Author: Stella Muraguri

Kenya’s financial landscape is witnessing a transformation as digital currencies offer innovative alternatives to traditional banking. Amidst a weakening national currency and rising inflation rates, Kenyans are turning their gaze to the burgeoning world of virtual assets. This pivotal moment for the country is not just about adopting new technology—it’s about reshaping how Kenyans save, invest, and engage with the global economy.

THE QUEST FOR DIGITAL GOLD: KENYA’S CRYPTOCURRENCY BOOM

As the Kenyan Shilling struggles and inflation soars, citizens are in pursuit of financial stability, leading many to embrace cryptocurrencies. Over 6 million Kenyans now own cryptocurrencies, using them as a hedge against inflation, a means for international trade, and a safeguard for their savings.

In an article by Freeman Law;

Kenya holds more than $1.5 billion worth of Bitcoin alone, equating to 2.3% of Kenya’s GDP. Substantially, this figure does not include other cryptocurrencies, such as Ethereum or Dogecoin. These statistics indicate that cryptocurrency is accepted by Kenyan society despite the CBK’s warnings.

Additionally, and according to Chainalysys, Kenya’s ranks 5^th globally in terms of P2P exchange trade volume ranking and 21st on the Global Crypto Adoption Index. This underscores its potential to become a regional blockchain powerhouse, offering a beacon of hope for financial freedom.

It is therefore apparent that despite the lack of regulations, virtual assets have surged in popularity as Kenyans seek refuge from economic volatility. These digital representations of value are more than just currency; they’re tools for investment and global money transfers, reshaping how Kenyans interact with the world’s financial systems.

We therefore can’t help but ponder, does ignoring and condemning the use of virtual assets create a safe and regulated environment for Kenyan investors in the virtual asset eco-system? Perhaps not.

Trading of virtual assets in Kenya operates on peer-to-peer model. The concept of Peer-to-Peer (P2P) trading is revolutionizing money exchange in Kenya. By enabling direct transactions between individuals in local currency, P2P platforms are democratizing access to the global marketplace and presenting a versatile solution for converting between cryptocurrencies and Kenyan Shillings.

This method not only bypasses traditional financial institutions but also empowers Kenyans to maintain control over their financial transactions.

NAVIGATING THE CRYPTOCURRENCY LEGAL PURGATORY STATUS

The burgeoning interest in virtual assets doesn’t come without its pitfalls. Kenyans face the dual challenge of cryptocurrency scams and the perils of an unregulated market, exemplified by the FTX Collapse of 2022. As the nation grapples with these risks, the need for robust financial literacy and prudent investment strategies has never been more critical.

Cryptocurrency we dare say is stuck in purgatory. While it is not illegal to deal with cryptocurrency in Kenya, the Central Bank of Kenya issued a cautionary notice to the public in 2015 stating that the public should desist from transacting in cryptocurrency. Similarly, through Circular No. 14 of 2015, the Central Bank of Kenya issued a directive which expressly advised financial institutions, not to open accounts for any person dealing with virtual currency. It specifically stated that failure to adhere to this directive would lead to remedial action for the financial institution.

A contrarian position to the CBK circulars was seen in the Finance Act 2023. The Act introduces a 3% tax on income earned from the transfer or exchange of digital assets. The owner of the platform or the person facilitating the transfer or exchange of a digital asset is expected to withhold the digital asset tax and remit it to the Commissioner within five working days after the withholding.

As Kenya Revenue Authority begins taxing crypto trades, the cry for clear regulations grows louder, underscoring the urgency for legislative clarity.

THE FUTURE OF CRYPTOCURRENCY IN KENYA: EMBRACING THE DIGITAL RENAISSANCE

Kenya is not alone in its struggle to find the right regulatory approach to cryptocurrencies. Nations worldwide are experimenting with different degrees of regulatory control, with varying degrees of success. These international experiences offer valuable lessons for Kenya as it seeks to chart its own course in the crypto world.

The road ahead for Kenya in the cryptocurrency domain is fraught with challenges but also ripe with potential. As the nation contemplates its next move, it must balance the need for innovation with the demand for stability. With the world watching, Kenya’s journey through the complex terrain of digital finance continues to unfold, promising to redefine the economic prospects and financial democratization for its people.

At the climax of the Africa Climate Summit, 2023, a prominent highlight of the historic event was the sight of the Kenyan President, driving into KICC in a modest yet striking yellow electric car. The scene was a stark departure from the traditional parade of extravagant vehicles that has become all too familiar. It was a disruption that signaled the inevitability of electric vehicles (EVs) infiltrating our transport system.

