Author: Gideon Kamau Muturi
The High Court of Kenya recently delivered a key ruling in I&M Bank Limited v Mitini Scapes Development Limited KEHC 5491, clarifying the procedure and limitations relating to the appointment of company administrators by debenture holders whose security predates the Insolvency Act (Act No. 18 of 2015). The Key take aways on appointments of administrators from the Ruling are as follows:
- Pre-Act Debentures and Administrator Appointment
Debenture holders with security instruments executed before the commencement of the Insolvency Act, typically under the repealed Companies Act, cannot unilaterally appoint company administrators under the Insolvency Act’s provisions. The High Court interpreted Sections 520 and 534 of the Insolvency Act to mean that only administrators appointed “under this Part” of the Act qualify as administrators for the purposes of company rescue procedures.
- Qualifying Floating Charges Requirement
The power to appoint an administrator directly under Section 534 of the Insolvency Act is limited to holders of a qualifying floating charge. This refers to a floating charge explicitly created or expressed under the Insolvency Act and empowering the holder to appoint an administrator. Pre-existing debentures did not meet this definition in the Mitini case.
- Ongoing Rights Under Repealed Companies Act
Section 734 of the Insolvency Act preserves the rights of holders of pre-existing debentures to appoint a receiver or manager under the repealed Companies Act provisions. This means such debenture holders can still appoint receivers/managers according to the terms of their debentures, but not administrators under the Insolvency Act without a court process.
- Court Appointment Required for Administrators
Although direct appointments of administrators by pre Insolvency Act debenture holders are precluded, the Insolvency Act allows these holders to seek a court order for an administrator’s appointment under Division 3 of the Act. Such appointments require formal court applications, with proper grounds and affidavits presented.
The Court will not retrospectively validate unilateral appointments made outside the statutory procedure.
- Purpose and Policy Considerations
The court acknowledged the need to balance efficient company rescue objectives with strict statutory compliance. While recognizing that the Insolvency Act aims to streamline insolvency processes, it held that Parliament may consider future amendments to clarify and potentially broaden the scope allowing pre Insolvency Act debenture holders more direct rights to appoint administrators.
- Practical Implications for Creditors and Companies
Creditors holding debentures that predate the Insolvency Act should carefully review their security documentation and understand they cannot immediately appoint administrators under the Insolvency Act.
To obtain administration of a company, such creditors must pursue court applications for administrator appointment and cannot rely solely on the insolvency provisions for direct action.
However, these creditors continue to enjoy rights to appoint receivers or managers under their original debenture terms and applicable provisions of the repealed Companies Act.
Nonethless, companies should be vigilant in challenging irregular appointments made by creditors under pre-Act debentures without court sanction.
Conclusion
This ruling underscores the importance of interpreting the Insolvency Act provisions harmoniously with existing legal frameworks and protecting statutory procedures for company rescue. Creditors and corporate practitioners are advised to seek legal guidance before attempting appointments of receivers or administrators to ensure compliance with the relevant statutes and court procedures.
Should you require assistance reviewing your security instruments or preparing applications for administrator appointments, please do not hesitate to contact us on gmuturi@gkmuturi.ke; info@gkmuturi.ke.
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