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Muriuki Muriungi*

Putting New Wine in New Wine Skins: Reforming Insolvency Law in Kenya.

Critically examine the salient features, innovations, and reforms relating to individual insolvency

as developed and cascaded progressively through the Kenyan Insolvency Bills 2008, 2010, 2012

and finally as enshrined in the current Insolvency Bill 2014 as compared to, and or, contrasted

with, the still applicable, Bankruptcy Act, Cap 53 Laws of Kenya.

Introduction

The law governing the insolvency regime in respect of individuals in Kenya has been the

Bankruptcy Act, Cap 53 Laws of Kenya which was enacted in the year 1938 and is a carbon

copy of the English statute of the time. Just like any other law that Kenya inherited from its

colonial master-Britain, the Bankruptcy Act has continued to govern the bankruptcy legal regime

and has ostensibly defied change for long. Indeed, some commentators have come to brand the

Bankruptcy Act as a moribund and archaic law that is dying for change for being out of sync

with modern day conditions as well as other insolvency laws from comparative jurisdictions.

There has been a clamour for a reform of business laws in Kenya, including the Bankruptcy Act,

with a view to modernizing and simplifying the insolvency process which has been characterized

by heavily technical and bulky procedures. This renewed impetus for the reform of laws

governing business has been necessitated by the new objectives of government, to wit, the Vision

2030 as well as the Economic Recovery Strategy for Wealth and Employment Creation.

The envisaged changes to the bankruptcy law regime vide the new Insolvency Bills 2008,

2010, 2012, and currently 2014 which is hoped to be passed into law, is a demonstration of the

keen desire for reforms by key actors. It is also a testament of the inadequacies and weaknesses
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of the current Bankruptcy Act in terms of dealing with emerging issues in business. The reform

of the law as well as the creation of key institutions as provided for in the Bills is essential to the

creation of a good investment climate and acceleration of economic growth. Before examining

the salient features, innovations, and reforms envisaged by the Insolvency bills, it is important to

examine the processes that culminated in the development of these Bills. In the year 1992, a

Taskforce charged with the reviewing of laws relating to insolvency of companies and

partnerships made recommendations targeted at modernizing and simplifying the laws. The

Kenya Law Reform Commission was tasked by the then serving Attorney General Amos Wako,

to review this taskforce report and draft an insolvency law that addressed the concerns raised.

There was conducted a consultation among various stakeholders such as lawyers, bankers,

accountants, and other public sector agencies such as the Official Receiver. The Commission also

took into consideration the best practices as evidenced by legislative initiatives in jurisdictions

such as the United Kingdom, New Zealand, Australia, and Canada besides making study tours in

these countries to learn of the practices and policies of their insolvency legal regimes. The first

Insolvency Bill was concluded in the year 2008 and tabled in Parliament. Subsequent Bills were

drafted in the years 2010, 2012, and 2014 but are yet to get the sanction of Parliament. As shall

be evident in the ensuing discussion, most of the innovations and reforms were introduced in the

2008 Bill and subsequently cascaded in the other Bills with minor changes therein. This paper

conducts a thorough analysis of the Bills with a view to examining the changes and reforms

envisaged by the Bills over the years while making a contrast to, and a comparison with, the

current Bankruptcy Act.

Preamble
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The Preamble of the Insolvency Bill 2008 is to the effect that the Bill is an Act intended

to amend and consolidate the law relating to receiverships, insolvency, provisional supervision,

winding up and individual bankruptcy, to provide for corporate and individual insolvency, to

provide for rehabilitation of the insolvent debtors and for connected purposes. This preamble was

also retained in the Insolvency Bill 2010 in its entirety. A preamble basically sets out the

intention of the drafters and is a descriptive component of a statute. It merely serves as a useful

guide of ascertaining the intention of the law maker by detailing the objects, purpose, and scope

of a particular statute. To this extent, the preamble as provided for in these bills is a good guide

to ascertaining the scope, objects, and the purpose of the Bills and illuminates on the mischief

that the Bills intended to curb. It is however, instructive to note that a preamble is of no legal

effect over and beyond ascertaining the intention of the draftsman.1 It is especially useful in cases

where there is ambiguity of a statute because it avails both a constructional and a contextual role

in interpretation of a statute. Most of the reforms and innovations wrought by the Insolvency