Whatever your views, electric vehicles are coming to our roads, neighborhoods and before you know it, to your driveway. But the question remains, how soon can we fully transition to e-mobility? Will it be integrated into our ecosystem?

EVs are powered by electricity stored in batteries. This energy can be harnessed from renewable sources making EVs a sustainable and eco-friendly solution to our transportation needs. With the escalating fuel costs burdening Kenyans, the need for an alternative mode of transport has never been more desperate. And with our abundant renewable energy resources, investing in efficient electricity storage for EVs is not just practical, it’s imperative.

Despite the huge potential promised, it is an apparent reality that EVs are yet to catch on and be fully accommodated in the Kenyan transport sector. This can be blamed on a few hurdles that the country is yet to jump over. Among them is a need for significant infrastructure investments in dedicated charging stations. EVs require access to reliable and affordable electricity, but charging stations are still scarce in many parts of our country. This therefore creates a chicken-and-egg situation; Who will invest in charging stations before there are enough EVs to make it profitable? And who will buy an EV if they can’t charge it?

Investor opportunities as Kenya Transitions To E-Mobility

At its inception, the current government vide its Bottom-Up Economic Transformation Plan 2022-2027, unequivocally conveyed its aspirations regarding energy transition, particularly within the transport and mobility sector.

Metaphorically, in the midst of surging fuel prices under the watch of the same government, perhaps there is no better time to go electric! EPRA estimates that the EV market in Kenya could be worth $2.5 billion by 2030. As businesses across various sectors embrace electric vehicles, they will require legal experts to navigate joint ventures, research and development agreements, distribution agreements, supply agreements, and product assembly and manufacturing agreements.

Public Public-private partnerships will also play a vital role in establishing the necessary charging infrastructure, and facilitating collaboration between the government, private sectors, and project financiers. Furthermore, corporations entering the e-mobility industry will benefit from legal expertise in private equity and venture capital investments.

REGULATORY FRAMEWORK FOR ELECTRIC VEHICLES

Currently, the Energy and Petroleum Regulatory Authority (EPRA) has already released guidelines, effective from September 1st 2023, for EV charging and battery swapping infrastructure which provide clear requirements for businesses operating in this space. For instance, all public charging stations must be certified and type-approved by the Kenya Bureau of Standards (KEBS). This ensures that charging stations meet high safety standards and provide consumers with a reliable charging experience.

FINANCING OF ELECTRIC CARS BY LENDERS

In a bid to make EVs more accessible and affordable, the Movable Property Security Rights Act, 2017 (MPSR) ensures a seamless and secure process of acquisition, financing, and delivery for both sellers and buyers. If a financier is involved, the Act guarantees their right to receive payment without experiencing a lengthy legal process. The Act may not need any amendments as it lends itself to all movable assets.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS:

Kenya’s push toward embracing electric mobility aligns seamlessly with the global Environmental, Social, and Governance (ESG) agenda. By signing the COP26 declaration and offering financial incentives and tax benefits to encourage the adoption of electric vehicles in its 2023 Budget Policy Statement, Kenya demonstrates its commitment to sustainable and environmentally responsible transportation practices.

ESG considerations are increasingly vital for investors and businesses worldwide. The transition to e-mobility presents numerous ESG opportunities for Kenya such as reducing air pollution and greenhouse gas emissions. Additionally, the renewable energy and EV manufacturing sectors can generate new jobs.

SUSTAINABLE DEVELOPMENT GOALS (SDGS):

The shift to EVs aligns with several of the Sustainable Development Goals (SDGs). EVs can help to achieve SDG 13 (climate action) by reducing greenhouse gas emissions. This is well in line with the Nairobi Declaration which unveiled Africa’s commitment to all-encompassing climate resilience.

Furthermore, EVs contribute to SDG 8(decent work and economic growth) by creating new jobs in the renewable energy and EV manufacturing sectors, fostering economic growth, and promoting decent work opportunities. However, it is crucial to prioritize inclusive and sustainable development throughout the e-mobility transition. This includes ensuring access to EVs for low-income households and rural communities. Kenya’s Vision 2030 identifies e-mobility as a prioritized sector and aims to increase the number of EVs on Kenyan roads to 500,000 by 2030 for the benefit of everyone.

CONCLUSION

In conclusion, Kenya’s transition to EVs presents an incredibly powerful and transformative opportunity to build a more sustainable and equitable future. By embracing electric vehicles, we can reduce air pollution, create new jobs, and contribute to our country’s sustainable development.

