12 October 2022 by Business Rescue Restructuring Insolvency Newsletter

War between two worlds: Recognition and enforcement of foreign insolvency proceedings

Globalisation and the growth of international trade have led to the increased movement of assets across borders. As a result, creditors may be compelled to deal with the estate of their debtors in several states, in order to reclaim their debts.

Such scenarios will inevitably give rise to cross-border insolvency issues that may be difficult to resolve unless there are provisions within domestic laws that facilitate co-operation and co-ordination of concurrent proceedings. For example, provisions that ensure that all creditors worldwide can participate in an insolvency proceeding with all their claims being treated on an equal basis. Proponents of territorialism, however, argue that insolvency proceedings should be confined to the territory where they were initiated, and the assets should be distributed to the creditors within that territory. In the matter of Zarara Oil & Gas Company Limited (Miscellaneous Application E532 of 2021) [2021] KEHC 191 (KLR) (Commercial and Tax) (3 November 2021) (Ruling), the High Court of Kenya had the challenging task of weighing the arguments for and against recognition of foreign insolvency proceedings.  

Facts

Zarara Oil and Gas Company Limited (Zarara) was an oil and gas company incorporated under the laws of Mauritius. As part of its business, the company extracted oil in Kenya and incurred various debts as a result. During the course of its activities, Zarara was unable to meet its commitments and the board of directors resolved to enter into liquidation proceedings, in accordance with the laws of Mauritius.

The company obtained a liquidation decree and appointed a liquidator to wind up its affairs. As part of his role, the liquidator sought to obtain a grant of recognition of a foreign award in Kenya, in order to lawfully take control of Zarara’s Kenyan assets and settle the existing liabilities. Relying on section 560, section 720 and Schedule 5 of the Insolvency Act of 2015 (Act), the liquidator applied to the High Court of Kenya for a recognition award.

However, three of the company’s creditors opposed this application, presumably because they intended to collect their debts independently and outside of the insolvency distribution priority imposed by the law.

On the one hand, OML Africa Logistics Limited and Alterrain Services Kenya Limited opposed the application on the grounds that the liquidator did not provide a list of Zarara’s creditors or any financial statements. It was argued that without this information, the liquidator had not demonstrated that the company was in fact in financial distress to warrant the recognition of the foreign award. It was further averred that granting a foreign award would be against Kenyan public policy, as the liquidator had not disclosed relevant information regarding on-going proceedings against Zarara in the Cayman Islands.

On the other hand, the Kenya Revenue Authority (KRA) argued that section 24 of the Tax Procedures Act of 2015 (TPA) exempted it from the distribution priority provided in the Act. It was argued that section 24 of the TPA allowed outstanding taxes to be ring-fenced from Zarara’s assets and settled before any distribution of assets was made, pursuant to the insolvency proceedings.

Key issues

Among various issues, the court analysed what is required to determine whether a grant of recognition is contrary to Kenyan public policy and, further, whether an argument for public policy could defeat an application for recognition. In determining this, the court referenced paragraph 19 of Schedule 5 of the Act and reiterated that a court would only refuse an application for recognition of a foreign award if its issuance would be “manifestly contrary to the public policy in Kenya”.

In interpreting this statement, the court referred to the decision in re Cooperativa Muratori and Cementisti – CMC Di Ravenna (Insolvency) Miscellaneous Application E627 of 2019 [2020] eKLR  wherein it was held that the use of the word “manifestly” indicated that the public policy exception could only defeat an application for recognition where such a grant would be clearly or plainly contrary to Kenyan public policy.

As a result, the court held that the creditors in this matter would only be entitled to use the public policy argument in exceptional and limited circumstances. Based on this, the court determined that the liquidator’s failure to disclose the existence of on-going proceedings against Zarara, was not substantial enough to be considered clearly or plainly contrary to Kenyan public policy. 

From this reasoning, it appears that although Schedule 5 of the Act was drafted to give judges and the Attorney General discretion to determine the question of public policy, in practice, the courts have taken a narrower interpretation of this provision, such that the threshold for proving this ground is relatively high.

Moreover, the court considered whether insolvency proceedings started in another jurisdiction could be taken to be prima facie evidence that a company was in financial distress. This issue arose because of the creditor’s argument that the liquidator had failed to provide the documents to demonstrate that the Zarara was in financial distress.

The court determined that foreign proceedings initiated in another country would be prima facie proof that a company is in financial distress, reasoning that if the court analysed the question of the company’s financial position, this would amount to an interference of the Mauritian court’s jurisdiction.

Insolvency practitioners and creditors ought to take note of the court’s approach to questions of a substantive nature in recognition proceedings. It is important to note that the court in this matter consistently refused to make determinations on substantive questions in an effort to preserve the jurisdiction of the foreign court.

Lastly, the court considered the question of whether the KRA’s debts could be settled prior to other distributions being made. The court referred to the case of re HP Gauff Ingeniure Gmbh & Co KG-JBG Miscellaneous Application E725 of 2019; [2021] eKLR, which held that ring-fencing taxes would undermine the basic principle of insolvency law. In particular, that all creditors of the same class ought to be treated fairly and equally. The court further determined that if it allowed the KRA’s argument, it would interfere with the Mauritian court’s jurisdiction, which was contrary to Schedule 5 of the Act, and would undermine the other creditors. It was therefore determined that although section 34 of the TPA provides for a priority of taxes, the KRA would not be entitled to a payment prior to the liquidator collecting the assets and distributing them.

Key take aways

This case highlighted the Kenyan court’s position as it relates to determining substantive issues during recognition proceedings. Of importance is that this case highlighted the court’s narrow approach to allowing for the public policy exception to defeat an award for recognition, all of which arguably point to the Kenyan court’s willingness to uphold the decisions of foreign courts and allow for these decrees to be valid and enforceable in Kenya, despite differences in insolvency laws.

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