The Business Laws (Amendment) (No.2) Act, 2021 (the Business Amendment Act) has introduced changes to various legislation, notably the Insolvency Act, which are aimed at increasing the ease of doing business in Kenya.
Financially distressed companies can now take advantage of a new 30-day pre-insolvency moratorium while trying to achieve a turnaround. There is no restriction on which companies can apply for this. This will be welcome news for many debtors as the moratorium prevents creditors from taking adverse action against the company.
Lenders who hold a floating charge over a company’s assets will now be able to challenge the distribution by an administrator or liquidator to unsecured creditors of 20% of the proceeds derived from the sale of assets over which they hold a floating charge.
The Business Amendment Act has also aligned the execution of land documents with the requirements of the Companies Act so that a seal is not required where a company is a signatory. Please see our article on execution formalities here.
Employers will be happy to hear that the Business Amendment Act has harmonized payroll deductions for NSSF, NHIF and the industrial training levy so that NHIF and NSSF contributions will now be due on the 9th day of every month and industrial training levy will be due on the 9th day of the month following the end of the financial year.
The Employment (Amendment) Act, 2021 is aimed at aligning Kenya’s employment laws with international best practice. It has introduced a pre-adoptive leave entitlement for employees, which is a welcome move and puts Kenya on a progressive path with respect to its employment laws. The Employment (Amendment) Bill, 2019 had proposed even more progressive changes, which were notably left out. There is therefore still capacity to align Kenya’s employment laws with international best practice.
We have discussed the key changes in detail below:
HIGHLIGHTS OF THE BUSINESS LAWS (AMENDMENT) (NO. 2) ACT, 2021
- Introduction of the Pre-Insolvency Moratorium
The Business Amendment Act has amended the Insolvency Act, 2015 to introduce a new pre-insolvency moratorium as a standalone procedure that can be used by the directors of eligible companies to obtain temporary protection from creditors, while the company considers a business rescue plan. There is no eligibility threshold for a company to qualify for the moratorium, provided that the applying company is in financial distress. Whereas the Business Amendment Act does not state what constitutes a “financial distressed company”, it would be fair to use the existing insolvency test as a measure, although the courts will have discretion as to what test is applicable.
Where the moratorium is in effect, among other restrictions, a landlord or other person to whom rent is payable may not exercise a right of forfeiture in relation to premises let to the company with the court’s approval; steps may not be taken to enforce any security over the company’s property, or to repossess goods in the company’s possession under a credit purchase transaction; and an administrator or liquidator of the company may not be appointed, except with court approval. Accordingly, floating charge holders and holders of fixed charges will not be able to appoint an administrator or an administrative receiver to enforce their security respectively, while the moratorium is in effect.
The pre-insolvency moratorium will be for a period of thirty (30) days but the Court will have discretion to extend the moratorium for a period of at least thirty (30) days if it believes that the extension is desirable in order to achieve the aims of the initial moratorium.
In applying for a pre-insolvency moratorium, the applying company is not required to notify any of its creditors, including holders of floating charges in relation to the company’s property, except a creditor that had applied for a liquidation order against the company before the coming into effect of the moratorium.
The responsibility to supervise a company that is granted a pre-insolvency moratorium will be vested in a “monitor” who has to be a licensed insolvency practitioner.
Considering the adverse impact of the COVID-19 pandemic on the finances of many businesses, the pre-insolvency moratorium is a late but welcome move that can be used by businesses whose fundamentals are still strong, to negotiate a rescue plan with their creditors. As highlighted, a company need not be insolvent to obtain a pre-insolvency moratorium and thus any financial distressed business can take advantage of the new procedure. Financially distressed companies can now take advantage of the new moratorium to undertake any restructuring exercises.
