INTRODUCTION TO

INSOLVENCY LAW
RIARA LAW SCHOOL
 DEFINITION OF TERMS

• What is Insolvency?
• This is the inability to pay one’s debts. It necessarily arises from the
extension of credit because without credit there can be no debt. Credit is
contractual deferment of debt. Can you imagine a world without credit?
• There are two kinds of credit. Loan credit and sale credit. What is the
difference between the two?
• For the purpose of insolvency law there is a vitally important difference
between equity and debt. Shareholders are not creditors. Unlike
creditors they have no claim to repayment from the company except
when dividend is declared or where there is a surplus during liquidation.
 DEFINITION OF TERMS

• What is a security in the context of credit? Security may be real

or personal.
• Real security is security in an asset or pool of assets and
typically takes the form of a mortgage or a charge covering
specific assets or a class of existing and future assets.
• Personal security consists of the reinforcement of the debtor
company’s undertaking by a third party such as a guarantor.
• Security plays a crucial role in expanding the availability of
credit but in insolvency law they also have implications for the
general body of creditors for their effect is to reduce the pool of
assets available for creditors.
 DEFINITION OF TERMS

• Insolvency law is that body of law that aims to

suspend the pursuit of individual claims by
different creditors and replace it with a
statutory regime in which creditor’s rights and
remedies are suspended wholly or in part and a
mechanism is provided for the orderly collection
and realization of assets and the distribution of
the net realizations of the assets among
creditors.
 ROOTS OF INSOLVENCY LAW

• Insolvency law has its roots in common law where there was no
collective procedure for the administration of an insolvent’s
estate and a disappointed creditor could seize the effects of the
debtor or his person.
• The Statute of Bankrupts passed in 1542 by Henry VIII
introduced the pari passu principle of distribution and directed
requisite authorities to seize and sell assets of debtors and pay
creditors according to the debt owed to them.
• Numerous bankruptcy laws followed but in contrast to modern
bankruptcy law their aim was penal rather than rehabilitative.
 ROOTS OF INSOLVENCY LAW

• The Bankruptcy Act 1705 introduced relief for bankrupts

through the concept of discharge from debts for those who co-
operated with their creditors.
• Until 1861 there were two systems in place, bankruptcy for
traders and insolvency for non-traders. The Bankruptcy Act of
1861 abolished this distinction and was later replaced by the
Bankruptcy Act 1914 which codified the laws on bankruptcy.
• The bankruptcy Acts never applied to companies. The birth of
corporate insolvency laws goes back to 1844 when parliament
enacted the Joint Stock Companies Act of 1844.
 ROOTS OF INSOLVENCY LAW

• Corporate insolvency law initially piggy backed on

bankruptcy and did not assume a truly distinctive status until
the advent of limited liability for members of a company. The
Companies Act 1862 contained detailed winding up provisions
including a provision for pari passu distribution.
• Later Companies Acts made further provisions for corporate
insolvency
• The Insolvency Act 1986 combined the insolvency of natural
persons and artificial persons under one statutory regime.
• The Kenyan Insolvency Act 2015 borrows heavily from the
UK 1986 Act.
 Pari Passu Principle

• Pari passu means "equal in right of payment". The pari

passu principle means that all unsecured creditors in
insolvency processes, such as administration,
liquidation and bankruptcy must share equally any
available assets of the company or individual, or any
proceeds from the sale of any of those assets, in
proportion to the debts due to each creditor. It is one
of the most fundamental principles of insolvency law.
 OBJECTIVES OF INSOLVENCY LAW

• Section 3 of the Insolvency Act identifies the following objectives of Insolvency Law:
i. to establish a framework for the efficient and equitable administration of the estates
of insolvent natural persons insolvent companies and other bodies corporate in
order to ensure fairness among the competing interests.
ii. For those debtors whose financial status is redeemable to enable them continue as a
going concern so that the obligations to creditors may be met in full or to the
satisfaction of creditors.
iii. Achieve a better outcome for creditors than would be the case if the insolvent
persons were adjudged bankrupt or liquidated.
iv. Where the financial position is ireedemable, to provide for an orderly regime of
bankruptcy and liquidation and provide for the optimal administration and
distribution of the assets for the benefit of creditors.
OBJECTIVES OF INSOLVENCY LAW

