When a Kenyan company can no longer pay its debts, its directors, shareholders and creditors face a cascade of decisions that are time-sensitive and consequential. The Insolvency Act 2015 — modelled substantially on the UK Insolvency Act 1986 but adapted for the Kenyan context — introduced administration as a formal rescue procedure for the first time, rationalised the liquidation process and strengthened the wrongful-trading regime that exposes directors to personal liability. Understanding the options, and the sequence in which they should be considered, is the starting point for any insolvency engagement.
At a glance
- The Insolvency Act 2015 introduced administration to Kenya — a statutory moratorium during which an administrator tries to rescue the company or achieve a better outcome for creditors than immediate liquidation.
- A company is insolvent in Kenya if it cannot pay its debts as they fall due (cash-flow test) or if its liabilities exceed its assets (balance-sheet test).
- Creditors’ voluntary liquidation and court-ordered winding-up are the main exit routes; a company voluntary arrangement (CVA) is an alternative where a majority of creditors agree to a formal compromise.
- Directors risk personal liability for wrongful trading if they allowed the company to incur debt when there was no reasonable prospect of avoiding insolvent liquidation.
- Preferential creditors (employees and certain government claims) rank above unsecured creditors but below fixed-charge holders and administration expenses in the distribution waterfall.
The statutory framework
The Insolvency Act 2015 (No. 18 of 2015) is the primary statute. It replaced the Companies (Winding Up) provisions in the old Companies Act and the Bankruptcy Act for individuals, consolidating both individual and corporate insolvency in one instrument. The Companies Act 2015 intersects on several points — registration of charges, directors’ duties and the appointment of receivers — and should be read alongside it.
The Act is supplemented by the Insolvency Regulations 2016, which prescribe forms, time limits and procedural requirements for administrators, liquidators and the Official Receiver. The Official Receiver’s office, a directorate within the Attorney-General’s department, handles court-ordered liquidations and the regulation of individual bankruptcies. Licensed insolvency practitioners (IPs) — a new professional class created by the Act — are authorised to act as administrators and voluntary liquidators.
Tests for corporate insolvency
A company is unable to pay its debts if a statutory demand for a debt exceeding KES 100,000 is served and remains unpaid for 21 days (the deemed-insolvency route), or if execution returned unsatisfied, or if the court is satisfied that the company is unable to pay its debts as they fall due (cash-flow test) or that the value of the company’s assets is less than the amount of its liabilities including contingent and prospective liabilities (balance-sheet test). Both tests can be relevant simultaneously: a company may be balance-sheet solvent but cash-flow insolvent, or the reverse.
Administration
Administration is the key innovation of the 2015 Act. An administrator — a licensed insolvency practitioner — is appointed to manage the company with the objective of rescuing it as a going concern, or, failing that, achieving a better outcome for creditors as a whole than would result from immediate winding-up, or, failing that, realising assets to make a distribution to one or more secured or preferential creditors.
An administrator may be appointed by the court (on application by the company, its directors or a qualifying creditor), by the holder of a qualifying floating charge (QFC-holder, who appoints out of court), or by the company or its directors (also out of court where no QFC-holder is involved). From the moment of appointment, a moratorium takes effect automatically: no legal proceedings, execution or security enforcement can begin or continue without the court’s leave. This breathing space is the central commercial attraction of administration.
The administrator must circulate proposals to creditors within eight weeks. Creditors approve, modify or reject the proposals at a creditors’ meeting. If approved, the administrator carries out the plan — which may include a business sale, a CVA, a debt restructuring or a pre-packaged sale to a connected party — before handing the company back to its directors (if rescued), moving it into liquidation, or applying for dissolution.
Company voluntary arrangement
A CVA is a formal agreement between the company and its unsecured creditors (and, where the court permits, secured and preferential creditors) to pay a reduced amount or over an extended period. The company’s directors propose the CVA; a licensed insolvency practitioner acts as the nominee to assess viability and chair the creditors’ meeting. A 75% majority in value of creditors voting approves the CVA, and once approved it binds all unsecured creditors who received notice of the meeting — including those who voted against it. A CVA does not itself create a moratorium (unlike administration), but a company can use administration as a gateway to a CVA where the moratorium is needed.
Liquidation
Members’ voluntary liquidation (MVL)
An MVL is used for a solvent company — one whose directors can honestly swear a declaration of solvency (that the company will be able to pay its debts in full within 12 months). It is the standard exit route for a company that has completed its purpose or whose shareholders wish to extract surplus assets. A liquidator is appointed, assets are realised, liabilities are paid, and the surplus is distributed to shareholders in accordance with their rights. The company is dissolved once the liquidator files final accounts with the Registrar of Companies.
Creditors’ voluntary liquidation (CVL)
Where the directors cannot make a declaration of solvency — because the company is insolvent or doubtfully solvent — the company passes into CVL on a shareholder resolution. Creditors have a dominant role: they can replace the liquidator chosen by shareholders with their own nominee, and the liquidator’s function is to realise assets for the benefit of creditors. The distribution waterfall is: (1) liquidation expenses; (2) preferential creditors (certain employee claims and PAYE arrears up to prescribed limits); (3) unsecured creditors pari passu; (4) deferred creditors and shareholders. Fixed-charge holders enforce outside the waterfall; floating-charge holders take after preferential creditors but before unsecured creditors.
