Adverse Possession in Kenya

 

 1.0 Introduction

Adverse possession is a means by which someone may acquire title to the land of another person through certain acts over a defined period of time. In Kenya, the concept of adverse possession refers to a situation where a trespasser to land can claim property after the lapse of a determined period of 12 years.

 

Otherwise referred to as squatter’s rights is a well-founded doctrine in law that allows a person who has unlawfully occupied another person’s land for a continuous period of at least 12 years to legally apply for registration rights over the property.

 

The three main tests in an adverse possession claim are: (a) one must have occupied the land to the exclusion of others; (b) the occupation must be without the consent of the owner; and (c) the occupation must be for a continuous and uninterrupted period of at least twelve years. So to speak, adverse possession is seen as one of the doctrine that goes against the concept of indefeasibility of title as one is able to register their ownership rights against the proprietor’s title.

 

Adverse possession here in Kenya borrows from the doctrine as was applied in the UK. The UK following the 2002 laws has however shifted position to protect the sanctity of title when the land concerned is registered. The claiming procedure laid under the 2002 law makes it difficult for squatters to succeed in adverse possession over registered land.

 

Under the 2002 UK law, a squatter seeking registration rights over registered Land in the UK after ten years of continuous occupation prompts the court to notify the proprietor of the occupied land and accord them an opportunity to oppose the application for registration. If an opposition notice is lodged, the registration is rejected unless there are equitable grounds, or that the squatter is the proprietor of the adjacent land which must be without boundaries and the squatter occupies the land subject to adverse possession in false belief that they are the owner.

 

However, if the application for registration is rejected and the squatter continues in occupation of the land for a

further period of two years, they are entitled to re-apply for registration. Kenyan law has not yet created a distinction between registered and unregistered land as far as adverse possession is concerned. Likewise, there is no requirement that a registered owner of land must be notified of an application for registration of adverse possession rights, and therefore land owners are always caught by surprise.

 

The prominence of adverse possession in Kenyan law is arguably both desirable and undesirable depending on the side of the coin one is looking at it from. Considering that the origin of the doctrine was to help prevent waste of land and to force land owners to monitor their property, truly a land owner that leaves their property unlawfully occupied for a continuous period of 12 years or more cannot be said to have needed that land in the first place.

 

Enforcing adverse possession may at the end of the day contribute hugely to curbing the menace of land inflation in Kenya where scarcity of property has driven land prices to unimaginable highs. On the other hand, as was the observation of the UK high court and Court of appeal in A Pye (Oxford) Ltd. v. United Kingdom a law that ousts an owner of land on the basis of inaction for 12 years is illogical and disproportionate.

2.0 Determining an act of adverse possession

The question would be whether or not the legitimate title holder has been dispossessed, or has discontinued their possession of their lawful title.

 

For an individual to allege a right of title on land, the person ought to have occupied the land uninterrupted for a period not less than 12 years. They must show by clear and unequivocal evidence that his possession was not permissible. That it was open, with the knowledge of the true owner.

2.1 Case law:

In Kasuve Vs Mwaani Investments limited & 4 others 1 KLR 184, the Court of Appeal restated what a plaintiff in a claim for Adverse Possession has to prove; “In order to be entitled to land by Adverse possession, the claimant must prove that he has been in exclusive possession of the land openly. They should have been habitants as of right without interruption for a period of 12 years. This could be either after dispossessing the owner or by discontinuation of possession by the owner on his own volition”.

 

The owner of the land must have been dispossessed or has discontinued possession of the property. It is also a well settled principle that a party claiming adverse possession ought to prove that the possession was peaceful, open and continuous. The possession should not have been through force, nor in secrecy and without the authority or permission of the owner.

 

It is assumed that if one owns property, they have an emotional bond to it. Therefore, they will rise up to defend their title against intruders on his/her property. It is also based on the presumption that people own land for many reasons. Among them economic, and if they could show no interest in in such land for lengthy periods, then they probably did not need it.