Nevertheless, the legal profession has a vital role to play in supporting Kenya’s EV revolution. Lawyers can help businesses and individuals navigate the complex legal landscape of EVs and ensure a seamless transition.

Prepared by Michael Muya, Grace Waswa & Stella Muraguri

This is an informative article and contains general information. It should not be construed as legal advice. Should legal advice be required, contact MMW Advocates LLP at info@mmw.legal for further assistance. The reproduction of this article is also prohibited without the prior consent of MMW ADVOCATES LLP.

In our first article, we gave a brief overview on the amendments to the Banking Act which article focused on the need for full disclosure by financial institutions; Interest rates on deposits and credit facilities & Penalties imposed upon contravention of the amendments to the Act.

This article focuses on whether the amendments affect pre-existing loans. To answer this question we need to briefly discuss the key features of loans and thereafter apply the law. (Kindly note that the article equally applies to deposits.)

Nature of Loans

In most instances, where a bank advances a loan, the debtor is required to repay the loan through instalments over a period of time. Meaning that a loan agreement is one that is performed though the continued payment of the facility. Therefore a loan agreement is one that is defined by continued performance. To simplify it, if the debtor is required to pay an instalment Kshs. 100/- on the 30th of every month, then it means that, every 30th of the month, a new obligation arises. The new obligation is expected to be honoured regardless of whether the debtor defaulted on the previous month.

This obligation is pegged on the payment terms of the loan agreement and once the debtor makes the payment of Kshs. 100.00, that obligation is fulfilled and it is until the 30th of the following month that a new obligation arises. This the typical nature of loans. (Please note that this scenario has been extremely simplified for purposes of this article).

It is on this background that we shall deal with the issue of the applicability of the amendments.

Applicability of the Amendments

It has been argued publicly that application of the amendments to pre-existing loans is be retroactive and as a general principal of law, the law does not apply retrospectively. To explain this; if for instance there was no law forbidding littering, and person X litters today, the tomorrow a law is passed stating that littering is an offence, person X cannot be charged with the offence of littering. After-all, he littered when littering was not an offence. The law will only be enforceable from the day of it being gazetted and published and not a day earlier. This example simply explains that the law is not retrospective, or, it does not operate “backwards”.

It is this principle that has been used to argue against the amendment affecting loan agreements that were entered between banks and its customers before the gazettement of the Amendments. However, as stated above loans create a continuing obligation. A loan by its very nature requires continued performance, which is the payment of instalments.

This is unlike most acts in law which are a one-time event, like littering, murder, stealing etc. A loan agreement creates a continuing contract unlike other contracts where performance is a one-off event. This therefore means that the moment the amendments become enforceable, which is 14th September 2016, the maximum interest rate chargeable shall not be more than 4 percent above a base rate set by the CBK. The law will only be applicable from the said date and on new obligations on pre-existing loans.

However, the law shall not be applicable to obligations that had not been fulfilled as at 14th September 2016. This means that, loans which were in arrears or obligations accruing prior the commencement date will not be subject to the reduction of interest rates. (Remember the law does not “operate backwards”). Further the law will not require banks to lower the arrears due to the capping of rates. The rates applicable on arrears will be that which operations prior to 14th September 2016.

Conclusion

It is imperative to note that in law, contractual obligations cannot supersede statutory or legal obligations. Simply put, if party X & Y entered into a contract for Y to take X fishing in Lake Z every month for Kshs. 10/-, then a law is passed outlawing fishing on Lake Z, X cannot insist for Y to take him fishing as this will be breaking the law. The same principle, though simplistic, applies.

The law supersedes all contractual obligations and parties are required to obey the law regardless of the terms of the contract. A party to a contract can therefore not insist on the performance of that which has been outlawed.
We hope that this article has been useful to you.

The Companies Bill 2010, was passed into law on 12th September 2015 by the President. The new Act repeals the Companies Act Cap 486 which is a pre-colonial law made in 1948.

Over the years there have been various attempts to change the repealed company act. This was because ways and modes of doing business have tremendously changed in the last 6 decades. Technology has become integrated in our businesses, there is a culture change where more people have entrepreneurial ambitions and in time Kenya has been named the best emerging economy to invest in due to accelerated infrastructure development and a stable political and macroeconomic environment. There was therefore need to modernise Kenya’s business sector so as to make it easier for local and foreign entities to invest in Kenya.

