The Mt Kenya Times 
By Jerameel Kevins Owuor Odhiambo
Corporate insolvency in Kenya represents a critical area of law that addresses the financial distress of companies unable to meet their obligations. Governed primarily by the Insolvency Act, 2015 (No. 18 of 2015), Kenya’s insolvency regime has shifted from a liquidation-centric approach to one emphasizing corporate rescue and restructuring. This transformation reflects a global trend toward viewing insolvency as an economic challenge rather than a moral failing, aiming to balance the interests of creditors, shareholders, and the company itself. The Act consolidates laws relating to the insolvency of both natural persons and incorporated or unincorporated entities, providing a harmonized framework for managing financial distress.
The Insolvency Act, 2015 defines insolvency under Section 384, stating that a company is insolvent if it cannot pay debts of at least KES 100,000 within 21 days of a written demand, if a court execution remains unsatisfied, or if the company’s liabilities exceed its assets. This provision establishes clear criteria for determining insolvency, enabling creditors, directors, or other stakeholders to initiate proceedings. The Act’s focus on early intervention encourages companies to address financial difficulties proactively, avoiding terminal liquidation where possible. This shift aligns with modern insolvency practices that prioritize business continuity over dissolution.
One of the key mechanisms under the Insolvency Act, 2015 is administration, outlined in Part VIII. Administration allows an insolvent company to be managed by a qualified insolvency practitioner, known as an administrator, with the goal of rescuing the business as a going concern or achieving a better outcome for creditors than liquidation would offer. The administrator takes control of the company’s affairs, suspending the powers of directors (Section 522), and works to restructure operations or negotiate with creditors. Notable cases, such as Athi River Mining (ARM) Cement, demonstrate administration’s potential to maintain operations, though outcomes vary depending on the company’s financial state.
Another significant provision is the Company Voluntary Arrangement (CVA) under Part IX of the Insolvency Act, 2015. A CVA enables a company to propose a debt repayment plan to creditors, overseen by an insolvency practitioner acting as a provisional supervisor. The proposal requires approval by a majority of creditors and company members (Section 625). If approved, it binds all creditors, providing a flexible alternative to liquidation. The process is private and avoids the publicity of bankruptcy, making it attractive for companies like Nakumatt Holdings, which attempted a recovery strategy under this framework.
Liquidation, while a last resort, remains a core component of Kenya’s insolvency framework, governed by Part VII of the Insolvency Act, 2015. Liquidation can be voluntary (members’ or creditors’ voluntary liquidation) or court-ordered (compulsory liquidation). Section 395 mandates that a special resolution be passed and published in the Kenya Gazette and newspapers for voluntary liquidation, after which the company ceases trading except for liquidation purposes. The High Court retains jurisdiction over compulsory liquidation, with applications permitted from creditors, directors, or the Attorney General (Section 424). Liquidation results in the company’s dissolution after asset distribution (Section 432).
The introduction of a pre-insolvency moratorium under the Business Laws (Amendment) (No. 2) Act, 2021 amending the Insolvency Act, 2015 marks a progressive step. Section 694A allows financially distressed companies to apply for a 30-day moratorium (extendable by another 30 days), during which creditors cannot enforce claims. This provision, overseen by a licensed insolvency practitioner (the monitor), encourages restructuring discussions without immediate creditor pressure. However, companies already in administration or liquidation are ineligible (Section 694B). This mechanism supports early intervention, enhancing Kenya’s business-friendly environment.
Insolvency practitioners play a pivotal role in Kenya’s insolvency regime, as outlined in Section 9 of the Insolvency Act, 2015. Practitioners, including liquidators, administrators, and bankruptcy trustees, must be authorized by the Official Receiver and meet educational and professional qualifications (Insolvency Regulations, 2016). Their role involves managing assets, ensuring fair creditor distributions, and facilitating rescue strategies. The Act’s emphasis on qualified professionals ensures accountability and expertise, though challenges remain due to unpublished regulations on practitioner qualifications.
Creditors’ rights are safeguarded under the Insolvency Act, 2015, particularly through provisions like Section 226 and Section 228, which outline options for secured creditors, such as surrendering their security or proving the balance after asset valuation. The Act also introduced the “prescribed part” under Section 422, reserving 20% of proceeds from floating charge assets for unsecured creditors, enhancing their recovery prospects. These measures balance the interests of secured and unsecured creditors, addressing historical inequities where unsecured creditors often recovered little.
Cross-border insolvency is addressed in the Fifth Schedule of the Insolvency Act, 2015, aligning with international best practices. It allows recognition of foreign insolvency proceedings, as seen in the case of Zarara Oil and Gas Company, where the Kenyan High Court recognized a Mauritian liquidator’s appointment. However, foreign liquidators must comply with local requirements, and asset transfers out of Kenya require court approval (Section 704). This framework supports global trade and investment while protecting local creditors.
Despite its advancements, Kenya’s insolvency regime faces challenges, including delays in litigation and gaps in regulation, such as the absence of pre-pack sale provisions. The Insolvency Act, 2015 has modernized corporate insolvency by prioritizing rescue over liquidation, but ongoing reforms are needed to address these gaps. Proposed amendments, stalled by the COVID-19 pandemic, aim to further align Kenya’s laws with global standards, enhancing its attractiveness for investment. As businesses navigate economic uncertainties, the Act provides a robust framework for managing insolvency while fostering corporate recovery.
The writer is a legal researcher and lawyer
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