1.0 What is insolvency?
An individual is insolvent if he/she is unable to discharge his or her debts as they fall due.
A company is insolvent if it does not have enough assets to cover its debts, that is, the value of its assets is less than the value of its liabilities, or if it is unable to pay its debts as they fall due. Generally, put, therefore, insolvency is the inability to pay debts. Insolvency in Kenya is governed by the provisions of the Insolvency Act of 2015.
There are several procedures that are provided under the law once an individual or a company goes through insolvency. Sometimes the procedures enable the individual or the company to return to solvency. This article explores the procedures available to an individual who has unfortunately found himself or herself in debt.
2.0 Insolvency of Natural Persons
The meaning of a natural person is a living human being as distinguished from a company or a corporation created by law. The term also denotes a sole proprietor or an individual as understood in common parlance.
The Insolvency Act avails four different types of insolvency procedures available to the individual depending on their circumstances. These are:
· Bankruptcy
· Individual Voluntary Arrangement
· No-Asset Procedure
· Summary Installment Order
2.1 Bankruptcy
Bankruptcy is a legal process where the debtor is declared as being unable to pay his debts. The affairs of the debtor (i.e., debtor’s assets and liabilities) are then placed before a bankruptcy trustee in the interests of his creditors generally. The bankruptcy trustee will either be the Official Receiver or any Insolvency Practitioner who is a professional licensed to practice insolvency. Bankruptcy proceedings can be initiated by a creditor or by the debtor himself. The process is commenced by the debtor or creditor filing a petition for bankruptcy. The petition is accompanied by an affidavit, a statement of financial position and an application for the court to appoint a suitable trustee over the debtor’s estate. In a bankruptcy, the bankrupt loses any rights to his property apart from his personal effects and tools of trade.
The bankruptcy process is meant to protect genuine people who have unfortunately found themselves in debt. A bankruptcy order bars creditors from harassing the debtor and intermeddling with his properties. A bankruptcy order can be lifted if the debtor pays off his debts. The bankrupt will automatically be discharged from bankruptcy after three years whether the debt is paid or not. Once discharged, the bankrupt is released from his bankrupt debts with some exceptions.
2.2 Individual Voluntary Arrangement
The Individual Voluntary Arrangement is one of the three alternatives to bankruptcy, the other two being the No-Asset Procedure and the summary installment order which are discussed briefly in the following paragraphs. It is a less formal procedure, is more flexible and it varies on a case to case basis depending on the nature of the proposal. An individual voluntary agreement cannot affect the rights of a secured creditor or preferential creditor unless they consent to it.
Under ordinary circumstances, the debtor makes a proposal with the assistance of a licensed insolvency practitioner. An application is then made to court for the court to issue an interim order. The court may at this point stay any other legal procedures against the debtor and/or his property. The Insolvency Practitioner must prepare a report to the court on the proposal. If the report is positive, then the court will allow the insolvency practitioner to convene a meeting of creditors. If the report is adverse, then the interim order ceases.
A creditors meeting is thereafter held which considers the proposal and the report of the creditors. The proposal is successful if accepted by 75% of the creditors in value of the debt held at a meeting. The creditors also appoint the Supervisor who implements the proposal and reports to the court.
The IVA is a fairly flexible procedure, without publicity unlike bankruptcy. It also carries less social stigma associated with bankruptcy. It may also be less costly to administer and therefore likely to increase returns to creditors. A successful voluntary agreement binds all creditors regardless of whether they voted for it or not.
2.3 No-Asset Procedure
No-Asset Procedure is an arrangement which applies when a debtor has no realizable assets to pay off the debt. The procedure is applicable where the debt is more than Kshs. 100,000/- and less than Kshs. 4,000,000/-. The procedure offers similar protection but which is not identical to bankruptcy. It allows the debtor to sort out his/her financial affairs and get back on his feet without entering formal bankruptcy.
Once a debtor is admitted under this procedure, he/she cannot take up new debt during the period of admission. Additionally, the debtor is obligated to pay alimony, child maintenance and education loans for a dependent child or step child. The No-Asset Procedure is, however, not available to a person who has been previously declared bankrupt or admitted to the same procedure.
A debtor is considered admitted to the No-Asset when the Official Receiver sends out the notices in the prescribed form. The admission is also publicized in the Kenya Gazette. Once admitted to this procedure, the creditors are barred from taking any steps to enforce the debts other than the ones contemplated above.
2.4 Summary Installment Orders
A summary installment order is an order from the Official Receiver directing the debtor to pay his debts in full and/or installments to an extent the Official Receiver considers practicable and depending on the peculiar circumstances of each case. A supervisor who is an insolvency practitioner oversees the process. The Official Receiver makes the order upon the application of the debtor or creditor and with the consent of the debtor. Currently the threshold of debt that is prescribed under this procedure is Kshs 500,000/-. Upon approval of the proposal, the debtor is required to pay off his debts within three years or within 5 years if agreed with the supervisor.