 

ANALYSIS.

 

The Constitution of Kenya through article 40 as read with article 64 allows citizens to acquire and own property; land, through a freehold or a leasehold tenure. Article 65 on the other hand allows non-citizens to acquire and own property; land, through a leasehold tenure.

 

Nevertheless the doctrine of adverse possession also comes into the land regime. Whereby a land owner is not assured of lifetime possession in the event of abandoning the land for years or not removing squatters from the land. As such it is one of the ways of acquiring land in Kenya.

 

Under the Statute of limitations; Limitations of Actions Act Cap 22, legal underpinnings are laid bare. Below are some of the relevant underpinnings;

 

Section 7 states that

 

“An action may not be brought by any person to recover land after the end of twelve years from the date on which the right of action accrued to him or, if it first accrued to some person through whom he claims, to that person”

 

Further in Section 13

 

“(1) A right of action to recover land does not accrue unless the land is in the possession of some person in whose favour the period of limitation can run (which possession is in this Act referred to as Adverse Possession), and, where under sections 9, 10, 11 and 12 of this Act a right of action to recover land accrues on a certain date and no person is in Adverse Possession on that date, a right of action does not accrue unless and until some person takes Adverse Possession of the land.

 

(2) Where a right of action to recover land has accrued and thereafter, before the right is barred, the land ceases to be in Adverse Possession, the right of action is no longer taken to have accrued, and a fresh right of action does not accrue unless and until some person again takes Adverse Possession of the land.

 

(3) For the purposes of this section, receipt of rent under a lease by a person wrongfully claiming, in accordance with section 12(3) of this Act, the land in reversion is taken to be Adverse Possession of the land”.

 

Section 16 provides as follows;

 

“For the purposes of the provisions of this Act relating to actions for the recovery of land, an administrator of the estate of a deceased person is taken to claim as if there had been no interval of time between the death of the deceased person and the grant of the letters of administration.”

 

Section 17 goes on to state;

 

“Subject to section 18 of this Act, at the expiration of the period prescribed by this Act for a person to bring an action to recover land (including a redemption action), the title of that person to the land is extinguished”.

 

Finally, Section 38(1) and (2) states;

 

“(1) Where a person claims to have become entitled by Adverse Possession to land registered under any of the Acts cited in section 37 of this Act, or land comprised in a lease registered under any of those Acts, he may apply to the High Court for an order that he be registered as the proprietor of the land or lease in place of the person then registered as proprietor of the land.

 

(2) An order made under subsection (1) of this section shall on registration take effect subject to any entry on the register which has not been extinguished under this Act.

 

Interpretation of the Law.

 

In the case of MATE GITABI VS. JANE KABUBU MUGA &  OTHERS (Nyeri Civil Appeal No. 43 of 2015 (unreported) the court held as follows;

 

“For one to succeed in a claim for adverse possession one must prove and demonstrate that he has occupied the land openly, that is without secrecy, without force, and without license or permission of the land owner, with the intention to have the land.

 

There must be an apparent dispossession of the land from the land owner. These elements are contained in the Latin maxim nec vi, nec clam, nec precario

 

Furthermore in the case of, DAVID MUNENE WAMWATI & 4 OTHERS VS THE REGISTERED TRUSTEES OF THE ANGLICAN CHURCH OF KENYA & ANOTHER (Nyeri Civil Appeal No. 36 of 2015 (unreported).

