotten from AREMA

   iii.         Verification of those standards i.e. are they being complied with? E.g. in Kenya, if you are importing a vehicle you must comply with certain standards provided by the government and pre- import inspections are carried out

f)      Payment e.g. international documentary credit as a payment method to finance where parties are from different jurisdictions such as LC; a bank in one jurisdiction will give another bank in another jurisdictionrtr a letter of credit stating that if the good is delivered, the money will be delivered to them.

      i.         Currency to be used for payment

     ii.         Price

   iii.         Foreign exchange fluctuations

    iv.         Interest

     v.         Penalties around payment

g)     Governing law- should be law that contract has the greatest nexus to; but parties are at liberty to choose the law; the substantive law and procedural law may differ

h)     Dispute resolution mechanisms i.e. Forum; focus on ADR especially international arbitration

i)      Should meet local requirements to be valid- other standard provisions e.g. proper execution etc.

 

 

CONSTRUCTION CONTRACTS

They include;

·       Standard building and works contracts

·       Road construction

·       Bridge, railways, airport construction

·       Facility maintenance

·       Construction or development of factories, power plants

·       Installation contracts

·       Extraction of natural resources

·       Among others

Construction contracts come up in different forms e.g. EPC, Operation and Maintenance Contracts, among others.

 

 

 

Concerns that must be provided for:

-Engineering, Procuring and Construction Contracts (EPC); any complex construction includes different expertise; from design, procurement to actual construction, inspection, commissioning (certifying the asset is ready for use)

-Financing; must think about all the above

Depending on the size, nature or type of construction, the financing and job may be done by one person or many.

-It may be necessary to appoint independent experts

-Bill of Quantities to be determined; on the items to be procured

-All approvals to be acquired for building must be acquired e.g. site approvals, safety or job approvals, contractor approvals, National Construction Authority approval

-Cost provisions

-Quality of procured items, labour and output

-Safety- during and after construction

-Delay- the cost of construction delays is massive

-Completion worry; that the job will not be finished

-Force majeure e.g. legislative, economic or regulatory changes- the condition must be that the conditions are material and cause foreseeable hardship

-Operation and maintenance i.e. how to ensure that it works; who shall operate the building etc.

-Project planning e.g. in relation to timing of shipments etc.

-Structural defects and how to deal with them, whether latent or patent

-Breach and termination

 

There are standard contract terms in construction e.g.- FIDIC- Federation of Engineers, among others.

These terms are adopted by construction contractors with minor amendments and variations.

 

Common Clauses

a)     Broad parties/ actors must all be provided for e.g. architect, engineer, contractor, owner, supervisor etc.

b)     Scope of contract must be clearly provided for

c)     Project timelines; specify the dates of all the phases

      i.         Pre construction phase- developing design, acquiring approvals

     ii.         Construction phase

   iii.         Commissioning and operation phase

    iv.         Defects liability phase, to test whether the construction was done correctly

All delays contemplated should be provided for.

d)     Variations- because construction periods are over a long time, there is need for mechanisms for variation due to occurrences that may not be foreseeable; who pays for the variation and what are the consequences (FIDIC has provisions)

e)     Payment clauses-

      i.         Price- total price? Does it include taxes? Does it include cost of hiring equipment?

     ii.         Currency- payment for materials procured locally should be in local currency; procurement abroad may be through foreign currency; provide for fluctuation in currency

   iii.         Mode of payment and frequency- can be milestone based, lump sum or a mixture of both

    iv.         Interest

 

f)      Dispute resolution on;

      i.         Technical disputes- will be resolved by the relevant expert i.e. expert determination

     ii.         Interpretation and implementation of the contract dispute- will go through mediation, then arbitration

g)     Performance bonds/ guarantees- to secure performance of the contractor; usually 10% of the contract price or milestone amount

h)     Liability and damages (liquidated damages)

i)      Defects Liability provisions

 

Look at a construction contract

 

 

 

 

 

INTELLECTUAL PROPERTY CONTRACTS

 

 

Companies rely on IP as assets than in physical assets.

Purpose of IP contracts- how to unlock value from IP

 

IP rights include;

– patents- new and inventive step

– industrial design- improvement on existing technology

– utility designs- ”

– copyright including software, painting, computer applications, tv shows etc.

– trademark including trade names and domain names

– traditional knowledge and cultural expression

– geographical indications

– business knowhow

 

Applicable Laws

Copyright Act

Trademark Act

Industrial Property Act

Traditional Knowledge

Trade Secrets Act

Constitution of Kenya

 

Not all IP needs to be registered e.g. copyright

 

All IP rights give proprietary rights to the holder. Meaning;

– the owner of an IPR has exclusive rights to economically exploit the IP

– the owner has rights to authorize use to other people

– to prevent others from distorting, or diluting your IPR

 

IP Contracts:

– License- Licensee has limited rights to use IPR over a limited time and pays a license fee in exchange

*Identify Parties

*Provide the scope- rights given

*Permitted use of the license

*Restrictions of use

*Term- how long

*Termination clauses- what happens when it comes to an end; what must you deliver?

 

– Assignment- IPR owner assigns his/her rights to a 3rd party for a specified period of time

During the assignment, the assignee may exercise all rights that the assignor has for a specified period of time e.g. the assignee may further license it

Even when assigning, it must be important to consider that there may be some permitted use, restrictions on use

*Term

*Consideration for assignment

*Reserved matters for assignor

*Termination and handover

 

– Transfer- sell or transfer all rights to the other party for a fee; it is like any other contract as it is transferred under consideration and the transferee assumes all rights and liabilities from the transferor

*there must be ironclad warranties and indemnities- transferor has actual valid, current and continuing rights to transfer; will not breach other obligations the IPR owner has

 

 

You must determine;

-When is either of the above methods applicable?

-Where will the IPR owner get more value?

-Draft the key clauses in each IPR contracts

 

 

Law Notes (Knowledge Tree ) 

Leave a Reply