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INSOLVENCY ACT 2015 – CRITICAL ANALYSIS ON IT’S INFLUENCE IN THE BANKING INDUSTRY

By November 5, 2018 No Comments

WHAT IS INSOLVENCY

According to Black law dictionary 2nd Ed., Insolvency is defined as:

The condition of a person who is insolvent; inability to pay one’s debts; lack of means to pay one’s debts. Such a relative condition of a man’s assets and liabilities that the former, if all made immediately available, would not be sufficient to discharge the latter. Or the condition of a person who is unable to pay his debts as they fall due, or in the usual course of trade and business.

Note: person is used to refer to both legal and natural person.

INSOLVENCY ACT, 2015 PREAMBLE

The Insolvency Act, 2015(the Insolvency Act) was enacted with the main aim of amending and consolidating the legislation relating to the insolvency of natural persons and incorporated and unincorporated bodies. It provides for and regulate the bankruptcy or liquidation of natural persons, incorporated and unincorporated bodies to enable their affairs to be managed for the benefit of their creditors.

REPEALED LEGISLATIONS, SECTIONS AND TRANSITIONAL PROVISIONS

Section 732 and 733 of the Insolvency Act repeals the Bankruptcy Act,  Bankruptcy rules, certain provisions of the Companies Act 2015 that coincide with the Bankruptcy Act and section 89 of the Law of Succession Act. The transitional and savings provisions of the Act provides that the Bankruptcy Act and the relevant provisions of the Law of Succession Act will continue to apply to any past event and to any step or proceeding preceding, following, or relating to that past event, even if it is a step or proceeding that is taken after the commencement of the Act. Past events include interalia where a bankruptcy notice is issued, making an application for a bankruptcy order or entering into a voluntary arrangement.

COMMENCEMENT

The Act was assented on 11th September, 2015 and came into operation within nine months after the publication of the Act however certain provisions of the Act had specific commencement dates. Therefore the Insolvency Act, 2015 (the ―Act‖) and the Insolvency Regulations, 2016 (the ―Regulations‖)  are now fully in force, regulate winding up procedures. [state the provisions and commencement dates.]

TRANSFORMATION

  • The Act seeks to redeem insolvent companies through administration as opposed to liquidation.
  • Act focuses more on assisting insolvent natural persons, unincorporated entities an insolvent corporate bodies whose financial position is redeemable to continue operating as going concerns.
  • The Act impacts secured creditors rights with respect to their securities.

TYPES SECURITIES

  • Charge
  • Floating Debenture
  • Movable Properties

OUTLINE

This presentation will focus on the influence of the Insolvency Act 2015  and creditors options and it will follow the following outline.

  • Creditor Application ;
  • Power of  a bankruptcy trustee;
  • Secured creditors options;
  • Power of the Court order

CREDITORS APPLICATION

Pursuant to  section 15 (1)  (a) and 17 of the Insolvency Act, A creditor can make a bankruptcy application to the Court. The effect of such an application on a secured creditor is to convert them to an unsecured creditor upon the debtor being adjudicated bankrupt.

Section 15(3) of the insolvency provides that an application can also be brought if the debtor is personally present at the date of application or had ordinarily resided or carried on business within three years of the date of application. Previously, a bankruptcy petition would only be applicable where the debtor was domiciled in Kenya or within a year before the date of presentation of the petition, had ordinarily resided, had a place of business or carried on a business in Kenya.

The Act has therefore widened the scope to allow bankruptcy application to be brought against debtors ensuring that creditors’ interests such as those of lending institutions (banks)  are protected.

WHO IS A BANKRUPTCY TRUSTEE

POWER OF A BANKRUPTCY TRUSTEE

Section 200 of the insolvency Act provides that a bankruptcy trustee can suomoto cancel a charge over any property of a bankrupt if (i) the charge was created within the two(2) years immediately before the bankruptcy commenced  and (ii) immediately after the charge was given, the bankrupt was unable to pay the bankrupt’s due debts.

Section 201 of the Act brought limitation to the trustees powers, which states a charge may not be cancelled if it either secures money actually advanced or paid;  if it secures the actual price or value of property sold or transferred; or if any other valuable consideration is given in good faith by the secured creditor at the time when the charge was created.  This safeguards the lending institutions on any money advanced and secured by a charge, such a charge cannot be cancelled by the bankruptcy trustee.

SECURED CREDITORS OPTIONS IN RELATION TO A CHARGED PROPERTY

section 226 and 228 of the Insolvency Act. In particular, the secured creditor has the option to:-

  1. realize the charge;
  2. surrender the charge to the bankruptcy trustee for the benefit of creditors; or
  3. have the property valued and prove for the balance due after deducting the amount of the valuation

Section 226 (3) of Insolvency Act  states that the bankruptcy trustee may, at any time by notice, require the secured creditor who holds a charge over a bankrupt’s property to choose any of the options within thirty(30) days after receipt of the notice.

Options 2  and 3 stated under section 226 (2)  should be done within the thirty(30) day period. Failure to comply with the notice within the stated period, will be deemed to be surrender of the charge  to the bankruptcy trustee , in which case the creditor may prove as an unsecured creditor for the whole debt this is pursuant to Section 226 (4) of the insolvency Act.


POWER OF THE COURT TO ORDER DISPOSAL OF CHARGED PROPERTY

Sections 227 (1) and (2) of the Insolvency Act provides that the bankruptcy trustee may make an application to Court; the Court may make an order enabling the bankruptcy trustee to dispose of the property as if it were not subject to the security, but only if the Court is satisfied that the disposal of the property would be likely to provide a better overall outcome for the creditors of the bankrupt.