 

Due to the punitive nature of adverse possession against a land owner, a claim based on it cannot be affirmed unless certain elements are proven by the adverse possessor. This ensures that registered land owners will not arbitrarily lose their properties which they have worked hard for and sacrificed to acquire. Every limitation of actions, including adverse possession, does come with certain exceptions and extensions to ensure justice and fairness as far as possible

 

How to Apply for a Change of Use on the ArdhiSasa Platform

To change a user on Ardhisasa, you can:

Log in to Ardhisasa at https://ardhisasa.lands.go.ke/account/login using your username and password
Click on the "Change of Use" application under the "Development Control" section
Select the type of change of use
Enter the details of the application, including the current and proposed land use, the land's status, and the DC-17 form reference number
Attach the required documents
Verify the application details
Click the "Submit" button
The property owner will receive an OTP code via SMS or email
The owner will need to verify the application by entering the OTP code
Click "Close" in the pop-up box
Click the "Submit Request" button in the top right corner
Confirm that you want to submit the request
Click "Yes" in the pop-up notification
Click "Close" in the pop-up notification
The required documents for a change of use application vary depending on the type of change of use. Some common documents include a site plan, a survey plan, and a letter from the planning authority.

The process of changing a user can be long and tedious, so it's important to engage professionals.

Caution and a Restriction as encumbrances on Land

 

1.0 Introduction 

Cautions and restrictions are instruments through which dealings in land can be curtailed until the happening of a certain event. Any person with an interest in the affected land can successfully lodge a caution or request a land registrar to place a restriction against dealing in a certain property.

In this article, we shall give an in-depth exploration of the two instruments and circumstances under which either can be applied.
 

1.1 Cautions

Section 71 of the Land Registration Act, 2012 is the guiding law on placement of cautions and it also outlines the persons who can be eligible to place a caution against a property.

By way of definition, a caution is a notice in form of a register to the effect that no action of a specified nature in relation to the land in respect of which the notice has been entered may be taken without first informing the person who gave the notice.

The caution is lodged by way of a specific form and the Registrar may in some instances require that the application be accompanied by a statutory declaration sworn by the person making the application. Persons who qualify to lodge a caution include but are not limited to spouses where property is held jointly ort where it forma part of matrimonial property and one of the spouses fears that the their partner may deal in a suspicious manner in the property in question, a person claiming a purchaser’s interest, this applies where a purchaser bought land but the Vendor has refused to complete the traction for one reason or the other or in a case where a purchaser has paid a deposit on property and they have reason to believe that the Vendor might deal fraudulently with the property before completion, a person or institution that has given an informal loan and has agreed with the borrower that they hold a title to a particular property as a lien for repayment of the loan, a lessee who holds a valid lease with a landowner etc. As long as a person is able to qualify their interest in the affected property and they have documentation to prove their claim, the registrar will make an entry of the caution in the register of the affected title. However, it is important to note that there are instances where a registrar will refuse registration of a caution specifically where they find that the caution is unnecessary or that the purpose for which the caution is being lodged can be achieved by lodging an instrument under the Act.

Upon registration of the caution, the registrar should give a notice in writing to the proprietor whose land, lease, or charge has been cautioned and this notice can be sent via registered mail or other means of communication provided that the registered owner of the affected property is sufficiently notified. Thereafter, a disposition which is inconsistent with the caution shall not be registered while the caution is still in effect except with the consent of the cautioner or by the order of the court.
Withdrawal and Removal of cautions

A cautioner may at any time before finalization of registration of the caution make an application to the registrar for withdrawal of the caution by means of the prescribed form and attaching reasons for withdrawal and where the registrar is satisfied that the reasons given are sufficient, they will approve the withdrawal as lodged.

On the other hand, a registered caution may be removed in three ways: –by the cautioner filing an application for removal of the caution in the prescribed form;
through a court order; or
by the registrar on application of any interested person and the registrar then serves a notice to the cautioner warning them that the caution will be removed at the expiration of the time stated in the notice thereof. If the cautioner would not have raised any objection at the expiry of the time stated in the notice, the registrar may proceed to remove the caution. In the event an objection by the cautioner is received, the registrar gives the parties an opportunity to be heard after which the registrar makes orders which they deem fit and may in the order provide for the payment of costs.

If for any reason a person who lodges or maintains a caution is found to have done so wrongfully and without reasonable cause, such persons will be liable for damages and may also be required to pay compensation in case of a suit by the affected person.

