Introduction to the Country
It is important to nuture any new ideas and initiatives which can make a difference for Africa.
Professor Wangai Maathai (Nobel Peace Prize Winner; and Environmental and Womens Rights Activist)
Kenya has a population of approximately 39,002,772 million people (July 2009 estimate).
Kenya has a presidential representative democratic republic. It has a president who is both the head of state and head of government; and of a multiparty system.
The Kenyan legal system is based on Kenyan statutory law, Kenyan and English common law, tribal law, and Islamic law.
In general,Kenya is perceived to be the regional hub for trade and finance inEast Africa. As at May 2010, the economic indicators suggested that a positive growth rate of 4-5% GDP was expected. This was largely due to expansions in the tourism, telecommunications, transport, construction sectors and a recovery in agriculture.
The Kenyan economy is primarily market based, with a few state owned infrastructure enterprises, and maintains a liberalised external trade system. Kenyas economy is reasonably diversified as the tourism industry is Kenyas largest foreign export earner followed by agriculture, which is the second largest contributor to the countrys GDP.
The Kenyan government is considered to be investment friendly and has enacted several regulatory reforms to simplify both foreign and local investment. In comparison to other countries in the region, it has a well developed social and physical infrastructure making it an alternative location to South Africa, for major corporations who seek a point of entry to the African continent.
Finance and Tax matters
(a) Financial assistance
(i) Does the concept of financial assistance exist?
The concept of financial assistance in Kenya is prohibited by virtue of section 56 of the Companies Act (Cap 486). The courts recognise the concept of commercial benefit and this would have to be proved before the issuance of guarantees by companies.
(b) Lending restrictions/banking monopolies
(i) Any restrictions applicable to the importation of capital by lenders?
There are no restrictions.
(ii) Requirement for the lenders/security agent to be registered in the jurisdiction?
According to the Banking Act (Cap 488), lenders who do not take deposits are not required to obtain a banking licence. The lenders are permitted to operate through a registered branch set up locally.
(iii) Can foreign lenders lend into the jurisdiction?
(c) Restrictions relating to repatriation of dividends
(i) Are there any restrictions relating to repatriating dividends?
Dividends maybe repatriated however withholding tax is chargeable on dividends.
(i) Are there any restrictions on the convertibility of the jurisdictions currency?
(e) Interest payments
(i) Are there any restrictions on the payment and compounding of interest? If so, does this also affect both local and foreign lenders?
There are no restrictions on the payment and compounding of interest. However, the in duplum rule is in force, and banks are only permitted to recover a maximum of twice the principal amount owing at the time the loan becomes non-performing plus the costs of recovery. This rule applies to both foreign and local lenders.
(i) Are there any withholding tax issues in relation to interest? If so, does this also affect both local and foreign lenders?
Withholding tax is chargeable at different rates for residents and non-residents:
Management fees 20%
Professional fees 5% 20%
Royalties 5% 20%
Dividends 5% 10%
Interest 15% 15%
(ii) List of double taxation treaties:
- United Kingdom
- India; and
(iii) Lender risks in respect of tax liabilities/tax domiciliation as a result of providing debt and/or taking/enforcing security interests
Please contact us for further information.
(iv) Can loan repayment/enforcement proceeds be treated negatively from a tax perspective for the lenders?
Please contact us for further information.
(g) Stamping costs
(i) Details of stamp duty costs
(A) Stamp duty on principal security documents is payable at the rate of 0.2% of the principal amount, and if there is collateral security it is charged at the rate of 0.1%.
(B) For supplemental security stamp duty is at a nominal charge of K.Shs.200.00.
(C) Wth regard to the sale of immovable property, stamp duty is charged at a rate of 4% of the selling price and the same rate of stamp duty is applicable when immovable property is sold pursuant to enforcement of security.
(D) Stamp duty for the increase of share capital is calculated at the rate of 1%.
Security, Enforcement and Insolvency
(a) Overview of security regime
(i) Can a security interest be obtained over a companys assets e.g.:
(A) accounts receivable (book debts); Yes.
