KENYA Law and Practice Contributed by: Walid Khan, Ruth Wangui Rukwaro and Christina Wanjiku Wood, Africa Law Partners
7.2 Waterfall of Payments General Framework
proceedings, insolvency may take longer due to back- log and procedural issues. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency Statutory Rescue Mechanisms Statutory rescue mechanisms in Kenya are avail- able under the Companies Act and Insolvency Act. The most commonly used vehicles are schemes of arrangement and company voluntary arrangements, allowing a company to sit with creditors to plan the reconstruction of debt while remaining in business. These mechanisms require the consent of creditors and, on average, approval by the court for them to be effective. Schemes of Arrangement A scheme of arrangement is a settlement of a com- pany with its creditors or shareholders and is gen- erally used to restructure financial obligations and avoid insolvency. It must be approved by a majority in number who hold over 75% in value of the credi- tors or class of creditors who vote. The scheme, when approved by the court, has binding effect on all con- A company voluntary arrangement allows directors to submit a payment or restructuring proposal to credi- tors with the assistance of an insolvency practitioner. It is less court-oriented and more accommodative than a scheme of arrangement, though court involve- ment can be required where there are disagreements amongst creditors. It may be employed to provide breathing space for viable firms facing temporary finance issues. 7.5 Risk Areas for Lenders At the initiation of insolvency proceedings, a mora- torium automatically prohibits lenders from enforcing security or pursuing guarantors immediately without a court order. The delay is significant, especially where the insolvency practitioner prioritises stabilising the business or discussion with other creditors. For the lenders, the delay reduces the ability for immediate action to preserve asset value. cerned creditors, including objectors. Company Voluntary Arrangements
The Kenyan Insolvency Act lays down a clear order of distribution during the winding-up of a company. This order aims to satisfy the commercial certainty and the protection of employees and public revenues. Credi- tor repayment is therefore carried out in strict order of priority with some classes far ahead of others. Insolvency Costs and Expenses The first payments are to fund the insolvency itself. These are the payment of the insolvency practitioner’s fee and other costs incurred in managing and pro- tecting the company’s assets. Without the payment of these charges, the insolvency process cannot operate effectively. Preferential Creditors After insolvency expenses, the preferential creditors are paid. They include employees for wages and out- standing benefits, within the confines of legislation, and the Kenya Revenue Authority for taxes. The law ensures that the government and employees are taken care of before creditors receive their money. Secured Creditors Fixed charge creditors take priority over assets charged to them in a specific manner. Floating charge creditors are paid out of the remaining assets of the company but subsequent to preferential creditors. The priority is because fixed security has better legal rights compared to floating security. Unsecured Creditors and Shareholders Unsecured creditors rank below preferential and secured creditors, and usually recover only a partial amount of their claims. Shareholders rank lowest for distribution and only receive a return if all of the credi- tors are paid in full, which does not often occur in practice. 7.3 Length of Insolvency Process and Recoveries Insolvency processes and recoveries in Kenya vary in length depending on different factors, including the amount of time required to ascertain creditors, liabili- ties and assets available for distribution. Additionally, given that the court plays a central role in insolvency
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