The new Act is therefore aimed at revolutionising business in the country by removing various pre-existing legislative stumbling blocks to doing business in Kenya. It is intended to reflect the prevailing circumstances of carrying on business – including modern patterns of regulation and ownership.

It codifies common law principles – in particular, the indoor management rule and common law fiduciary duties of directors. Along with this, it modernises company law by recognising electronic communication and the use of websites and other electronic avenues for a company’s communications. The new Act has also increased the penalties and fines for offences relating to companies.

It is key to note that the new Act is not yet operational. Its provisions only become operational on the date which the Act is published in the Kenyan Gazette. We shall send you piecemeal articles noting that the Act has over 1,000 sections and is incredibly detailed (bulky) and comprehensive.

Key highlights of the new Act:

A. Types of Companies; Part II

The Act maintains the types of companies as was described in the repealed Act;

• Companies Limited by Shares
• Companies Limited by guarantees- this company does not have a share capital but by undertakings on contributions that will be made upon liquidation
• Unlimited Companies- there is no limit on the liability of its members
• Private company- Can be any of (a), (b) or (c) with a limit of 50 members and shares are not freely transferable
• Public company-there is no limit as to membership and the public is invited to purchase its (subscribe for) shares

B. Formation of A Company

Previously, Section 4 (1) of the Companies Act Cap 486 of the Laws of Kenya required a minimum of seven persons and two persons for the formation of a public and private company, respectively. With the new Act, private companies should have at least one director, whereas public companies must have at least two directors, who must be natural persons and over the age of 18 (and not 21 as was set out in the repealed Act).

The focus of this volume will be on the introduction of sole member companies which is the most drastic change in the Act. However before I delve into that it is key to differentiate between a member and a director for ease of understanding this article.

Difference between members and Directors

In Kenya, members of a company are commonly referred to as directors of a company. However in law there is a difference between members and directors of a company. Members of a company are the persons who subscribe to the memorandum and articles (memarts) of a company for purposes of its registration. (Reference is made to the last page of the “mem-arts” which states the name, address and shares allocated to each member). A director is one who is elected or appointed by the members to run the affairs of a company. We shall however look at the law on directors in the latter volumes.

C. The Single Member Company

i. Features of a sole member company

The new Act, has introduced an exciting concept referred to as the single/sole member company for private companies. This means a single entrepreneur can now incorporate a private company as a sole member and director, and gain the benefits that come with a company.

Initially, sole entrepreneurs were sentenced to operate as a sole proprietorship or look for family members or friends to gain the minimum number of two members for purposes of incorporating a company! It explains why a lot of indigenous successful companies are family run.

ii. Quorum

Interestingly, the sole member/director will constitute quorum in the general meetings. The sole member will be required to provide the company with details of the decisions from a general meeting, unless they are written resolutions.

iii. Capacity to contract

A sole member/director also has capacity to enter into a contract under Section 194 of the Act. However such contract is only valid if the terms of the contract are

• Set out in writing in a memorandum (agreement)
• Recorded in the first meeting of the directors following the making of the contract (even if the terms of a contract are not in writing, the directors can adopt and ratify it

iv. Validity of unprocedural decisions made by sole members

If a sole member/director makes a decision that ought to have been taken at a general meeting and should have been part of a written resolution, the decision shall not be invalidated because of the skip on procedure. The decision shall remain valid and binding.

This is meant to cure the mischief of sole member/directors making decision on behalf of the company and the company directors reneging on it on the basis of process yet a third party has relied on the decision relayed by the sole member/director.

v. Perpetual succession of sole member company

The question that will obviously form the subject to a lot of debate will be the issue of perpetual succession in the sole member company. The question is, does perpetual succession apply to single member companies? Yes it does!
Section 2 of the new Act states that one or more persons are enabled to incorporate a company with perpetual succession. This means that even upon the death of the sole member, the company will remain as a going concern and the death of the member will not affect the life of the company.

This is a great advantage to sole entrepreneurs whose business would cease to operate or exist upon their death in sole proprietorship. Further, while initially upon the death of the sole proprietor, creditors would pursue the estate of the deceased for the debt, in this case it is the company that will be responsible for the debt or liability, which liability is limited by shares or guarantee.

vi. Change of number of members

There are no restrictions on increasing the number of members to more than one or reducing the number of members to one, other than the company ensuring that the additional member/s details are entered in its register of members.

vii. Passing of resolutions

A sole member company can only pass an ordinary or special resolution as a written resolution. This is different from companies with two or more members which have the option of passing resolutions in writing or at a meeting of the members. While initially resolutions had to be witnessed or executed by the company secretary that is not a mandatory requirement considering that a company is only required to have a company secretary if it has a paid up capital of Kshs. 5,000,000.00 or more.