(B) inventory (stock in trade); Yes.
(C) shares of a company (issued and authorised); Only issued shares.
(D) equipment; Yes.
(E) real property; Yes.
(F) insurances; No. and
(G) project contracts; Yes.
(ii) Can shares of a project company validly be pledged and enforced under an English law share charge?
(iii) Can a company grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility?
Yes, provided the memorandum and articles of association allow for the same. (iv) If the borrowings to be secured are under a revolving credit facility, are there any special priority or other concerns?
Please contact us for further information.
(v) Can the relevant security interests be granted to a security agent or trustee on behalf of the lenders from time to time?
The concept of a trust is recognised in Kenya and it is therefore possible to appoint a security agent/trustee. In addition the original lenders can be changed by way of assignment or novation.
(vi) Please indicate the claims that would have priority over the relevant security interests.
Please contact us for further information.
The following order of priority would take precedence over (a) other unsecured creditors and (b) secured creditors, with regard to any assets charged in favour of such creditors by way of floating charge:
(A) all taxes and local rates due at the relevant date and having become due and payable within twelve months before that date not exceeding in the whole one years assessment;
(B) all government rents not more than one year in arrears;
(C) employees (other than directors) wages or salary for four months prior to the relevant date and all workmans or labourers wages for services rendered, not in either case exceeding K.Shs. 20,000.00 per individual claimant;
(D) all retirement benefits contributions of any employee of the Company not exceeding K.Shs. 20,000.00;
(E) amounts due by way of workmens compensation;
(F) amounts due in respect of contributions payable during the period of 12 months immediately preceding the relevant date under the National Social Security Fund Act, Chapter 258 of the Laws of Kenya.
(vii) Is there a public security registry?
There are two types of registries in Kenya. The first, is the lands registry where any security created over any immovable property owned by the company, or its affiliates, is registered. The second, is the companies registry where debentures and charges created by a company are registered.
(viii) Formalities: in connection with the creation of a security interest in shares or other assets:
(A) Statutory perfection requirements;
The consent of the Commissioner of Lands (or other head lessor) is required for the perfection of a security interest in a property leasehold. It is a requirement that the security interst is filed the Lands Registry and Companies Registry, the Companies Registry will issue a Certificate of Registration for Charges and Debentures.
(B) Any other formalities
A companys board resolutions are required for the creation of security interests. In addition, if a company has created previous securities, it is required to give notification of such securities to its existing secured creditors.
(C) Steps for perfection and length of time taken
Following the due execution of the security documents, the documents are sent for stamping which takes approximately seven (7) working days. Thereafter, the documents have to be registered at the Companies Registry which would take approximately five (5) working days. Moreover, in the event that there is a charge over the property, the documents would have to be registered at the Lands Registry, which takes approximately seven (7) working days.
(D) Any significant financial costs or significant time delays required to create and perfect the relevant interest?
Time delays are common in Kenya as both the lands and companies registries are poorly organised and files are often misplaced.
(b) Insolvency and enforcement regime receivership
(i) Is there a court or similar register that can be searched in respect of proceedings and insolvency actions?
There is a court register which is open to the public but is yet to be computerised. Therefore one can search the register for ongoing proceedings and insolvency actions.
(ii) Summary of the different options for an insolvency related process.
(A) Kenya does not have a specific insolvency statute in force. However, the insolvency, receivership and liquidation of companies is within the ambit of the Companies Act. According to the Act, a company may be wound up pursuant to the said act through:
(I) a compulsory winding up by the court;
(II) a voluntary winding up, which may be either a members voluntary up or a creditors voluntary winding up; or
(III) a winding up subject to the supervision of the High Court.
In all the aforementioned scenarios, after the decision is made to wind up the company either through a court process or members resolution the assets of the company vest in the liquidator, who winds up the company.
(iii) Are summary or expedited proceedings available?