Compulsory (court-ordered) winding-up
A petition to the High Court for winding-up may be presented by the company, a creditor, a contributory, the Official Receiver, or certain regulators. The court appoints a provisional liquidator (usually the Official Receiver) pending the hearing, and a liquidator on the making of the order. The Official Receiver takes initial custody and investigates the company’s affairs; a private licensed IP may be appointed as liquidator where the creditors prefer it.
Directors’ personal liability
Section 681 of the Insolvency Act 2015 empowers the court, on application by the liquidator, to declare that a director who knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation and failed to take every step that a reasonably diligent person would have taken to minimise loss to creditors, is personally liable to contribute to the company’s assets. This is the Kenyan equivalent of wrongful trading.
Separately, fraudulent trading (section 682) — carrying on business with intent to defraud creditors — exposes a director to both civil liability and criminal sanction. Misfeasance (section 680) covers a broader class of conduct by officers and those concerned in the promotion, formation or management of the company.
What you should do now
For directors of a financially stressed company
Increase board meeting frequency. Take legal and financial advice early — the Insolvency Act’s wrongful-trading provisions run from the point at which a director knew or ought to have known of the risk of insolvent liquidation. Document every decision: the board’s reasoning, the advice received, the steps taken to cut losses. Consider whether administration should be proposed to preserve value while creditor discussions are under way. Do not take on new credit unless there is a clear, documented basis for believing the debt can be serviced.
For creditors
A QFC-holder (typically a bank with a debenture containing a floating charge) has the most powerful tool: out-of-court appointment of an administrator without notice. Review your security package before a crisis; if the charge is not registered, it may not qualify. Unsecured creditors should consider issuing a statutory demand early — a 21-day unpaid demand is the simplest route to proving insolvency for a winding-up petition.
For shareholders and investors
If the company is insolvent, shareholders’ interests are residual and may be worthless. The priority in a CVL or CVA is creditor recovery; shareholder approval of a restructuring should be seen for what it is — a bargain to preserve residual value. In a pre-packaged sale through administration, shareholders typically receive nothing unless they are also creditors.
Frequently asked questions
Q1. Can an administration moratorium stop a bank from enforcing its security?
Yes, in principle. The administration moratorium prevents a secured creditor from enforcing security without the court’s permission, even a QFC-holder who appointed the administrator. However, in practice, if the QFC-holder is the appointing party, the administrator owes duties to all creditors and may apply to the court to allow enforcement where it would benefit the general body of creditors.
Q2. What is a pre-packaged sale and is it permitted in Kenya?
A pre-packaged sale is an administration where the sale of the business is negotiated and agreed before the administrator is formally appointed, and completed immediately after appointment. The Insolvency Act does not expressly prohibit pre-packs; Kenyan administrators have carried out pre-packs in practice. The administrator must be able to justify the sale price as the best reasonably obtainable, which usually requires an independent valuation.
Q3. Does a CVA bind all creditors?
A CVA that is approved by 75% in value of creditors voting binds all unsecured creditors who received notice, including those who voted against. It does not bind secured creditors unless they separately consent, and it does not affect the rights of preferential creditors unless they agree.
Q4. What is the ranking of employee claims in a liquidation?
Certain employee claims are preferential — wages and salary owed in the four months before the winding-up commencement (up to a statutory cap), accrued holiday pay, and contributions to occupational pension schemes. Preferential claims rank above unsecured creditors and the holder of a floating charge, but below fixed-charge holders and liquidation expenses.
Q5. Can a company in liquidation in a foreign jurisdiction be wound up in Kenya?
Yes. A foreign company registered in Kenya under the Companies Act 2015, or one that has assets or conducts business in Kenya, may be wound up by the Kenyan court regardless of whether proceedings are pending elsewhere. The court has discretion and will consider comity and the interests of local creditors.
How OLM Law can help
OLM Law advises directors, creditors, administrators, liquidators and investors on the full range of corporate restructuring and insolvency options. We have experience in formal insolvency procedures, informal workouts, pre-insolvency restructuring and directors’ liability advice. We work alongside licensed insolvency practitioners and financial advisers to provide integrated legal support throughout the process. Contact us at [email protected] to discuss your situation.
Sources and authorities
Insolvency Act 2015 (No. 18 of 2015), in particular Part VI (administration), Part VII (CVA), Parts VIII–X (liquidation), s. 680 (misfeasance), s. 681 (wrongful trading), s. 682 (fraudulent trading). | Insolvency Regulations 2016. | Companies Act 2015 (No. 17 of 2015), in particular s. 103 (registration of charges) and the directors’ duties provisions at ss. 142–151. | Official Receiver’s office: ag.go.ke. | All statutes available via kenyalaw.org.
Disclaimer: This article is general commentary on Kenyan law as at September 2026 and does not constitute legal advice. Specific situations require specific advice. No solicitor-client relationship is created by reading this article. OLM Law Advocates LLP accepts no liability for action taken in reliance on it.
About the author
John Maina
Partner · Advocate of the High Court of Kenya
John is a Partner at OLM Law Advocates LLP, advising corporations, banks and high-net-worth clients on corporate and commercial law, M&A, banking and finance, real estate and dispute resolution across Kenya and East Africa.
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