The Law on Cross-Border Insolvency in Kenya

Introduction

Cross-border insolvency refers to situations where an insolvent entity has assets or creditors in more than one jurisdiction. It is more concerned with insolvency of companies which operate in more than one country rather than individual bankruptcy. With globalization, such cases have become increasingly common, requiring efficient legal mechanisms to manage insolvencies across borders. Cross-border insolvency in Kenya is a new creature that came along with the enactment of the Insolvency Act in 2015.

I. Key Objectives of Cross-Border Insolvency Law

Paragraph 2 of the Fifth Schedule to the Insolvency Act outlines several objectives of cross border insolvency proceedings, including:

1. Enhancing coordination between Kenyan courts and foreign jurisdictions (Cooperation).

2. Providing a predictable legal framework for international trade and investment (Legal Certainty).

3. Ensuring equitable treatment for all creditors and stakeholders (Fair Administration).

4. Protecting and optimizing the debtor’s assets globally (Asset Maximization).

5. Supporting financially distressed businesses to preserve jobs and investments (Business Rescue).

II. Legal Framework and Recognition of Foreign Proceedings

Cross-border insolvency is primarily governed by the Insolvency Act, 2015 through its Fifth Schedule, the Act incorporates the United Nations Commission on International Trade Law (UNCITRAL). Under Section 720 of the Insolvency Act, the UNCITRAL Model Law on cross-border insolvency forms the basis for cross-border insolvency cases in Kenya.

The UNCITRAL Model Law on Cross-Border Insolvency was established in 1997. It harmonizes insolvency laws while respecting the sovereignty of local laws and processes. The law promotes cooperation between courts in different countries. It ensures efficient and fair handling of cross-border insolvencies. It was meant to protect creditors, debtors, and foster business confidence in international trade.

In this article we decode the key provisions for recognition of foreign insolvency proceedings as established under the Fifth Schedule of the Insolvency Act.

III. Conditions to be met meet before foreign insolvency proceedings are recognised.

The conditions that an applicant must meet before foreign insolvency proceedings are recognized are set out in paragraph 17 of the Fifth Schedule of the Insolvency Act. Pursuant to Paragraph 17 of the Fifth Schedule, an application shall be filed by a foreign representative. In brief, the application shall be supported any or a combination of the following:

(i) A certified copy of the foreign court’s decision.

(ii) A certificate affirming the existence of foreign proceedings and the appointment of the representative.

(iii) Other acceptable evidence of the proceedings.

(iv) An application for recognition may also be rejected if it not accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative.

(v) The court may require a translation of documents supplied in support of the application for recognition into English as the official language of Kenya.

IV. Who is a foreign representative?

A foreign representative means a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or financial affairs or to act as a representative in the foreign proceeding. See paragraph 4 of the Fifth Schedule of the Insolvency Act. The foreign representative mut provide evidence of their appointment as such and the decision from the sanctioning their mandate and proving the existence of the proceedings in a specific jurisdiction. The existence of the foreign proceedings will be presumed to be correct if not contested by the creditors, and evidence led to prove the same. See In the matter of Zarara Oil & Gas Company Limited [2021] KEHC 191 (KLR).

V. The parameters for the court’s consideration when determining an application for recognition.

Paragraph 19 provides the parameters for the court’s consideration when determining an application for recognition as follows.

Recognition requirements

The court shall recognize a foreign proceeding if:

a. It qualifies as a proceeding under paragraph 4.

b. The foreign representative applying meets the definition under paragraph 4.

c. The application meets the conditions of paragraph 17(2).

d. The application is submitted to the court.

Types of recognition

The court will recognise the foreign proceeding as:

a. A foreign main proceeding means a foreign proceeding taking place in a foreign State if the debtor has the centre of its main interests in that State

b. A foreign non-main proceeding, means a foreign proceeding, other than a foreign main proceeding, taking place in a foreign State if the debtor has a business establishment in that State.

VI. What is Centre of Main Interests (COMI)

Noteworthy, no definition of the meaning of COMI is given in Kenyan statutes. Courts have explained that a debtor’s “centre of main interests” is presumed to be the location of the debtor’s registered office, unless there is evidence to the contrary. This presumption is based on Article 16(3) of the UNCITRAL Model Law, which applies when no other definition of COMI is provided in the statute. It was so held in In re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] KEHC 1610 (KLR) which affirmed Kenya’s adoption of a universalist approach.

Timely decision

a. The court must determine the application for recognition as soon as possible.

Notification

b. Once the proceeding is recognised, the foreign representative must notify the debtor.

Modification or termination

c. Recognition can be modified or terminated if the grounds for recognition were lacking or have ceased to exist.