Kenyan debentures provide for the appointment of a receiver. The power to appoint a receiver can be exercised at any time by the debenture holder and this appointment is not supervised by a court. There are no restrictions on a debenture holder to refrain from exercising its rights of appointing a receiver as this could result in a loss to the company and its unsecured creditors.
(iv) Are any governmental or other consents required in connection with:
(A) the enforcement of a security interest in shares; No.
(B) the enforcement of a security interest in other assets; No. or
(C) the enforcement of a guarantee (sovereign or otherwise)? No.
(v) Do lenders inherit all environmental liabilities when they become owner of the shares upon enforcement (or at any other time)?
The definition of owner under EMCA is relatively wide and therefore lenders would inherit environmental liabilities upon enforcement.
(vi) Can security interests be enforced by both private sale and public auction, and is it necessary to appoint a court or other official to carry out the enforcement?
There are two statues that form the substantive law for land in Kenya:
(A) The Registered Land Act (Cap 300) (RLA); and
(B) The Transfer of Property Act, 1882 (TPA).
Under the RLA an auctioneer must be appointed and a public auction conducted when a lender exercises the power of sale. Under the TPA private treaty is an acceptable method of selling the property. Hence, the Court does not carry out the enforcement of the security interests.
Corporate, Insurance and Employment matters
(a) General corporate issues
(i) Project company incorporation:
(A) Type of corporate vehicle
(I) Any of the following vehicles governed by the Companies Act would be a suitable project vehicle depending on the structure of the project and based on the project vehicles ownership and taxation issues: a private limited liability company which must have a minimum of two shareholders and two directors and the registration currently takes up to one month due to the restructuring of the Companies registry;
(II) a public company requires a minimum of seven shareholders and two directors. This vehicle may be favourable for trying to raise funding for the project through equity and eventual listing on a stock exchange (a company must fulfil the requirements of being a public company in order to be eligible for listing). The registration period is also approximately one month; and
(III) a branch of a foreign company with established premises in Kenya for purposes of carrying on business in Kenya. This would also require a month to register.
(B) Issues relating to thin capitalisation
The Income Tax Act (Cap 470), contains provisions on thin capitalization of foreign controlled companies where a company incorporated in Kenya is controlled by a non-resident person alone or together with four or fewer other persons and, the highest amount of all loans advanced to that company at any time during the year are more than three times the sum of the revenue reserves and the issued and paid up capital of that company. The Kenya Revenue Authority bars any tax deduction on the part of the interest that exceeds the prescribed ratio of debt to capital (3:1).
(C) Requirement to have indigenous shareholdings
There are no specific restriction(s) on indigenous shareholding, however there may be statute based restrictions; for instance in the insurance industry.
(I) Thin capitalisation requirements
(II) Can a limited liability company be established?
(III) Is it possible to use a foreign company or a branch of a foreign company to act as project company?
It is possible provided the company first acquires a certificate of compliance pursuant to part X of the Companies Act.
(D) Estimated timescale for incorporation in the country. Are there any specific fees or other costs payable to governmental authorities in respect of incorporation?
There are generally no minimum capital requirements for companies however the industry minimum has been set at K.Shs.2,000.00. In addition, there are specific statutes which may provide for minimum capitalization requirements depending on the industry or nature of business governed by those statutes.
(b) General corporate issues
(i) Is a private company free to lend and/or issue guarantees?
A private company can lend money but can only issue guarantees if the same is provided for in its memorandum and articles. Where companies are not related commercial benefit must be proved.
(ii) Are there any restrictions on dividend distribution?
There are no restrictions on the distribution of dividends.
(i) Mandatory insurance: are there any insurances which the project company or the Project is required to have by law (or regulations or similar)?
There are no mandatory insurance requirements in relation to the Project assets or project company.
(ii) Is there any minimum requirement to place the insurance with local insurers or any other similar restrictions? If so, can reinsurance be lawfully placed internationally?
Ideally insurance business (other than reinsurance business) should be placed with a Kenyan insurance company. However, insurance can be placed with foreign companies with prior written approval of the Commissioner of Insurance.