1.2 Restrictions

Restrictions as encumbrances against dealing in affected land as noted in section 76 of the Land Registration Act, 2021 are inhibitions that are imposed by the government or the registrar where land is set to be compulsorily acquired or to prevent fraud, or improper dealing or for any other sufficient cause. Restrictions are also known as registrar’s caveat for the reason that the registrar may, either with or without the application of any person interested in the land, lease or charge and after directing such inquiries to be made and notices to be served and hearing such persons as the Registrar considers fit, make an order (hereinafter referred to as a restriction) prohibiting or restricting dealings with any particular land, lease or charge.

A restriction may be expressed to endure for a particular period of time or until the occurrence of a particular event or until a further order is made and may prohibit or restrict all dealings or such other dealings that do not comply with specified conditions noted in the restriction and the restriction shall be registered in the appropriate register.

Once effected, the registrar is required to give notice, in writing, of a restriction to the proprietor affected by the restriction. The effect of a restriction is such that an instrument that is inconsistent with a restriction shall not be registered while the restriction is still registered except by order of the court or of the registrar.

1.2.1 Removal of Restrictions

The registrar may, at any time and on application by any person interested or at the registrar’s own motion and after giving the parties affected by the restriction an opportunity of being heard order the removal or variation of a restriction. Upon the application of a proprietor affected by a restriction and upon notice to the registrar, the court may order a restriction to be removed, varied or make such other order as it deems fit, and may make an order as to costs.

Both cautions and restrictions are ways in which affected parties, other than the registered proprietor of the land in question, can prevent dealings and dispositions in such land provided that there are sufficient grounds for placing the encumberances.

A Review of Garnishee Proceedings and the Procedure involved

 1.0 Introduction 

Generally, a party in a civil proceedings seeks to enjoy the fruits of his judgment when the matter is decided in his favour. However where a judgment debtor is reluctant in complying with the judgment, the judgment creditor has the legal right to bring an action for the enforcement of the judgment. The enforcement can be commenced by Judgment Summons, Writ of Fieri Facias, Garnishee Proceedings, Writ of Sequestration, Writ of Possession and Writ of Delivery of Goods. Amongst all these, the most exploited form of enforcing judgment in Nigeria is the Garnishee Proceedings.

MEANING OF GARNISHEE PROCEEDINGS

 

The court in the case of STB LTD v CONTRACT RESOURCES (NIG) LTD defined a Garnishee as a third party who is indebted to a judgment debtor or having custody of his money and who at the instance of the judgment creditor is being called upon to pay the judgment debt.

 

It can also be defined as,

 

"a judicial proceeding in which a creditor asks the Court to order a third party who is indebted to a debtor to turnover to the creditor any of the debtor's property in possession of that third party."

 

Alternatively put, Garnishee Proceedings is one of the methods of enforcing monetary judgment. The need often arises when a Judgment Creditor finds it Augean to recover the debt owed to him by the Judgment Debtor. Hence; the Court on the application of the Judgment Creditor (Garnishor), orders a third party (Garnishee) to pay to the Garnishor, a debt the Garnishee originally owed to the Judgment Debtor.

 

For a prompt understanding of the terminologies used above, the parties involved in a Garnishee Proceedings are as follows;

 

Judgment Creditor- this is the party entitled to a sum of money in any given judgement. This party is known as the Garnishor.

Judgment Debtor- this is the party expected to pay the Judgment Creditor a specified sum of money based on a given judgement.

Third Party- this party owes the Judgment Debtor a sum of money.

The debt being referred to above must be due and payable to the Judgment Debtor. In other parlance, it must be a present debt and not 'a debt to come.' This Proceedings is governed by the Sheriff and Civil Process Act, Cap S. 6 Laws of the Federation of Nigeria, 2004 (SCPA), the Judgment (Enforcement) Rules (JER), High Court Rules of various States and case laws.