Section 227(3) of the Insolvency Act provides that such an order, if granted, is subject to the condition that the bankruptcy trustee apply towards discharging the amounts secured by the security the net proceeds of disposal of the property, and any additional money, required to be added to the net proceeds. This is so as to produce the amount determined by the Court, as the net amount that would be realised on a sale of the property at market value. A secured creditor will now rank in priority in receiving the proceeds of the sale over other  creditors or costs .

DISCHARGE OF BANKRUPT

Automatic Discharge of a bankrupt

The Bankruptcy Act previously did not provide a time frame within which a bankrupt would be discharged. Section 254 of the Insolvency Act now provides for an automatic discharge of a bankrupt after three(3) years except under the circumstances set out under subsection 2 which includes an objection by a creditor or the bankruptcy trustee to the discharge under section 256.

On being discharged, a bankrupt is released from all debts provable in the bankruptcy except debts incurred by fraud or fraudulent breach of trust or amounts payable under the Matrimonial Causes Act or the Children Act. [PERIOD TO CONTRACT DEBT BY THE BANKRUPT]

However it is expected that a secured creditor would have already realized its security before the end of this period therefore, it would not be generally affected by an early discharge of the bankrupt.

Voluntary Arrangement

The Insolvency Act allows a debtor to enter into an arrangement with the creditors as an alternative to bankruptcy. A debtor’s proposal(with or without modifications) takes effect as a voluntary arrangement by the debtor on the day after the date on which it is approved by the Court. On taking effect, the approved proposal binds every person (including a secured creditor and a preferential creditor) who was entitled to vote at the meeting or would have been so entitled if the person had received notice of the meeting, as if the person were a party to the arrangement. The provisional supervisor thereafter becomes the supervisor of the arrangement.

Pursuant to section 310(7), if a proposal or a modification to a proposal affects the right of a secured creditor to enforce their security, the proposal or modification may not be approved unless the secured creditor consents to it. If the secured creditor does not consent to it, it will not be approved unless the secured creditor would be in a position no worse than if the debtor were adjudged bankrupt or would receive no less from the assets to which the creditor’s security relates, or from their proceeds of sale, than any other secured creditor having a security interest in those assets that has the same priority as the creditor’s. Also, where the secured creditor does not consent to it, it will not be approved unless the secured creditor would be paid in full from those assets, or their proceeds of sale, before any payment from them or their proceeds is made to any other creditor whose security interest in them is ranked below that of the creditor, or who has no security interest in them. This relates, Insolvency of incorporated and unincorporated bodies

Administration

The Act provides an option for the administration of an insolvent company; pursuant to section 522, the objectives of administration are to maintain the company as a going concern, to achieve a better outcome for the company’s creditors as a whole than would likely to be the case if the company were liquidated and to realise the property of the company in order to make a distribution to one or more secured or preferential creditors. Whereas previously, a company could be wound up immediately it became insolvent, the Insolvency Act now gives the company an opportunity to operate as a going concern and not necessarily engage in the sale and realization of its assets as a primary option.

Appointing an Administrator

An administrator may be appointed by the Court, a holder of a floating charge or by the company or its directors. The administrator is deemed an officer of the Court, whether appointed by the Court or not. With respect to a holder of a floating charge, section 534 of the Act provides that the holder must be a holder of a qualifying floating charge in respect of a company’s property. A qualifying floating charge is one which is created by a document that states that this section of the Act applies to the floating charge or purports to empower the holder of the floating charge to appoint an administrator of the company. The holder of a qualifying floating charge may also apply to Court for an administration order. The Court has the power to make an administration order in respect of a company even if a company may be able to pay its debts.

Position of Creditors once a Company is under Administration

Once appointed, the administrator shall assume control of all the property to which the administrator believes the company is entitled to and is to manage the affairs and property of the company. While a company is under administration, a creditor may take steps to enforce a security over the company’s property only with the consent of the administrator or with the approval of the Court. The administrator may also make a distribution to creditors of the company and where a creditor is neither a secured nor a preferential creditor, a payment may be made to the creditor as part of a distribution only with the approval of the Court.

Administrator’s powers over charge property

The administrator of a company may dispose of, or take action relating to, property that is subject to a floating charge as if it were not subject to the charge. If this is done, the holder of the floating charge has the same priority in respect of acquired property as that holder had in respect of the property disposed of. However where a company’s property is subject to a non-floating charge, an administrator, should they intend on disposing the property, must make an application under section 588 of the Act to dispose property secured by charge if the Court believes that disposal of the property would be likely to promote the purpose of the administration of the company. Even so, the Act still provides protection to secured creditors where it expressly provides that an administrator’s statement of proposals may not include action that affects the right of a secured creditor of the company to enforce the creditor’s security (section 590).

The Position of Securities during moratorium

When a company’s directors propose a voluntary arrangement, a moratorium takes effect. The implications of a moratorium are that the company is restricted in obtaining credit or paying its debts and liabilities during this period. Further, any steps taken to enforce any security over the company’s property can only be done with the approval of the Court and the Court may impose some conditions on such an approval. Also, approval of the Court is required where proceedings are commenced against the company or its property.

Security given by a company at a time when a moratorium has effect in relation to the company can only be enforced, if at that time, reasonable grounds existed for believing that enforcement of the security would benefit the company. A company in respect of which a moratorium has effect may dispose of any of its property only if there are reasonable grounds for believing that the disposal will benefit the company and the disposal is approved by the moratorium committee. It is important to note however that a company may transfer property as if it were not subject to the security only where the holder of the security consents or the Court gives its approval.

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