VII. Factors considered in determining whether the public policy exception could defeat an application for recognition.

The decision to recognise foreign proceedings was subject to whether the action was manifestly contrary to the public policy of Kenya. For the public policy exception to defeat an application for the recognition it had to be demonstrated that the grant of recognition would be so clearly or plainly contrary to the public policy of Kenya. By inclusion of the word "manifest", the public exception clause was intended to be invoked in exceptional and limited circumstances. See In the matter of Zarara Oil & Gas Company Limited [2021] KEHC 191 (KLR) ( Majanja J) explaining similar position of the court in In re Cooperativa Muratori and Cementisti – CMC Di Ravenna (Insolvency) [2020] KEHC 10264 (KLR)(Tuiyott J as he then was).

VIII. Whether the Kenya Revenue Authority (KRA) is a priority creditor in cross boarder insolvency proceeding in Kenya by virtue of section 34 of the Tax Procedures Act.

Section 34 of the Tax Procedure Act provides that if the person responsible for the taxes is liquidated or declared bankrupt, the tax amounts held in trust (such as VAT, excise duty, and withholding tax) do not become part of the bankruptcy estate. These amounts must be paid to the Commissioner before any distribution of assets to creditors.

The courts have held that treating Kenya Revenue Authority (KRA) as a priority creditor by virtue of section 34 of the Tax Procedures Act and any argument that KRA should be paid the taxes owed before any other creditor was paid would undermine the basic principle underlying insolvency. All creditors of the same class had to be treated fairly and equally. Such a position would amount to the court taking over the insolvency proceedings contrary to the Fifth Schedule to the Insolvency Act and undermining the other creditors.

Even though section 34 of the Tax Procedures Act establishes priority of taxes, the issue of payment can only arise once a liquidator collected the assets and proposed to pay the creditors. See In the matter of Zarara Oil & Gas Company Limited [2021] KEHC 191 (KLR). See also, In re HP Gauff Ingeniure Gmbh & Co. KG-JBG [2021] KEHC 4296 (KLR) (Majanja J).

Basically, the courts have always upheld paragraphs 24 and 25 of the Fifth Schedule to the Insolvency Act which provide that in recognizing cross border insolvencies, a company’s creditors had to be protected.

IX. Protection of the interests of the local creditors.

Paragraphs 24 and 25 of the Fifth Schedule to the Insolvency Act provides for structures meant to ensure that the local creditors’ interests are secured by protecting their rights to participate in proceedings and to seek court assistance when necessary. The estbaishe the following:

(a) Protection of creditors and interested parties

When granting, modifying, or terminating relief in an insolvency case, the court must ensure that the interests of creditors, the debtor, and other interested persons are properly protected. The court may also impose conditions as it sees fit and can modify or end relief at the request of any affected party, the foreign representative, or on its own initiative.

(b) Insolvency events

If a debtor, such as a bank, experiences an insolvency event (like bankruptcy or liquidation), the court must terminate the granted relief if an application for recognition has already been made or relief was provided.

(c) Voidable actions

Once a foreign proceeding is recognized, the foreign representative can take action to void or challenge transactions detrimental to creditors. In non-main foreign proceedings, these actions must relate to assets that should be handled under Kenyan law.

As disused above, once a recognition application satisfies the procedural requirements of the Fifth Schedule to the Insolvency Act 2025 and demonstrates that it is aligned to the objectives of cross-border insolvency as set out in Paragraph 2 of the Schedule, then the Court in Kenya shall grant recognition unless the action clearly falls within the public policy exception.

Public policy was defined in Christ for all Nationals v. Apollo Insurance Co. Ltd [2002] 2 EA 366 (Ringera J as he then was) to mean benefit enjoyed by a party which is:

(i) Inconsistent with the Constitution or other laws of Kenya, whether written or unwritten or

(ii) Inimical to the national interest of Kenya or

(iii) Contrary to justice and morality”.

In Open Joint Stock Company Zarubezhstroy Technology v Gibb Africa Limited [ [2017] KEHC 6835 (KLR) beside approving the definition by Ringera J the court added that public policy refers to “the set of socio-cultural, legal political and economic values, norms and principles that are deemed so essential that no departure therefrom can be entertained. Public policy acts as a shield for safeguarding the public good, upholding justice and morality and preserving the deep-rooted interest of a given society.”

X. The Effects of Recognition of Proceedings against a company undergoing foreign insolvency proceedings

Part 22 of the Fifth Schedule of the Insolvency Act, 2015, governs cross-border insolvency and the treatment of ongoing proceedings where a debtor is subject to foreign insolvency proceedings recognised in Kenya. It provides that upon recognition of foreign insolvency proceedings, certain actions against the debtor’s assets are automatically stayed, including:

(i) The commencement or continuation of individual actions concerning the debtor’s assets, rights, obligations, or liabilities.

(ii) Execution against the debtor’s assets.

(iii) Suspension of the right to transfer or encumber the debtor’s assets. However, Part 22(2) allows a creditor or interested party to apply for leave to continue such proceedings despite the stay. The court has discretion to grant leave, subject to conditions it deems appropriate.

