KENTIENO

2024

COMMERCIAL – Quick Notes

Table of Contents
1. COMPANIES AND PARTNERSHIPS.............................................................................. 1
A. Companies ................................................................................................................ 1
a) Types & registration .............................................................................................. 1
b) Corporate veil ........................................................................................................ 3
c) Directors ................................................................................................................ 4
d) Shares, shareholders & share capital ...................................................................... 5
e) Beneficial ownership ............................................................................................. 7
f) Meetings and resolutions ....................................................................................... 7
g) Annual returns ...................................................................................................... 8
h) Comparison ........................................................................................................... 8
i) Conversion .......................................................................................................... 10
B. Partnerships ............................................................................................................ 11
a) General Partnership ............................................................................................. 11
b) Limited Partnership ............................................................................................. 14
c) LLP...................................................................................................................... 16
Comparison................................................................................................................. 21
Dissolution ................................................................................................................. 22
2. MERGERS AND ACQUISITIONS ................................................................................ 23
Legal framework ............................................................................................................. 23
Mergers........................................................................................................................... 23
Difference between merger and acquisition ................................................................. 23
Notifiable mergers ....................................................................................................... 25
Non-notifiable mergers ................................................................................................ 26
Factors to be considered on the approval of mergers – after notification ...................... 26
Documents required for a merger (process) ................................................................. 27
Key elements of due diligence...................................................................................... 27
Acquisitions ................................................................................................................... 28
Acquisitions – risks and benefits of (agreeing on) a letter of intent. .............................. 28
Sample Asset purchase agreement ............................................................................... 28
Takeover ......................................................................................................................... 30
3. INSOLVENCY PROCEDURES ...................................................................................... 31
KENTIENO
2024

A. Bankruptcy .............................................................................................................. 31
Debtor’s application ..................................................................................................... 31
Creditor’s application .................................................................................................. 34
Discharge ..................................................................................................................... 36
Bankruptcy offences.................................................................................................... 36
Alternatives ................................................................................................................. 37
B. Insolvency ............................................................................................................... 38
a) Liquidation .......................................................................................................... 38
b) Alternatives ......................................................................................................... 43
4. FINANCIAL SERVICES AND PAYMENT SYSTEMS ................................................... 46
Introduction.................................................................................................................... 46
Legal and regulatory framework ..................................................................................... 46
Payment Systems............................................................................................................. 47
Role of CBK in National Payment Systems.................................................................... 50
Procedures under the National Payment System Act, 2011.................................................. 51
Protection of personal data and other consumer information ........................................ 52
5. COMMERCIAL AGREEMENTS.................................................................................... 53
a) Joint venture ............................................................................................................ 53
Contractual JV ............................................................................................................. 53
Full Function Joint Venture .......................................................................................... 55
b) Distributorship ........................................................................................................ 56
c) Franchise ................................................................................................................. 58
d) Guarantee................................................................................................................ 61
e) Trust........................................................................................................................ 62
6. MOVABLE PROPERTY SECURITY RIGHTS ............................................................... 66
Creation .......................................................................................................................... 66
Registration .................................................................................................................... 67
Enforcement ................................................................................................................... 68
7. TAX PROCEDURES IN COMMERCIAL TRANSACTIONS ........................................ 71
a) Classification of taxes .............................................................................................. 71
b) Types of income and Taxation of incomes ............................................................... 71
Types of income tax ..................................................................................................... 71
CGT ............................................................................................................................. 72
KENTIENO
2024

c) Tax Planning, Avoidance & Evasion Capital Gains Tax ............................................ 74

d) Tax Dispute Resolution Mechanisms – statutory interpretation; types and procedures
of tax dispute resolution mechanisms.............................................................................. 74
e) Tax Procedures Act – tax returns, assessment, recovery and penalties in relation to
commercial transactions .................................................................................................. 74
Extension of time to submit tax return ......................................................................... 74
Late submission penalty ............................................................................................. 75
Recovery...................................................................................................................... 75
KENTIENO
2024

1. COMPANIES AND PARTNERSHIPS

A. Companies

a) Types & registration

Characteristics of a private limited company

S 9, Companies Act

• Separate legal personality – sue and be sued, own property, enter into
contracts.
• Perpetual succession.
• Its articles:
✓ restrict the members right to transfer shares.
✓ limit number of members to 50.
✓ prohibit the public from subscribing to shares.
✓ require the consent of all members to add a new member.
• Is not limited by guarantee.
• Certificate of incorporation states that it is a private company.

Public companies

S 10, Companies Act

• Articles allow its members the right to transfer their shares in the company;
• Articles do not prohibit invitations to the public to subscribe for shares or debentures
of the company;
• Certificate of incorporation states that it is a public company.