Bills 2008 and 2010 can be easily gleaned from the preamble and include a consolidation of the

law relating to insolvency as well as the adoption a fresh start policy by way of providing for

rehabilitation of debtors. There is some shift in the Insolvency Bill 2012 in the preamble which

was carried in toto into the current Insolvency Bill 2014. The preamble reads, An Act of

Parliament to amend and consolidate the law relating to natural persons and incorporated and

unincorporated bodies; to provide for and regulate the bankruptcy of natural persons; to provide

alternative procedures that will enable the affairs of insolvent natural persons to be managed

1 If any doubt arises, from the terms employed in the legislature it has always been held a safe
means of collecting the intention to call in aid the ground and cause in making the statute and to
have recourse to the preambleto open the minds of the makers of the Act and the mischief
which they intended to redress. As set out by Tindall, C. J. in Sussex Peerage Claim
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for the benefit of their creditors; to provide for the liquidation of incorporated and

unincorporated bodies(including ones that may be solvent); to provide as an alternative to

liquidation procedures that will enable the affairs of such of those bodies as become insolvent

to be administered for the benefit of their creditors; and to provide for related and incidental

matters. Notably, there is an addition to the preamble namely; the provision of alternative

procedures to bankruptcy in a bid to avoid insolvency proceedings and possibly assist in the

rescue of businesses. The emphasis of this provision in the preamble again demonstrates the keen

desire to rescue surviving businesses that have a chance for survival. In contrast, the Bankruptcy

Act barely reads in its preamble that it is an Act of Parliament relating to Bankruptcy.

Office of the Insolvency Practitioner

Besides the preamble, the Insolvency Bills had a major innovation through the creation of

the office of the Insolvency Practitioner in section 4, charged with the role of acting as a

liquidator, receiver, or administrator. The Bill provides the qualifications for individuals desiring

to act as Insolvency Practitioners who must apply to the Insolvency Practitioners Board. Most of

these provisions are encompassed in the Insolvency Bill 2010, 2012, and 2014 though this office

as well as its functions have been expanded and given more meaning. Section 5 of the 2008 Bill

provides that it is a criminal offence for a person who does not meet the qualifications set, to act

as an Insolvency Practitioner. The Insolvency Bill 2010 sets the penalty for this offence at a jail-

term of two years or a fine of Ksh. 100,000 or both. Notably, the Insolvency Bill 2014 provides

for a comparatively stiffer penalty for this offence of a fine of Ksh. 5 million. The increase in the

penalties afforded for this offence is to curb persons without qualifications from purporting to act

as Insolvency Practitioners. A keen look at the creation of this office as well as the Insolvency

Practitioners Board indicates that the Bill intends to have a profession regulating Insolvency
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Practitioners. It seeks to ensure adherence to certain minimum standards and thus prevent the

abuse of the profession as has happened in the past where persons acting as liquidators, receivers

and administrators have ended up misusing their positions to the detriment of debtors. The

regulation of the profession and the institution of a code of conduct is also informed by the need

to ensure that Insolvency Practitioners do not overcharge their fees for services against the

debtors, and then leaving them for dead. Clearly, this would be contrary to the intention of the

Bills which is basically, to rehabilitate the debtors, as far as possible. In contrast, this office of

the Insolvency Practitioner is conspicuously absent in the Bankruptcy Act and constitutes one of

the major innovations targeted at streamlining the insolvency legal regime.

Corporate and Individual Insolvency

Another major innovation of the Bills and as evident from the preamble, is the institution

of corporate insolvency in the Insolvency Bills. At the moment, the Bankruptcy Act only covers

bankruptcy proceedings with respect to individuals only. The law relating to winding up of

companies is governed by the Companies Act, Cap 486 Laws of Kenya, but which is also set to

be amended by the yet to be enacted Companies Bill. By attempting this, the Insolvency Bills

seek to not only rationalize, but also amend and consolidate the law relating to receivership and

insolvency for both individuals, corporate, and unincorporated bodies. This is a stark contrast to

the current regime where the law relating to insolvency is encompassed in multiple statutes

which make it difficult for insolvency practitioners. The harmonization brought by the Bills is

therefore laudable. Liquidation of Companies is contained in Part VI of the Insolvency Bill 2014

and replaces the word winding up with the term liquidation. Part VII provides for liquidation

of unregistered companies as does Part X of the Bill.