Conclusion

As stated earlier sole entrepreneurs will be the biggest gainers from the Act as they will gain the benefits accruing from a limited liability company with the freedom of sole proprietorship.

While the law protects parties that contract with single member companies under Section 319 by validating decisions made without due procedure by sole member/director companies, there is still need for subsidiary legislation.

Businesses may be apprehensive in dealing with sole member companies particularly because of the issue of perpetuity of the business upon the death of the sole member/director. While the law states that a single member company has the benefit of perpetual succession, there may be apparent risks upon the death of a sole member/director such as;

• Where the sole member is the sole director, who will run the company upon his death?
• In the event that the sole member/director dies while the company is in debt, whose responsibility is it to ensure that the debt is paid up?

Therefore while this concept is exciting to sole entrepreneurs and the estate of the deceased, as the law protects it through limited liability, the law has not endeavoured to protect parties such as banks, debtors, suppliers etc that would transact with the single member company.

To tread on caution, I would be recommend that parties transacting with single member companies, ensure that such companies have other directors as opposed to where the sole member is the sole director. This ensures that upon the death of the sole member, the directors of the company can still run the business.

The New Act contains more extensive disclosure and compliance requirements for companies that are incorporated outside Kenya that wish to register to do business in Kenya (such as franchises that are interested in doing business in Kenya). This is found in Part XXXVII of the New companies Act.

One significant change that was introduced is that a foreign company, which from the definition of the New Companies Act is a branch entity, is now required to have at least 30 per cent of the company’s shareholding held by a Kenyan citizen by birth.

The Act categorically states that the registrar will not register a foreign company unless the company has at least one local representative. The law makes it a punishable offense for a foreign company to operate without the input from local directors. Under Section 975 (3) of the Act, the officers, if found guilty of this offense, they will each be liable to a fine not exceeding 5 Million shillings.

The effect of this provision is that every branch that wishes to operate in Kenya will be required to effect a share transfer or share allotment of at least 30 per cent of its shares to a Kenyan individual in its jurisdiction.

The Act goes on to further to state, that should the local representative choose to exit, then the foreigners will have 21 days to get a replacement failure to which the company shall have breached the law, attracting a fine of Sh500,000 from each of the directors. This is if they continue operation in the country without the local representation.

It is our opinion that the impact of this provision may not have been fully appreciated for the following reasons;

• There may be foreign shareholding restrictions in the other jurisdictions;
• It may be very expensive for Kenyan individuals to purchase or invest at least 30 per cent in a foreign company.
• The process of carrying out a due diligence in a company in another jurisdiction to effect the share sale or allotment would not only be time-consuming, but also expensive.

While the intention of the imposition of local shareholders may be noble, the restrictions placed therein may make it difficult for foreign companies to invest in Kenya, particularly where 30% of the capital base is unsustainable and/or unaffordable for a local representative. The diligence, time, cost and human resource required in seeking out a local representative and ensuring that the representative is one who will work well with the foreign shareholders and understands the foreign company’s vision will not be an easy task. This will create a bottleneck for foreign investors who will have to be the ones to look for local investors who are willing to purchase 30% of the business.

On the flip side of the coin, the introduction of local representatives for foreign companies will ensure that Kenyan entrepreneurs to benefit from companies that are investing in Kenya. Foreign companies will not operate without input from local investors and this will drive our economy. Local partners will be of great benefit, particularly for [“maneuvering”] around the inherent pitfalls specific to the Kenyan market. A “local face” can be helpful, if not necessary, in overcoming the perception placed on a foreign-owned business, particularly when the local partner is projected as the lead developer.

It is key to note that this section will not be applicable to existing foreign companies that are already registered in Kenya under Cap 486.

The New Act contains more extensive disclosure and compliance requirements for companies that are incorporated outside Kenya that wish to register to do business in Kenya (such as franchises that are interested in doing business in Kenya). This is found in Part XXXVII of the New Companies Act.

One significant change that was introduced is that a foreign company, which from the definition of the New Companies Act is a branch entity, is now required to have at least 30 per cent of the company’s shareholding held by a Kenyan citizen by birth.

The Act categorically states that the registrar will not register a foreign company unless the company has at least one local representative. The law makes it a punishable offense for a foreign company to operate without the input from local directors. Under Section 975 (3) of the Act, the officers, if found guilty of this offense, they will each be liable to a fine not exceeding 5 Million shillings.