3.0 Company Liquidation process
Liquidation as an insolvency procedure for a corporate entity undergoing financial hardship
A company is defined under the Insolvency Act, 2015 to include an unincorporated entity. There are a number of reasons why a company might become insolvent; the most common reasons being; loss of market; when companies don’t adapt to the changing or shrinking marketplace or when the company’s services has been overtaken by technology, lawsuits, management failures, inadequate skills, fraud, loss of finance, excessive overheads, expansion etc. The Insolvency Act imposes criminal liability on the directors of a company that continues to trade knowing that the company is insolvent.
In Kenya, the directors and/or shareholders are able to initiate several forms of insolvency processes if they believe the company is about to become insolvent. Prior to the year 2015 liquidation was the only option available for a company undergoing insolvency. The Insolvency Act, 2015 was then enacted to provide various alternatives in an attempt to rescue the business. Once the directors of a company recognize the company as being insolvent or likely to become insolvent, they can explore various options available to the company. These are:
– Liquidation
– Administration
– Company Voluntary arrangement
– Administrative receivership
In this second part of the article, we will look at the process of liquidation in detail;
3.1 Liquidation
Liquidation is a terminal process for any company. It marks the end of a company’s business. A liquidator is appointed to collect into the assets of the company, turn them into cash and distribute the proceeds to the creditors in a defined order of priority. In most instances the process of liquidation is irreversible and the company will never trade again There are two main forms of liquidation to wit;
1. Compulsory Liquidation
2. Voluntary Liquidation
3. Compulsory Liquidation
Compulsory liquidation is also referred to as liquidation by the court. In this type of liquidation, a petition is made to court and if granted an order is made to liquidate the company. This procedure commences when either the company itself, creditors, directors, shareholders, administrator, the attorney general or a provisional liquidator files a petition in court to liquidate a company. There are many reasons for making a liquidation order, the most common being that the company is insolvent. Insolvency will usually be established by failure of the company to comply with a statutory demand requiring the company to pay what is owed within 21 days, or by an execution against the company’s assets in order to fulfill a judgment that remains unsatisfied. The Attorney General may also petition to liquidate a company on the grounds of public interest.
Once the court grants the petition, a liquidation order is made and a liquidator is appointed. The liquidator will either be the Official Receiver or an insolvency practitioner. The liquidator will collect into the assets of the company and distribute to the creditors. If there is a surplus, it will be distributed to the shareholders. Thereafter, the liquidator will apply to have the company struck off from the register of companies. The process of striking off the company is commenced by the registrar upon receiving an application from the liquidator. A notice is placed in the Kenya Gazette inviting objections to the strike off. If no objection is received within 3 months, the company is deemed dissolved. Dissolution formally marks the end of the company.
3.3. Voluntary Liquidation
In voluntary liquidations, members resolve to have the company liquidated. The process will be a members’ voluntary liquidation if the company’s directors make a statutory declaration that the company can pay its debts within a year, otherwise it will be a creditors’ voluntary liquidation.
3.3.1 Members Voluntary Liquidation
This procedure is used for a solvent company. The company is still under the control of the shareholders, who resolve to liquidate and appoint a liquidator. There are many reasons why a solvent company could be closed. The company could have finished the objective for which it was formed; owners of the company may wish to close down the company and retire; a subsidiary which has outlived its usefulness may be closed; directors of a company may wish to close the company and free up funds or relocate.
The directors of the company swear a declaration within 5 weeks preceding the resolution to liquidate. The declaration is accompanied by a statement of assets and liabilities with a statement that all the creditors will be paid within 12 months. A shareholders meeting will then be convened within 21 days to pass the resolution to liquidate. A liquidator is often appointed with the resolution to liquidate. The liquidator will then proceed to realize the assets, pay creditors and distribute ay surplus to members, hold a final meeting of creditors and eventually apply for dissolution of the company.
3.3.2 Creditors Voluntary Liquidation
A creditors’ voluntary liquidation is commenced by a resolution of the directors but it is under the control of the creditors who can appoint a liquidator of their choice. The liquidator is an authorized insolvency practitioner. This option is mostly used by the directors of the company who want to take action at an early stage and reduce personal liability for wrongful trading. The directors convene a general meeting which passes a special resolution to liquidate the insolvent company. Private companies usually pass a written resolution with a 75% majority. Thereafter, a meeting of creditors should be convened within 14 days (but usually follows immediately). A statement of affairs, report on history of the business and causes of the failure of the company are presented to the meeting.
One a resolution to liquidate is passed, the company ceases to trade, its assets are realized and the funds distributed to the creditors. The liquidator also holds annual meetings of the creditors. The liquidator calls a final meeting of the creditors where the final accounts are presented and the liquidator issues a report of the liquidation.
Courtesy of: BRS
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