Receivership of an insolvent Kenyan bank

An insolvent bank in Kenya is subject to a different set of rules from the ordinary company. This differentiation in treatment seems to be partly informed by the fact that the failure of one or more banks may cause severe disruption to the financial system. According to the Insolvency Act, 2015 an administrator may not be appointed in respect of a company that is a bank. On the other hand, the Kenya Deposit Insurance Act, 2012 prohibits the appointment of a liquidator except with the approval of the High Court and upon prior certification by the Central Bank of Kenya (CBK) that it will not appoint the Kenya Deposit Insurance Corporation (Corporation) as the liquidator.

7 Dec 2022 3 min read Business Rescue, Restructuring & Insolvency Newsletter Article

At a glance

  • Insolvent banks in Kenya are treated differently due to their potential impact on the financial system.
  • The Kenya Deposit Insurance Corporation has the power to assume control of a bank, appoint a manager, and declare a moratorium on payments.
  • Possible outcomes include liquidation, capital infusion, or transfer of assets to a solvent bank, with timing being crucial for successful rescue.

Undergoing a company voluntary arrangement or obtaining a statutory moratorium by an insolvent bank pursuant to the Insolvency Act, while not expressly prohibited, remains a theoretical possibility never to be exercised by a bank as it would inevitably result in a bank run and accelerate the likelihood of its receivership or liquidation by the CBK through the Corporation.

The Corporation is granted power by the CBK to be the sole and exclusive receiver of a bank if the CBK determines, among other things, that the bank’s assets are less than its obligations to its creditors or that the bank is likely to fail to meet any financial obligation or meet depositors’ demands in the normal course of business. Upon the appointment of the Corporation as receiver, the bank’s activities remain suspended until the receivership process ceases. The Corporation’s appointment is for a period not exceeding 12 months and this can be extended by the CBK for a further period of six months if it appears justified. Under exceptional circumstances the appointment may be extended by a further 12 months by the Cabinet Secretary.

The Corporation assumes control of the bank following written notice from the CBK that the bank has ceased or is likely to cease to be viable. Upon assuming control the Corporation is entitled to appoint any person as manager. The powers of the bank and its directors are vested in the Corporation or the person that is appointed as manager for the duration of the bank’s receivership. Where the Corporation has assumed control, a moratorium is triggered and no injunction or legal proceeding can be commenced in respect of the assumption of control and no agreement may be terminated or payment accelerated. The Corporation also has the power to declare a moratorium on the payments due to depositors and other creditors.

The outcome of the receivership is that the Corporation may recommend to the CBK that the bank is liquidated in which case the Corporation shall be appointed as liquidator. Alternatively, the Corporation may require additional capital from the bank’s shareholders in order to restore its financial condition. It can also decide to commence an exclusion and transfer process whereby part or all of the assets and relevant liabilities are transferred to another solvent and well managed bank and the liquidation of the insolvent bank with its the residual assets and liabilities. The exclusion and transfer must be completed within 60 days of the receivership, failing which the Corporation is obligated to recommend to the CBK that the insolvent bank should be liquidated. The transfer of such assets and liabilities is irrevocable and the consent of debtors, creditors or security holders is not required.

The CBK and the Corporation in dealing with insolvent banks has had a mixed bag. The wide-ranging powers granted to the Corporation to turn around an insolvent bank suggest that there should be more success than failure, but perhaps some of the failing banks that have been placed under receivership were already irredeemable. The timing of the appointment by the CBK and the execution of the mandate by the Corporation remain key cogs in the successful rescue of insolvent Kenyan banks.

The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2024 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us