KENYA Law and Practice Contributed by: Noella Lubano, Paul Kamara, Kateline Mang’ich and Anne Cheloti, Oraro & Company Advocates
• Third priority – tax obligations incurred by the com - pany under the Income Tax Act and the Customs and Excise Act. These claims are paid before the secured creditors are paid. Thereafter, any remaining amounts are paid out to the unsecured creditors or non-priority creditors, with the exception of the instance of administration, where 20% of the company’s net assets are set aside for the satisfaction of unsecured debts. 2.3 Secured Creditors Debentures Debentures are contractual instruments between a lender and borrower, acknowledging the existence of a debt. In Kenya, they may include debenture stock, bonds or any other securities of the company, whether or not constituting a charge on the company’s assets for the advanced facilities. Debentures are catego - rised into three types: • floating debentures – these are securities over a group or all of the assets of the company, which crystallise and attach on the assets on the occur - rence of a specific event, provided for within the debenture; • fixed debentures – this is a security issued to a lender over the company’s identified and speci - fied movable property or the assets of a third-party guarantor; and • fixed and floating debentures – this is a security over both the fixed and movable assets of a com - pany, usually preferred by most creditors due to the adequacy of the securities. Charges These are instruments pursuant to which a lender is granted a right of sale over an immoveable asset upon a borrower’s default. The title to the asset remains with the borrower, but they cannot deal with the asset without the lender’s consent. Assignment Companies may assign rights over immovable prop - erty as security for facilities, including but not limited to the assignment of rent.
In addition, companies may use their movable prop - erty as security through the Movable Property Security Rights Act, 2017 (MPSR Act), which allows for the use of movable assets such as a chattel mortgage, credit purchase transaction, credit sale agreement, floating and fixed charge, pledge, trust indenture, trust receipt, financial lease, receivables and any other transaction that secures payment or performance of an obligation (Section 4). Under Part II of the MPSR Act, a security right needs to be created and registered with the reg - istrar of companies. If a creditor is apprehensive that a company is in the process of dissipating its assets to obstruct any judg - ment or is moving the assets out of the court’s juris - diction, said creditor may apply for an injunction to stop any dealings in the assets or to attach the prop - erty of said company (Order 39 Rule 5 and Order 40 of the Civil Procedure Rules). Retention of Title 2.4 Unsecured Creditors Pre-Judgment Attachments An unpaid seller in possession of goods sold to an insolvent company may retain possession of such goods until payment or tender of the price (Section 41 of the Sale of Goods Act). Furthermore, an unsecured creditor may exercise lien and ownership over the hire purchase goods until payment of the hire purchase price in full, by way of a hire-purchase agreement (Section 8 (1)(e) of the Hire Purchase Act). Set-Off See 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation . 3. Out-of-Court Restructuring 3.1 Out-of-Court Restructuring Process Requirement for Mandatory Consensual Restructuring Negotiations While Article 159 of the Constitution of Kenya encour - ages the use of alternative dispute resolution, there is no law requiring lenders to engage in restructuring negotiations before commencing insolvency proceed - ings. The borrowers’ and lenders’ rights are ordinar - ily crystallised in statute and contracts/facility letters.
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