• Insolvency law also aims to provide a mechanism

by which the causes of failure can be identified
and those guilty of wrongdoing can be brought to
book and adequately sanctioned.
• The qualifications for insolvency practitioners
help to achieve these aims because they are
designed to ensure their integrity and
competence.
 REGULATION OF INSOLVENCY IN KENYA

• Insolvency in Kenya is currently regulated by the Insolvency Act

2015.
• Prior to this corporate insolvency was dealt with under the
winding up provisions of the Companies Act Cap 486 of the Laws
of Kenya while the insolvency of natural persons was covered in
the Bankruptcy Act Cap 53 of the Laws of Kenya.
• The Insolvency Act of 2015 is closely modelled on the UK
Insolvency Act of 1986 and provides the statutory mechanisms
under which bankruptcy and liquidation can be carried out. It
also offers alternatives to both bankruptcy and liquidation.
 INSOLVENCY PRACTITIONERS

• Section 4 of the Act identifies the following persons as insolvency

practitioners:
i. Bankruptcy trustees
ii. Liquidators
iii.Administrators
iv.Supervisors of voluntary arrangements for both natural and
artificial persons
• Section 5 provides that it is an offense for someone to act as an
insolvency practitioner without the requisite authority.
• Section 6 outlines the qualifications and disqualifications of
insolvency practitioners.
• Section 8 provides that any person who wants to act as an
insolvency practitioner must apply to the official receiver for
authorization.
 THE VARIOUS INSOLVENCY REGIMES

• There are various statutory procedures that may come into

play within the context of insolvency proceedings:
i. Receivership – an administrative receiver is a receiver
appointed under a debenture secured by a floating charge
covering the whole or substantially the whole of the
company’s assets. The primary function of the administrative
receiver is to take control of the company’s assets and effect
such dispositions as will result in payment of the amount due
under the debenture. Note that in reality administrative
receivership is not a true insolvency proceeding, it is merely a
method by which the debenture holder can enforce his
security.
 THE VARIOUS INSOLVENCY REGIMES

ii. Administration – not every insolvency ends in liquidation for a

company. Administration is the legal process of attempting to rescue
the company as a going concern. The administrator has the power on
behalf of the company to do all things necessary for the management of
the affairs, business and property of the company. The most significant
feature of administration is that it imposes a moratorium on all legal
proceedings and creditor actions against the company while the
administrator seeks to achieve the purposes for which the
administration order was granted.
iii. Liquidation/winding up – this is a procedure of last resort. It involves a
liquidator being appointed to take control of the company and to
realize its assets and distribute them to creditors according to their
legal priority. Once the process has been completed the company is
dissolved.
iv. Formal arrangements with creditors – companies in distress may be able to
negotiate settlements with the creditors for the satisfaction of their claims otherwise
than by payment in full. These agreements may be:
• A composition – agreement by which creditors accept, in a single sum or by
instalments, an amount which is less than the amount owed to them.
• A compromise – this is an agreement in settlement of a claim which is in doubt,
dispute or difficulty of enforcement
• A scheme of arrangement – this has a very wide meaning. It includes conversion of
debt into equity, conversion of secured claims into unsecured ones and vice versa
etc.
• Moratorium – this is a freeze on the exercise of creditor’s rights agreed among the
creditors.
• Reconstruction – business of a company is transferred to a new company in
consideration of the issue of shares in the new company to the members of the old
company in exchange for their shares in the latter.
 THE PLAYERS

• Insolvency procedures involve a number of

institutions and actors. These can be identified as
follows:
i. Administrators
ii.Receivers
iii.Liquidators
iv.Trustees in bankruptcy
v.Company voluntary arrangement supervisors
vi.Individual voluntary arrangement supervisors
 CASES

1. Bankruptcy Cause No. 9 of 2015

2. Bankruptcy Cause no. 10 of 2007