 

THE STAGES AND PROCEDURE INVOLVED IN GARNISHEE PROCEEDINGS

 

The Garnishee Proceedings is sui generis[3], it comprises mainly of two stages which will be thoroughly explained below;

 

Stage One

 

To commence the Proceedings, Order 37 Rule 2 of the Federal High Court (Civil Procedure) Rules 2019 provides that the Garnishor must file a motion ex-parte, supported with an affidavit and a written address. At this stage, the court makes a garnished order nisi. The effect of an order nisi is to obviate the Garnishee (third party) from paying the Debtor's money in his possession to the Debtor; but to pay it directly to the Garnishor. The order nisi also compels the Garnishee to appear in Court on a specified date, for the sole purpose of showing cause on why he (the Garnishee) should not be mandated to pay the Garnishor the money owed to the Debtor. The order nisi is served on the judgment debtor and Garnishee 14days before the adjourned date for hearing. Section 83 Sheriffs and  Civil  Processes Act 2004, empowers the court to make an order for the attachment of the money  in the  custody of a third party belonging to a judgment debtor for the satisfaction of debt upon an application brought by a judgment creditor.

 

Stage Two

 

At this stage, the Garnishee comes to show cause.  If he doesn't show good cause or fails to appear, the court will make the garnishee order absolute. This amounts to a final judgment and the Judge becomes funtus officio. It is apposite to state here that, where the Garnishee fails to pay; despite an order absolute, judgment will be executed upon him by writ of Fifa.

 

PROCEDURE

 

By the virtue of Section 83 (1) & (2) of Sheriffs and Civil Processes Act (SCPA), the proceedings is commenced by an application brought by a motion ex-parte supported with an affidavit praying for a Garnishee order Nisi. The affidavit in support of the motion ex-parte is in Form 25 in the 1st Schedule to SCPA and the affidavit must contain the following;

 

a) The names, addresses and occupations the judgment creditor, judgment debtor and Garnishee.

b) That the judgment had been given and the date.

c) That the judgment is still unsatisfied.

d) The amount of the judgment debt that remains unpaid.

e) That another person is indebted to the judgment debtor and is within state.     

 

Failure to serve the Garnishee and Judgment Debtor the order nisi, will automatically amount to the nullification of the proceedings. If the Garnishee refuses to pay the said sum for reasons known to him, the Garnishee must go to Court on a date (not less than fourteen days after service) fixed for hearing by the Registrar, to refute the intention of the Court to make the order, absolute. The Garnishee does this by filing an Affidavit to Show Cause, which must contain any of the following facts;

 

That the money does not belong to the Judgment Debtor.

That the money belongs to a third party with a lien or charge over it.

He can also file a counter affidavit, showing reasons why the money in his possession should not be used to satisfy the debt.

 

As uncomplicated as the Garnishee Proceedings may be, there are two main contentious or diverging issues surrounding this proceedings and it is expedient to discuss them briefly.

 

A. WHO ARE THE PARTIES IN GARNISHEE PROCEEDINGS?

 

As earlier stated, the parties in a Garnishee Proceedings are the Judgment Creditor (Garnishor), the Judgment Debtor and the Third Party (Garnishee). However; you find that in practice, some decisions consider the Judgment Debtor an active participant, others consider him otherwise.

 

The position of the Court of Appeal in the case of P.P.M.C. LTD v. DELPHI PET. INC. (2005) 8 NWLR (pt 928) 458; where the appellant, who was the judgment debtor, appealed against a garnished order; the court held the judgment debtor is not a necessary party in the garnishee proceedings and at such don't have the right of appeal (only the Garnishee 'GTB' had the right). The Court held that a Garnishee proceedings is between the judgment creditor and the Garnishee (third party) and the judgment debtor is not a necessary party.

 

In the case of United Bank for Africa Plc v. Hon. Boro Ekanem, which was in all fours to the case above, the Court of Appeal stated that the Garnishee is the only party expected to react where he is dissatisfied with the order nisi, stating reasons why the order nisi should not be made absolute. It added that, the Judgment Debtor is a mere busy body, meddling in affairs that is not a concern of his.