- Additional Rights for Floating Charging Holders
The Amendment Act has amended the Insolvency Act to allow a holder of a floating charge to apply to the Court for an order restricting the distribution of assets of a company where there is floating charge over the company’s property by a liquidator or administrator or provisional liquidator for purposes of satisfying the unsecured debts of the insolvent company. The right to make the application to the Court was previously only available to the liquidator, administrator or the provisional liquidator of the Company. Under the Insolvency Act, notwithstanding the existence of a floating charge over a company’s property, a liquidator or administrator or provisional liquidator may avail up to 20% of the net assets of the insolvent company for the satisfaction of unsecured debts and may not distribute that portion to the floating change holder unless it exceeds the amount required to satisfy the unsecured debts of the Company.
This is an additional protective measure for asset-based lenders who lend to companies that later become insolvent.
- Execution of Contracts for Land The Business Amendment Act has amended the Law of Contract to provide that a contract involving land transactions executed by two authorised signatories (being directors or the company secretary) or a director of the company in the presence of a witness who attests the signature in accordance with the Companies Act, 2015, constitutes a validly signed contract. This amendment aligns the provisions of the Law of Contract with the requirements of the Companies Act and clarifies on what is already the best practice.
- Virtual and Hybrid General Meetings Following previous decisions by the Kenyan Courts allowing both private and public companies to hold virtual and hybrid meetings where their articles did not allow, on account of the COVID-19 pandemic, the Business Amendment Act has now enshrined the ability of companies to hold virtual and hybrid general meetings in the Companies Act, 2015.
- Determination of cases at the Small Claims Court The Amendment Act has amended the Small Claims Court Act to stipulate that all proceedings before the Court on any particular day so far as is practicable shall be heard and determined on the same day or on a day to day basis until the final determination of the matter, which shall be within sixty days from the date of filing the claim.
- NHIF, NSSF and NITA PAYMENTS
The Amendment Act has amended the National Hospital Insurance Fund (NHIF) Act, the National Social Security Fund (NSSF) Act and the Industrial Training Act to harmonise the due date for the respective payroll deductions. NHIF and NSSF contributions will now be due on the ninth day of every month and industrial training levies will be due on the ninth day of the month following the end of the financial year.
In addition, the NSSF Act has been amended to provide that the penalty of five percent of the respective contribution shall apply where a contribution has not been paid on or before the ninth day of the month. Previously, employers had until the end of the month in which the last day of the contribution period fell to remit the contributions.
The harmonization of the NSSF, NHIF and industrial training levy payments is aimed at enabling the implementation of the unified payroll system, which the Kenya Revenue Authority (KRA) recently rolled out. The initiative is aimed at increasing compliance by employers with respect to payroll deductions.
HIGHLIGHTS OF THE EMPLOYMENT (AMENDMENT) ACT, 2021
Introduction of Pre-Adoptive Leave
The Employment Act has been amended to entitle an employee to one month’s pre-adoptive leave with full pay where a child is placed in the employee’s continuous care and control, from the date of the placement of the child. An employee is required to notify his/her employer in writing of the intention of the adoption society to place a child in the employee’s custody at least 14 days before the placement of the child and the notice should be accompanied by the relevant documentation, including a custody agreement and an exit certificate from a registered adoption society. An employee who takes pre-adoptive leave has a right to return to the job they previously held immediately prior to the leave or to a reasonably suitable job on terms and conditions not less favourable than those which would have applied had the employee not been on pre-adoptive leave. Where an employee’s pre-adoptive leave has been extended with the employer’s consent or immediately before its expiry, the employee’s pre-adoptive leave shall expire on the last day of such extended leave. In addition, an employee shall not forfeit their annual leave entitlement on account of taking pre-adoptive leave.
We note that the amendment marks a progressive approach to Kenya’s employment laws with respect to adoption. Notably, where a couple adopts a child, the pre-adoptive leave will apply to the couple unlike in other countries such as Peru where if the adopting couple is married, only the woman is generally entitled to adoption leave. In addition, we note that contrary to the amendment, some countries afford adoptive mothers with the same rights as biological mothers with respect to adoptive leave, which is sometimes subject to the age of the child.
Employers should ensure that their human resources policies are updated and that the employment contracts of their employees reflect the pre-adoptive leave entitlement.