Interestingly, Para. 22 does not set out the factors to be considered when granting leave to a party to continue proceedings against a company under administration. Some courts while acknowledging that the section does not specifically apply to Cross-border insolvencies, have opined that the factors set out in section 560A (1) of the Insolvency Act for lifting a moratorium following administration may guide the court. See Entreprise Generale Malta Forrest S.A.S v Kenya Electricity Transmission Company Limited & another [2022] KEHC 601 (KLR).

Similarly, in Benisa Limited v CMC DI Ravenna, Kenya Limited; BSA Bank Kenya PLC (Objector) [2022] KEHC 3401 (KLR), the court held as follows:

“The fact that the defendant is the subject of insolvency proceedings has consequences under the Insolvency Act, 2015. Under section 22(b) of the Fifth Schedule to the Insolvency Act dealing with Cross Border Insolvency, execution against the debtor’s assets is stayed. This stay is by operation of law. By proceeding with execution, it is clear that the Plaintiff, as an unsecured creditor, violated the statutory moratorium in place in an attempt to gain preference over the other unsecured creditors which is contrary to the objects of the Insolvency Act. Such execution cannot be allowed to proceed.”

XI. Challenges in Cross-Border Insolvency in Kenya

(i) As seen in the CMC DI Ravenna case, courts will not recognize such insolvency proceedings without sufficient documentation to prove their existence.

(ii) The courts must ensure that foreign proceedings do not contravene Kenyan public policy.

(iii) Coordination with Foreign Jurisdictions may occasion practical difficulties in enforcing Kenyan court orders abroad and vice versa.

These challenges are best illustrated in the following selected cases:

In re Cooperative Muratori & Cementisti – CMC DI Ravenna [2019] KEHC 1610 (KLR). In this case, the High Court of Kenya dealt with a foreign debtor seeking recognition of insolvency proceedings initiated in Italy. The case highlighted the following:

(i) The importance of compliance with procedural requirements under Paragraph 17.

(ii) The court’s discretion to grant recognition based on evidence of foreign proceedings.

(iii) The need to safeguard the rights of Kenyan creditors and ensure no prejudice occurs.

(iv) The law grants the court the power to recognize foreign proceedings unconditionally or with specific conditions, typically aimed at ensuring fairness to all creditors.

In re HP Gauff Ingeniure Gmbh & Co. KG-JBG [2021] KEHC 4296 (KLR) HP Gauff Ingeniure GmbH & Co., KG-JBG (“the Company”) was undergoing insolvency proceedings in Germany under the Nuremberg Local Court. These proceedings had been recognised by the Kenyan High Court on January 18, 2021, which imposed a stay on adverse actions against the Company’s assets in Kenya and prohibited the transfer of assets without court approval. Subsequently, the company filed an application seeking orders to transfer all the traced assets in Kenya to the insolvency estate.

Employees of the company in Kenya opposed on grounds of unresolved claims against the Company. Kenya Revenue Authority (KRA) opposed due to outstanding tax liabilities amounting to KES 1.9 billion, arguing the transfer would jeopardize tax collection. The main issues were (i) Whether Kenyan assets and payments could be transferred to Germany and (ii) Whether unresolved employee claims or KRA’s tax claim could bar the transfer.

The court held that the transfer adhered to recognition orders and facilitated creditor repayment; employee claims were under German insolvency jurisdiction.; and that KRA’s objections could not override insolvency principles of equal creditor treatment.

In Benisa Limited v CMC DI Ravenna, Kenya Limited; BSA Bank Kenya PLC (Objector) [2022] KEHC 3401 (KLR), an Applicant sought leave to continue the proceedings against the Isolux Ingeniera S.A, which was in receivership, as a nominal defendant. This application invoked Part 22 of the Fifth Schedule of the Insolvency Act, 2015, which governs cross-border insolvency and the treatment of ongoing proceedings where a debtor is subject to foreign insolvency proceedings recognized in Kenya. The main issue was whether the court should grant leave to the Applicant under Part 22(2) of the Fifth Schedule of the Insolvency Act, 2015 to proceed with the suit against the Company in Liquidation, despite the ongoing insolvency proceedings in Spain which had been recognised in Kenya.

The court held that Section 22(b) of the Fifth Schedule imposes an automatic stay on execution against the debtor’s assets. The plaintiff, as an unsecured creditor, violated this statutory moratorium by proceeding with execution, thereby seeking preferential treatment over other unsecured creditors, which contradicts the objectives of the Insolvency Act. Consequently, the court ruled that such execution cannot proceed.

Authored by Benson Odiwuor Otieno; Advocate of the High Court of Kenya

This article is a publication of the Litigation Practice Notes series, featured in The BOLD Newsletter. For questions, clarifications, or suggestions on this or related subjects, contact the author directly at insights@bensonodiwuor.com/ info@bensonodiwuor.com``