Alternatives to Bankruptcy
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In line with the purport of the Bills of rehabilitating debtors and rescuing businesses that

are in dire financial conditions, the Bills also brought in reforms by way of providing for

alternatives to bankruptcy. Section 13 of the 2008 Bill enumerated the alternatives to bankruptcy

namely: making a proposal to creditors on how he will settle the debts, entering a summary

installment order where he would pay the debts in installments, or entering the no asset

procedure where he states that he has no realizable assets. The no asset procedure and the

summary installment order are welcome additions by the Bills. The No Asset procedure allows a

debtor who has no realizable assets to state so to the court and his creditors, and thus be

discharged of his debts if at all they are between Ksh. 100,000 and not in excess of Ksh. 4

million. This provision is meant to ensure that a business is not dissolved owing to some small

debts and adopts the debt-forgiveness concept. Similarly, a debtor who is insolvent and faced

with financial problems may be allowed to settle his debts in monthly installments instead of

paying a one-off sum under the summary installment order. Crucially important is that this

provision has been cascaded progressively over the years and is still encompassed under section

14 of the Insolvency Bill 2014.

Adjudication

A distinction must also be made with respect to the adjudication procedure in the

Insolvency Bills as contrasted with the Bankruptcy Act. Section 14 of the 2008 and 2010 Bill

provides that adjudication occurs when the debtor is adjudged bankrupt through either the

application of the debtor himself, or the creditor. In contrast, the Bankruptcy Act provides that

the adjudication procedure begins with the presentation of the bankruptcy petition by either the

debtor or the creditor. Besides, there is a notable increase in the amount of debt that could give a

creditor a chance to present a bankruptcy petition in the Bills. Section 6 of the Bankruptcy Act
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capped the figure at a debt of over Ksh. 1,000. The figure is well understandable given that the

Act was enacted in the year 1938 when Ksh.1,000 was a substantial amount of money. However,

this figure is too small as to initiate bankruptcy proceedings of an individual in modern day

Kenya. Consequently, the Insolvency Bills at section 17 greatly enhances this figure to an

amount of Ksh. 50,000 and above. Further, under the acts of bankruptcy under section 20 of the

Insolvency Bills 2010, 2012, and 2014, states that there must be a judgment of Ksh.50, 000 and

above if creditors are to present a bankruptcy petition. This is a major reform from the current

Bankruptcy Act which provides at section 3(g) that, a judgment of any amount owing from a

debtor to a creditor could give rise to bankruptcy proceedings. The move to increase the figures

that could occasion bankruptcy proceedings is laudable as it will help in curbing the rampant

cases of abuse of the provision by creditors who use it to pursue small debts thus leading to the

bankruptcy of individuals and partnerships that would otherwise survive.

Official Receiver and Trustee in Bankruptcy

A minor innovation of the Insolvency Bill 2012 and 2014 in contrast to the earlier 2008

and 2010 Bills is the creation of divisions in the Bills which entail the various stages. An

examination of the Acts of Bankruptcy under the Act as well as the Bills over the years shows

only a slight difference. Overall, the acts of bankruptcy have been retained from section 3 of the

Act and into the Bills, though some of them have been merged in the Bills. Similarly, the

Insolvency Bills have retained the individual appointment of trustees in bankruptcy under Part V

of the Insolvency Bill 2014. Section 202 to 215 of the Insolvency Bill 2014 provides for the

office of the Official Receiver as well as the Trustee in Bankruptcy. It is important to note that

the Office of the Official Receiver has been somewhat changed by the bills by being given

bigger powers. For instance, the 2012 and the 2014 Bills under Part II (sections 4-11) gives him
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the power of receiving applications from persons interested in acting as Insolvency Practitioners.

Notably, this power was removed from the Insolvency Practitioners Board as encompassed in the

2008 and the 2010 Bills.

Public Examination of the Debtors

In addition, the Insolvency Bills provide for public examination of debtors just like the

Bankruptcy Act, albeit with slight differences. Public examination of the debtor serves to give

effect to one of the objectives of bankruptcy law as set out in section 3 of both the Bills and the

Act, namely to protect the interests of both the creditors and the public. The moment a debtor is

subjected to public examination, creditors as well as the trustee in bankruptcy are afforded the

chance to interrogate the debtor as regards his financial affairs so as to ascertain whether he was

fraudulent in his dealings and thus contributed to his own insolvency. This further aids the court

in determining whether such a debtor deserves any rehabilitation. It is worth mentioning that the

fresh start policy pursued by the Bills by way of rehabilitating the debtor is targeted at honest but

unfortunate debtors. Besides enabling the survival of individuals and businesses, it also helps in

safeguarding the fundamental dignity interests of such individuals. It is indeed because of this,

that bankruptcy law is not only regarded an economic legislation but also a social legislation.

