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Putting the insolvency reforms in perspective

By Judy Muigai

Many countries have introduced insolvency reforms in the recent past, partly in an attempt to enhance their legal frameworks and partly to respond to exigencies stemming from the COVID-19 pandemic.  From a Kenyan perspective, amendments to insolvency laws have been made through recent Business Laws Amendment Acts but we also note that a draft Insolvency Amendment Bill, 2020 (Bill) was published on the BRS website, and contains some proposals that are worth pondering.

The Bill proposes to unshackle liquidators by providing that they do not require the approval of a liquidation committee or court when exercising specific powers including paying creditors, making a compromise with creditors or borrowing money for the beneficial realisation of the company’s assets.  The Bill also expressly provides that all powers of directors cease except so far as the liquidator or court sanctions their continuance.

Giving liquidators more autonomy in the performance of their function will likely make liquidations shorter and more efficient.  On the flip side however, this could also expose them to a higher risk of allegations from creditors that they have not acted in their best interests.  More empowered liquidators also need to be subject to greater monitoring by regulators and this may be why the Bill proposes to increase the penalty for failure by a liquidator to file accounts and returns five-fold from Kshs 200,000 to Kshs 1 million.

Turning to administration, the Bill is proposing some new controls.  For instance, an administrator may not dispose of property to any person connected with the debtor company without first obtaining the consent of creditors or court.  This change could be motivated by the desire to protect creditors from property sales to related parties on disadvantageous terms.  The change also shields administration from being abused to bypass normal corporate approval processes for sale of business and assets.

Another proposed change is that the Official Receiver (OR) should be served when a court is entertaining an application to extend the administrator’s term.  Under the proposed amendment, the OR is entitled to file a reply and make representations to court during such hearing.  This change is designed to prevent administrations from running for excessive periods of time to the disbenefit of creditors.

One proposal in the Bill that administrators would welcome is a higher threshold for challenging an administrator’s conduct of an administration.  Currently, a creditor can challenge an administrator’s conduct where it detrimentally affects that creditor, but the Bill proposes to replace this requirement to refer to conduct which unfairly harms the creditor.  This change recognises that there is a distinction between a negative result that is due to discrimination by the administrator and a negative result that arises despite the best efforts of the administrator to treat all creditors equitably.

When it comes to creditors, the Bill provides greater clarity regarding the treatment of claims.  For example, it clarifies that the office holder (administrator, liquidator or receiver) has to make provision for debts which are the subject of claims that are yet to be determined.  To avoid disrupting distributions to creditors, the Bill provides that a creditor is not entitled to disturb the payment of a dividend where the amount claimed is increased after the payment of a dividend or if the creditor did not prove for the debt before declaration of dividend.  This is a helpful change as it would prevent one creditor from holding back payments to the majority of creditors. 

Another proposed change that is useful to creditors is that if there is property which cannot be readily or advantageously sold by virtue of its peculiar nature or special circumstances, it can be divided among creditors.  This proposed change is a reflection of some of the challenges faced by insolvency practitioners in disposing of assets in depressed sectors or at a time when demand is sluggish or prices are dampened.

The Bill also contains amendments which would be on the regulator’s wish list.  For example, the Bill proposes that the DPP delegates its prosecutorial powers to the OR in relation to offences under Insolvency Act.  These changes would give the OR the teeth with which to pursue offenders under the Insolvency Act directly.  An alternative option given in the Bill is for the DPP to gazette the appointment of a special prosecutor. 

There is also a proposal to codify the code of ethics for insolvency practitioners by including them in a schedule to the Insolvency Act.  The OR’s ability to regulate insolvency practitioners would be strengthened if the professional and ethical principles to which they are subject are enshrined in statute. 

The Bill also proposes to plug one of the major gaps in the current insolvency laws by introducing an entire division on the subject of receiverships.  The proposed amendments clarify that the OR can be appointed as a receiver, which expands the pool of potential appointees.  The Bill also extends the powers of an administrator to an administrative receiver by deeming that those powers are incorporated into the instrument under which the receiver has been appointed.  Not surprisingly, the Bill proposes to restrict the term of appointment of a receiver to 12 months unless extended by a qualifying floating charge holder (typically a bank) for a maximum of six months or by the courts.  The Bill also places certain time-bound obligations on receivers such as the requirement to issue reports to creditors within three months and to lodge accounts after 12 months of appointment etc.  In the absence of these types of provisions, a receiver’s responsibilities are determined by the party who appointed them rather than the regulator.

One other issue that caught our attention in the Bill is that it refines some provisions relating to the discretion of the courts.  For example, the Bill provides that a liquidation order may not be refused solely on the ground that the debtor company’s assets are subject to a security that is equal in value to or in excess of those assets.  This provision is broader than the current form which refers only to a mortgage and not any other type of security.   The Bill also states that the applicant for an injunction against the appointment of an administrator must deposit security and the provision lists the factors that the courts should consider when determining the appropriate quantum eg whether there is likelihood of substantial loss to the debtor or applicant and the value of the security under which the administrator is appointed.  Such legislative amendments provide clearer parameters for the courts to apply when weighing the competing prayers presented by creditors and other stakeholders.

Kenya is not alone in contemplating far-reaching insolvency reforms.  We note that Rwanda introduced new laws relating to insolvency in December 2021 which contain some progressive provisions such as those on insolvency of partnerships and business rescue finance which are worth perusing on the path to improving our insolvency regime.

The article was featured in the Business Daily on 31 May 2022 and can be accessed here