The effect of this provision is that every branch that wishes to operate in Kenya will be required to effect a share transfer or share allotment of at least 30 per cent of its shares to a Kenyan individual in its jurisdiction.

The Act goes on to further to state, that should the local representative choose to exit, then the foreigners will have 21 days to get a replacement failure to which the company shall have breached the law, attracting a fine of Sh500,000 from each of the directors. This is if they continue operation in the country without the local representation.

It is our opinion that the impact of this provision may not have been fully appreciated for the following reasons;

• There may be foreign shareholding restrictions in the other jurisdictions;
• It may be very expensive for Kenyan individuals to purchase or invest at least 30 per cent in a foreign company.
• The process of carrying out a due diligence in a company in another jurisdiction to effect the share sale or allotment would not only be time-consuming, but also expensive.

While the intention of the imposition of local shareholders may be noble, the restrictions placed therein may make it difficult for foreign companies to invest in Kenya, particularly where 30% of the capital base is unsustainable and/or unaffordable for a local representative. The diligence, time, cost and human resource required in seeking out a local representative and ensuring that the representative is one who will work well with the foreign shareholders and understands the foreign company’s vision will not be an easy task. This will create a bottleneck for foreign investors who will have to be the ones to look for local investors who are willing to purchase 30% of the business.

On the flip side of the coin, the introduction of local representatives for foreign companies will ensure that Kenyan entrepreneurs to benefit from companies that are investing in Kenya. Foreign companies will not operate without input from local investors and this will drive our economy. Local partners will be of great benefit, particularly for [“maneuvering”] around the inherent pitfalls specific to the Kenyan market. A “local face” can be helpful, if not necessary, in overcoming the perception placed on a foreign-owned business, particularly when the local partner is projected as the lead developer.

It is key to note that this section will not be applicable to existing foreign companies that are already registered in Kenya under Cap 486.

On 19th December 2016, Hon Justice Onguto delivered a Judgement in the case of Anthony Otiende Otiende Vs Public Service & 2 others (2016) eKLR which has sent the country into shock over the validity of the titles they hold when he made a declaration that the registration forms as promulgated by the CS-Lands well as the consequent forms of titles are unconstitutional, null and void. Worse was that there was misreporting by various news outlet to the effect that the security banks and financial institutions are holding are of no value in light of the said judgement.

That said, what orders and declarations were made by the court as regards the referenced topic? I will endeavour to explain & interpret them herein below.  The case was instituted by way of a constitutional petition under Section 110 (2) of the Lands Registration Act.

The Section deals with delegated legislation and provides as follows:

1) The Cabinet Secretary…may prescribe

a) the forms to be used in connection with this Act…

2) In making the regulations, rules or prescribing any matters required under this Act, the Cabinet Secretary “SHALL” take into account the advice of the Commission as required under the Constitution and such regulations or rules shall be tabled before Parliament for approval.

The court in making its determination, stated that indeed in prescribing the forms for purposes of the disposition of land, the CS failed to consult the National Land Commission and further failed to table the forms before parliament for approval. The court stated that the wording of section places a mandatory obligation on the CS to do these 2 things and not a discretionary obligation. This is emphasized by the use of the word “SHALL” on the section as opposed to the use of the word “may” or “can, which word connotes a duty and imperative obligation and not a mere directive one.

On this basis, and noting that the CS disregarded this mandatory statutory requirement, the court was called upon to make a determination on whether the forms that have been used by the public for purposes of land transactions since 2013 were valid.

The court noted that where a non-parliamentary body/third party is mandated by the law with the task of making delegated legislation, it is the role of parliament to supervise the laws legislated by the third party as it is the primary role of parliament to make legislation. It is for this reason that the law requires and demands parliamentary approval.

The CS was thus found wrong to have prescribed the forms in isolation and without the necessary consultation and approval. The forms as is were therefore declared null and void.  The court, even in declaring the prescribed forms as unconstitutional, was conscious of the fact that an outright declaration of invalidity would certainly interrupt the registration processes of various titles and create doubt and uncertainty over the titles that have been disposed or transacted over under the said forms.