Section 17 of the Bankruptcy Act provides for public examination of the debtor. It provides that

the evidence given by the debtor on oath during such examination can be used against him in

court proceedings. Under section 173 of the Insolvency Bill 2014, it is provided that a statement

made during public examination is not admissible in criminal proceedings against the debtor

save as in the prosecution of a bankruptcy offence. It is notable that section 172 of the Bill also

provides that there is no privilege against self-incrimination as is the case in criminal trials. The

rationale for such a provision is to prevent a fraudulent debtor from hiding behind the veneer of
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self-incrimination and thus escape the dragnet of the law. More so, whereas the Bankruptcy Act

allows for the presence of an advocate during public examination, such advocate is neither

allowed to answer questions put to the debtor nor address the court. In contrast, under section

174 of the Insolvency Bills 2014 as well as provided in the other Bills, a debtor may be

represented by an advocate and answers given by him do form part of the examination. It is

likely to be the case that the Bankruptcy Act as framed, intended to ensure that the debtor is able

to clearly shed light on his dealings without the assistance of an advocate. Nonetheless, the new

Bills must have been informed by the new constitutional dispensation which makes it a right to

be represented by an advocate. Further, it could be a response to the realization that some debtors

are so disturbed following the start of insolvency proceedings, that they may be unable to

properly account for their dealings and thus need representation.

Automatic Discharge of Debtors

Another major innovation of the Insolvency Bill 2010 which has been carried forward to

both the 2012 and the 2014 Bill is the provision for automatic discharge of debtors upon

adjudication. This means that insolvent debtors need not apply to the court for a discharge but are

automatically discharged after adjudication. Again, this is illustrative of the intention of the Bills

to give insolvent debtors a fresh start in life free from all liabilities in form of debts. Such a

provision was lacking in the Bankruptcy Act and a debtor had to make an application to the court

for such discharge. In this sense, the procedure has been simplified and this definitely bodes well

for the insolvency legal regime in Kenya in that it reduces the costs associated with the

application for discharge and other appurtenant costs thereto.

Cross-Border Insolvency and Schedules


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Further, there is provision for cross-border insolvency in section 463 of the Insolvency

Bill 2010 as well as the Fifth Schedule and has been carried forward to both the 2012 and the

2014 Bill in the Fifth Schedule. This provision, which is again notable for its absence in the

Bankruptcy Act, is informed by the globalization of trade and cross-border transactions that take

place. Consequently, it is common to find a foreigner intending to initiate insolvency

proceedings against an individual or a business or a national intending to file insolvency

proceedings against a foreign individual or corporation. As such, the reform brought about by

this provision is commendable as it is an awakening to the reality of modern day. This is because

it has the effect of boosting the confidence of investors by creating a good investment climate

that can only be good for the whole economy. It is also notable that there is some shift as regards

the Schedules from the 2008 Bill which was akin to the 2010 Bill. There is a shift in the 2012

Bill which is still retained in the current 2014 Bill. In summary, the Schedules consist of the

powers of a trustee in bankruptcy and those of the liquidator during liquidation, preferential

debts and powers of administrators as well as for cross-border insolvency. The Sixth Schedule of

the 2012 and the 2014 Bill provide for consequential amendment of various statutory enactments

such as the Advocates Act, the Land Act, the Land Registration Act among others, so that they

are in tandem with the new Insolvency Bills.

Conclusion

In conclusion, it may well be stated that the various changes, innovations, and reforms

initiated by the 2008 Insolvency Bills have in the main, cascaded through the years and are

reflected in the current 2014 Insolvency Bill albeit, with minor changes as demonstrated in this

paper. More importantly, they signal a major milestone from the current Bankruptcy Act and are

a response to the current modern day conditions aimed at ensuring business rescue and a
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simplification of the insolvency procedure. Over and above the changes noted, it is also the case

that there is a general modernization of the language from the one used in the Bankruptcy Act.

Finally, it is the contention of this paper that the changes envisaged by the Bills are long overdue

and therefore urge Parliament to buy no more time in ensuring that these changes come to

fruition.