Professional Documents
Culture Documents
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
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
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
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.
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
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
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
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
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
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
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
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
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
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.