So as to cure this issue, the court went on to invalidate the impugned forms but at the same time and in the public interest suspended such invalidation to avoid throwing the entire system of registration of title into disarray and chaos. The court then made the following declarations;

• The court declared that the registration forms as well as forms of title including Leases, Title Deeds, Grants and Certificates of Title or of Lease made and promulgated by the CS-Lands without the advise of or input of the National Land Commission and without the necessary public participation and or parliamentary scrutiny and approval are unconstitutional null and void;
• However considering the immediate consequences of the above declaration on the registration of titles processes, the declaration of invalidity is hereby suspended for 12 months to enable the CS to regularise the situation by undertaking consultation with the NLC, engaging the public participation, and seek parliament’s approval. This means that the public may proceed to dispose and transact with these forms for 12 months pending the promulgation of other forms by the CS.
• The court stated that the declaration of invalidity will not operate retroactively. This means that thought the court notes that the titles the public may have acquired for either personal or commercial transactions such as security for facilities will not be treated as invalid even if the forms that were used in obtaining these titles were not valid. It therefore does not affect titles that were acquired prior this judgement.
• That should the CS not comply in promulgating new forms within the 12 months, then any forms transacted after the 12 month suspension period will be null and void and any consequential transactions undertaken using these forms after the said reprieve period will be null and void.

Conclusion

In conclusion, the misreporting that the titles or securities you hold are invalid are false is a misinterpretation of the judgement. The declaration of invalidation of title is not retroactive and therefore does not affect your title. Further there will be no stay of transactions as there is a 12 month reprieve period within which the invalidation of the forms for disposal of land under the Lands Registration Act has been suspended.

We will note to update you once the CS complies with the court orders and publishes the new forms. We hope that this article has been useful to you.

Bankruptcy was governed by the Bankruptcy Act chapter 53 of laws of Kenya (formerly the English Bankruptcy Act 1930) while the liquidation of companies was governed by the Companies Act chapter 486 laws of Kenya (formerly the English Companies Act of 1948). The Acts largely reflected the English position of the time.

Insolvency of Natural Persons

Creditors Application

Previously a creditor could only make a bankruptcy petition id the debtor resides in Kenya. However, the new Act has widened the scope and 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.

Bankruptcy Trustee can Cancel Charges

A bankruptcy trustee can on its own initiative cancel a charge over any property of a bankrupt if the charge was created within the two(2) years immediately before the bankruptcy commenced and immediately after the charge was given, the bankrupt was unable to pay the bankrupt’s due debts.

However, 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.

Secured Creditor’s Options in the Event of Bankruptcy

The Act provides three options available to secured creditors in the event of bankruptcy. The creditor can:-
a) realize the charge;
b) surrender the charge to the bankruptcy trustee for the benefit of creditors; or
c) have the property valued and prove for the balance due after deducting the amount of the valuation

The Insolvency Act now provides that the bankruptcy trustee will 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.

It is important to note that failure to comply with the notice with respect to selecting an option will be deemed to be a surrender of the charge to the bankruptcy trustee for the general benefit of the creditors. It is therefore necessary that a lending institution exercise its option to realise its security within the thirty day notice.

Claim for Interest by a Creditor

A creditor may claim interest on the debt up to the date on which the bankruptcy commences. Post-bankruptcy, the bankruptcy trustee can only pay interest on the allowed creditor’s claims, if surplus assets remain after the bankruptcy trustee has paid the claims.

Power of the Court to Order Disposal of Charged Property

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.

The proceeds of the sale will go towards discharging the amounts secured by the security, and any additional money, required to be added to the net proceeds. It can therefore be deduced that a secured creditor will now rank in priority in receiving the proceeds of the sale over the trustee’s costs.

Where a Secured Creditor realises the Security

Where a secured creditor realises the security, they are required to account to the bankruptcy trustee for any surplus remaining after payment of the debt, interest and any proper payments to the holder of any other charge over the property.

Voluntary Arrangement – An Alternative to Bankruptcy

The Insolvency Act allows a debtor to enter into an arrangement with the creditors as an alternative to bankruptcy. On taking effect, the approved proposal binds every person including a secured creditor and a preferential creditor.

Conclusion

The new insolvency law gives priority to revival of distressed persons rather than the previous regime that aimed at auctioning or liquidating them. It provides for rescheduling of debt to lengthen the repayment period instead of commencing bankruptcy proceedings in court.

The legislation effectively cuts the power of creditors to dictate the terms of a settlement with banks largely affected as they have been the main creditors in bankruptcy transactions. However, to secured creditors’ advantage the Act provides for alternative procedures that facilitate the management of affairs for the benefit of both the bankrupt person and the secured creditors.

Demand letters are often issued by lawyers and creditors so regularly that most companies have taken to ignoring demand letters as if to test the seriousness of the author of the demand. For some companies, they prioritize the contents of the demand letter when a litigation suit arising from said demand is instituted.