(iii) Are there any restrictions in respect of granting security rights over the insurances or reinsurances?
The Insurance Act (Cap 487), provides that an insurer is only permitted to secure temporary loans or overdrafts by way of a mortgage or charge which is not over ten per cent (10%) of its admitted assets.
(i) Legislative/regulatory issues: is there any legislation or regulation impacting on foreign employees, in particular the conditions relating to work and residence permits? Please give an indication of the process and costs in relation to obtaining work and residence permits.
Foreign employees would require work permits as prescribed under the Immigration Act (Cap 172). An application for a work permit is made to the Ministry of Immigration and approval that takes between 2 â 6 months. Upon approval a security bond is required in the sum of K.Shs.100,000.00 and the fee payable is K.Shs.100,000.00. In addition, the approval of a work permit also ensures residency.
(ii) Foreign restrictions: are there any restrictions that apply to foreign employees and foreign contractors/subcontractors and if so what do they need to do in order to comply with local legislation?
There is a requirement that all foreigners should register for and obtain an alien registration card.
(a) Land registry: is there a land registry (or similar) in the country that can be searched to confirm whether a project company has granted of any mortgage, charge, option assignment, lien or other encumbrance over the whole or part of the properties or assets of a company?
There are land registries that relate to the different land regimes. When a security or encumbrance is created over land it is registered against, the title at the registry and is considered a public record. Therefore one can conduct a search at the relevant registry to enquire on possible encumbrances.
(b) Landlordâs rights: please indicate whether there are any rights which accrue to the landlord (or the overnment or any other bodies) that may override the terms of a land lease or threaten the rights of a project company particularly any right of repossession or acquisition.
The Land Acts provides that, the Government or a private person, acting as a Landlord, can re-enter leased premises and forfeit the Lease when there is a breach of the terms of the lease.
Overriding the above rights are the provisions of the Kenyan Constitution and the Land Acquisition Act (Cap 295) which, subject to certain qualifications, gives the Government the right to compulsorily acquire land for the payment of compensation.
(c) Direct agreement: are you aware as to whether a direct agreement in respect of a lease has previously been provided to lenders on other transactions?
A direct agreement in respect of a lease has not been previously provided to lenders on other transactions in Kenya. Further, it is unlikely that such an agreement may be provided to the lenders in future.
(d) Forfeiture rights: do relief from forfeiture rights exist and would the lenders be entitled to rely on such rights?
The Government Lands Act (Cap 280) provides that the courts adjudicating on a forfeiture proceeding shall be guided by principles of English law and doctrines of good faith. There are no statutory rights providing for relief from forfeiture.
(e) Is there any additional legislation governing property rights?
Please contact us for further information.
(f) Are there any formalities with which lenders need to comply when enforcing security over land?
There is a requirement to give notice to the borrower for failure to pay the loan. Following the expiry of the notice period the lender may enforce the security by selling the land (see comments on 1.4 (b) (vi)) or appointing a receiver to manage the property.
International law and arbitration
(a) Supra-national treaties
(i) List all Bilateral Investment Treaties to which the country is party.
Kenya is a party to bilateral investment treaties with Germany, the Netherlands and the United Kingdom respectively.
(ii) Is the country a signatory to the Energy Charter Treaty?
Kenya is not a member state nor does it have observer status to the Energy Charter Treaty.
(i) Requirements and restrictions applicable to the choice of arbitration roles and place of arbitration
The choice of Arbitration can be determined by the parties to the agreement and it does not necessarily have to be in Kenya. Kenya is also part of UNICTRAL.
(ii) Are foreign arbitral awards / decisions are enforceable in the country (i.e. is the country a party to the New York Convention on the Recognition of Foreign Arbitral Awards (the âConventionâ)?
Foreign Arbitral awards are enforceable in Kenya and Kenya is a party to the New York Convention on the Recognition of Foreign Arbitral Awards (Ratified on 11th May, 1989).