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Kenya: More companies are going insolvent in Kenya, putting the spotlight on severance pay for employees

28 September 2022
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A sharp increase in company restructurings and insolvency processes in Kenya has raised concerns over how this affects employees who face the prospect of losing their jobs.

The short answer is that Kenyan employment and insolvency laws do address the question of severance pay for affected employees.

The longer answer, however, is that severance pay for employees of insolvent companies differs from that for employees who are retrenched under other circumstances, such as downsizing.

It is important to understand the differences in the light of a recent surge in companies being restructured or going through insolvency processes.

According to the Official Receiver’s office, the number of companies under administration in Kenya at the end of 2021 was eight times higher than in the previous year, jumping from only two cases in 2020 to seventeen. However, the number of companies under administration thus far in 2022 has reduced to nine.

The increase in 2021 is a significant indicator of insolvency trends in Kenya. However, we note that this may be attributable to the impact of the Covid-19 pandemic on the operations of businesses in Kenya.

Under the Kenyan Insolvency Act of 2015, companies in distress may first be placed under administration to ascertain whether they can be returned to profitability. If there is no hope of restoring a struggling company to financial health, the administrator may, among other things, decide to dissolve the company. However, if a company is unable to pay its debts and therefore insolvent, then the company may either be voluntarily or involuntarily liquidated without first being placed under administration.

Job losses may occur even if there is a reasonable prospect of a company under administration staying afloat, as we have seen in several high-profile cases involving companies under administration in the past six months. Thus, the issue of severance pay for employees of insolvent companies is becoming more pressing.

Differences in severance pay requirements

When an employer retrenches employees for business or operational reasons, such as automation taking over the work that people used to do, the employees are entitled to severance pay at the rate of not less than 15 days’ pay for each completed year of service. This is according to the Employment Act 2007, which also entitles employees to notice pay (or payment in lieu of notice) and accrued but untaken leave.

However, where an employee’s services are terminated on account of the insolvency of the employer, the employee’s entitlement to severance pay differs.

Under Kenyan employment laws, a company is deemed to be insolvent in four scenarios:

  • If the employer has a winding-up order or an administration order made against it;
  • If the company has passed a voluntary resolution for winding up; 
  • If a receiver manager has been appointed; or
  • If a holder (creditor) of any debenture secured by a floating charge of the company’s assets has taken possession of the company’s property. 

In all of these scenarios, the Employment Act requires an insolvent employer to pay certain debts that it owes its employees, including: 

  • arrears of wages between one to six months;
  • notice pay (as defined in the employment contract or human resources policy; if this is not defined in either of these, employees receive one month’s pay);
  • payment for leave days accrued but not taken; and
  • any basic award of compensation for unfair dismissal (if applicable).

Notably, for any of these debts, the total amount payable for a particular period of time is capped. The maximum amount payable for any one month may not exceed either KES 10 000 or one-half of the monthly remuneration (whichever is greater). If the period is shorter than a month, the payment is pro-rated. For example, if an employee earns KES 50 000, their maximum entitlement for any one month (based on the debts owed from the list above) would be KES 25 000.

Of course, it may happen that the insolvent company simply does not have the resources to pay these debts. In these circumstances, the Government of Kenya may be asked to step in.

Assistance from the Government

An employee of an insolvent company may apply to the Cabinet Secretary for Labour and Social Protection to pay an amount of the debts the employer owes the employee. These payments are made out of the National Social Security Fund.

Before any payments are made, the Cabinet Secretary must be satisfied that the employer is insolvent, that the employee’s employment was terminated, and that the employee was entitled to be paid the whole or part of any debt.

Where an administrator or receiver manager has been appointed to take control of the insolvent company, the Cabinet Secretary will only make payments on receipt of a statement from that officer of the amount owed to the employee.

If worse comes to worst and a company is liquidated, the question of redundancy payments under the Insolvency Act comes to the fore. Here, it is the liquidator who pays out debts to the creditors of the company, including its employees whose services are terminated.

Where do employees stand in the queue?

Under the Insolvency Act, redundancy payments of up to two hundred thousand Kenya Shillings per employee, that are owed to employees and that accrued either before or because of the liquidation are recognised as a preferential debt. As such, they fall under what are known as ‘second priority claims’.

This means that an employee’s redundancy entitlement of up to two hundred thousand Kenya Shillings per employee will form part of the amounts paid out before the unsecured creditors if funds are available but after the expenses of the liquidation, which take first priority. The first priority claims include the remuneration of the liquidator and the reasonable costs of the person who applied to the court, resulting in the liquidation. The Insolvency Act recognises the employees’ entitlement as important and the placement of employees as second priority, above even tax arrears (which are ranked third), is intended to ensure that where possible, employees do receive some form of payment as a result of their loss of employment as a matter of importance.

The bottom line of all this is that insolvency is strictly regulated in Kenya and its employment and insolvency laws provide for employees to be paid in the event of insolvency, even if the amounts payable may not be significant. Companies, whether in difficulties or not, would be well advised to familiarise themselves with their legal obligations towards employees.