However, with the coming of the Insolvency Act, once a debtor, be it a company(business) or a person, is served with a statutory demand, the possibility of being declared bankrupt or having your company liquidated is very real should the said debtor ignore the statutory demand.

A statutory demand simply put, is a letter from the creditor demanding that the debt amount be paid within 21 days failure to which the creditor will apply to the court to declare the debtor as unable to pay its debt. So whilst it is like your usual demand letter, it is key to watch out on the paragraphs that threaten that failure to pay the demanded amount, will lead to insolvency proceedings. A statutory demand, issued under section 17 of the Insolvency Act 2015, is what ignites the insolvency process.

Should a debtor receive a valid statutory demand and the debtor fails to set it aside within 21 days after receiving the demand, the creditor is entitled to make an application to court for a bankruptcy/liquidation order against the debtor. A debtor can only set aside the demand by way of an application filed in court. Failure to do so, the creditor will then file an insolvency application by way of a petition and in the absence of any valid response, the court can proceed to declare the debtor as insolvent.

A company that suffered the fate of having its assets liquidated due to ignoring a statutory demand is F. M. Macharia (K) Limited (Reported in 2017 eKLR-Judgement delivered by Hon. Justice Onguto on 11thApril 2017). F. M. Macharia (K) Limited, hereinafter the debtor, was issued with a statutory demand by a creditor to pay up Kshs. 1,467,117 within 21 days failure to which the creditor would file insolvency proceedings against it.

The debtor failed to respond or set aside the demand within 21 days and the creditor carried forth her threat and filed a petition to liquidate the debtor/company.

The petition for liquidation of the company was heard by the court and the creditor produced invoices to demonstrate that the debtor owed the said sums of money. The court found that the creditor had proven that a debt existed from the invoices and that a valid statutory demand had been issued to which the debtor had failed to challenge. The court thereafter ordered that;

1. a)  F. M. Macharia (K) Ltd (and its assets )be liquidated
2. b) The costs of the Petition are to be paid to the creditor out of the assets of the Company.
3. c) The Official Receiver is to be constituted as the liquidator of the Company.

This should therefore serve as an example, regardless of whether it’s a company or a natural person, that should you receive a statutory demand that threatens insolvency proceedings, it is best to engage the debtor towards settlement of the debt or seek to set aside the demand.

THE FINANCIAL MARKETS CONDUCT BILL

In the recent past, the Kenyan money market has witnessed a meteoric rise in the number of lenders, including the ever-emerging mobile money lending platforms. Besides mobile lenders we now have credit lending companies that are mushrooming all over Kenya, offering easy access to loans and accepting both conventional and unconventional securities. The sprouting of alternative sources of financing has been propelled by;

1. The capping of interest by the Banking Act on September 2016, which in turn reduced lending by Banks;
2. Alternative lenders, unlike Banks, do not have a rigorous vetting process for purposes of lending;
3. The quick turn-around time in lending by Alternative with promises to offer a loan facility within 24 hours;
4. Alternative lenders do not require conventional securities and are not concerned by the borrower’s credit rating score;
5. The fact that most Kenyan businesses constantly have liquidity problems despite possessing a large account receivable book, and often need quick loans to boost their cash flow (Invoice Discounting).

Alternative lenders seem aware of these unique Kenyan issues and are seemingly bridging the gap for Kenyans who don’t have formal bank accounts, conventional types of security or whose incomes are not stable enough to borrow from formal financial institutions. While these services have improved access to loans, the question that is unaddressed is, should this sector be regulated?

The government in its need to regulate the sector, sponsored the Financial Conducts Management Bill proposing the licensing and regulation of alternative lenders including the creation of a Financial Markets Conduct Authority (FMCA) being the oversight body. The act proposes;

1. Licensing and regulating of all credit lending entities and entities that offer financial services including financial investment services and product
2. A prescription of the maximum rates of interest chargeable on a loan;
3. Limitation in the varying of the interest rate applicable during the term of the contract.

In conclusion while alternative lenders have provided ease of access to loans, there is no denying the fact that this noble intention has been tainted by charging unconscionable interest rates as high as 43% and mining data so as to solicit potential borrowers by text to borrow at undisclosed rates and terms. It is therefore apparent that there is need for this market segment to be regulated so as to promote a fair, non-discriminatory marketplace for access to credit.

We will note to advise you as the Bill progresses; however, it is imperative to state that the Bill has been dormant with no real progress or traction.