 

On the contrary, Ogakwu JCA in the case of Nigerian Breweries Plc v. Demure asked a rather sarcastic rhetorical question,

 

"Now, if as contended that it isn't necessary to have the judgment debtor as a party in the garnishee proceedings, what is the essence of the provision for the order nisi to be served on him? Is it merely for his information or for him to attend Court as a spectator to applaud and cheer on the judgment creditor and garnishee in contention on the destination of funds which belong to him"

 

The Court of Appeal in Fidelity Bank PLC v. Okwuowulu (2012) LPELE 8497 (CA); posited that in garnishee proceedings for order nisi, the judgment debtor is not to be heard. But in the latter, it becomes a tripartite proceeding. The court held that the three parties are parties to a garnishee proceeding.

 

Having considered the two conflicting judgments, I agree with the later judgment which affirms the necessity of the Judgment Debtor in Garnishee Proceedings. This is predicated on the fact that, the money in dispute belongs to the Judgment Debtor. It is only fair, as provided for in Section 36 of the 1999 Constitution of the Federal Republic of Nigeria (as amended) that the Judgment Debtor is heard and as such, has a say in the Proceedings.

 

In addition, Section 83(1) of SCPA, provides that a judgment debtor is to be examined orally before or after the order. Thus, even though the application by the judgment creditor is brought by way of motion ex-parte for order Nisi, the judgment debtor is expected to be heard in the proceedings that would lead to the making of the order absolute.

 

Section 83(2) of SCPA, which makes it compulsory for the service of the order nisi on the judgment debtor at least 14days before the making of the order. As was stated in an Obiter in the case of Nigerian Breweries Plc v. Dumuje, what is the essence of the service only for the Judgment Debtor to be excluded in the proceedings?

 

It is worthy of note to state here that, the Judgment Debtor does not always have to be a Bank. It could be an individual, co-operative society or any Debtor to the Judgment Debtor.

 

B.    EFFECT OF STAY OF EXECUTION IN GARNISHEE PROCEEDINGS

 

Where a Judgment Creditor receives a judgment in his favour, it is not uncommon to find the Judgment Debtor who has appealed this judgment, filing an application for a stay of execution. The bone of contention here is, will the order of stay of execution stop the garnishee proceedings?

 

In the case of Purification Tech (Nig) LTD v. A.G Lagos State, the Court held that garnishee proceedings are independent, actions distinct from an Appeal and an application for stay of execution. As a result, the Judgment Creditor can still use a Garnishee Proceedings to enforce the judgment. The case of Denton - west v. Umuoma (2008) 6 NWLR (pt 1083) 418 at 442 is analogous to the aforementioned case. 

 

A contrary view was postulated in Nigerian Breweries Plc and Anor v. Dumuje. It was held that garnishee proceedings could not continue as a means of execution, pending a motion for a stay of execution. The continuance of the garnishee proceedings will impose a fait accompli on a superior Court deciding the appeal. The rationale behind this decision, is to give the parties a form of assurance that the debt is in a safe custody while the contention between the parties continues. The Court further stated here that, a Judgment Debtor is a necessary party in garnishee proceedings. It is expedient to state here that this is a Court of Appeal judgment, subject to the reasoning and decision of the Supreme Court.

 

In conclusion, The Garnishee Proceedings requires prudence and due diligence. This is owing to the fact that the Judgment Debtor may dubiously transfer his money from the Debtor known to the Judgment Creditor to another Bank or individual. 

 

This method of enforcing judgment is one of the most effective ways of recovering debts as opposed to threats and puffs. The Judgment Creditor here is spared the agonising process of listening to tales of the unavailability of funds and the endless wait for the fulfilment of a promise to pay. Instead, he recovers his debt directly from a third party (the Garnishee), who is in possession of the Judgment Debtor's money.

A Legal Review of insolvency and the processes involved for Natural persons and Companies

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