Registration of companies

Comply with the requirements of sections 13 to 16, Companies Act with respect to
registration.
Application done on e-citizen – BRS.

1. Memoranda & articles of association.

2. Name search and reservation – up to 5 proposed names.

3. Application – objects and business activities.

4. Company physical address – street or road name, town name and county.

1
KENTIENO
2024

5. Whether liability is limited – by shares or guarantee.

6. Whether company is private or public.

7. Director & shareholder details – name, ID, KRA PINS, residence, photos.

8. Statement of Nominal Capital

9. Share capital and respective shares.

10. Execution by members & directors

11. Payment of 10650.

12. Once registration is approved by the registrar one can download the Certificate

of Incorporation and list of directors/form CR12.

Procedure for registering a foreign company

Done pursuant to S 974-979, Companies Act 2015 & Registrar of Companies Rules.

• Application done through e-Citizen; pay requisite fees.

• Required documents:

a) A certified true copy of the Memorandum and Articles of Association (or

constitution) of “the Company”,

b) Certified true copy of Certificate of Incorporation. Both Certified as a true

copy by a Notary Public and notarised from the Country of Origin.

c) Company address – present physical and postal Address of “the Company”.

Both the Local Office and the Head Office.

d) Member details – full names, addresses, nationalities and occupations of each

of the Directors and the Company Secretary.

e) Local representatives – name, physical and postal address of Kenyan local

representative. (required by S 979, Companies Act)

• File company returns, duly signed.

• Notarised copies of the documents lodged at the Companies Registry for

registration of the Branch.

2
KENTIENO
2024

• It takes approximately 4 weeks to secure the Certificate of registration or in this

regard “a Certificate of Compliance” (with name & date of incorporation)

b) Corporate veil
What is the Corporate Veil and when can it be lifted?

Corporate veil: Salomon v Salomon – a company and its shareholders are two distinct
and separate personalities; thus, shareholders of a company cannot be held liable for
the company’s debts and other obligations.

Piercing the veil of incorporation/lifting the corporate veil

• Fraudulent trading → Gilford Motor Company v Horne

• Non-publication/misdescription of the company’s name.
• Agency, trustee or nominee → Adams v Cape Industries
• Negligence → Chandler v Cape Industries
• Indemnity
• Accounts – if they fail to submit records.
• To prevent deliberate evasion of a contractual obligation.
• Impropriety → Adams v Cape
• Single Economic Unit → DHN v Tower Hamlets/Jones v Lipman
• Evasion of corporate tax.

What is a derivative action?

Sections 238 – 241 Companies Act, 2015

• Action brought by shareholders to enforce rights of the company on its behalf;

brought by a member when the directors have failed to act and there is real risk
of actual loss befalling the company.
• The action is designed as a tool of accountability to ensure redress is obtained
against all wrongdoers, in the form of a representative suit filed by a
shareholder on behalf of the corporation against a director or a third party.
• It is an exception to the rule in Foss v Harbottle:
“A company is a separate legal personality, and the company alone is the proper
Plaintiff to sue on a wrong suffered by it” and;

3
KENTIENO
2024

the Turquand rule – “the court will not interfere with the internal management of
parties acting within their powers”
• Derivative action can be brought for one of the following reasons under Section
238(3) of the Companies Act 2015:
o Negligence
o Default
o Breach of duty
o Breach of trust

c) Directors
Duties of a company director

Statutory duties:

S 140 - 147, Companies Act

• Protest their removal.

• Act within their powers.
• Act in good faith – promote success of the company.
• Exercise independent judgment – individual, professional & devoid of undue
influence.
• Exercise reasonable care, skill and diligence.
• Avoid conflict of interest – personal gain to the detriment of the company.
• Not to accept benefits from third parties.
• Declare interest in proposed or existing transactions.

Specific duties

• Obtain shareholders’ approval before entering into certain transactions.

• Convene general meetings.
• Ensure company keeps proper accounting records.
• (Private company) – not to allot shares save for as provided.

Powers of directors

• Bind company – enter into contracts on behalf of company.

• Control voting power of company.
• Convene general meetings.
• Allot shares.
• Allot equity securities.

4
KENTIENO
2024

Removal of directors

Section 139 & 141, Companies Act 2015

• Removed by ordinary resolution (simple majority).

• Special notice required for resolution to remove director.
• Copy of notice sent to concerned director.
• Director may protest against removal.

Other ways of vacation of office of director – retirement, disqualification, resignation.

d) Shares, shareholders & share capital

Different shares available for issue in a company

1. Ordinary shares – they carry one vote per share, and they entitle the owner to
participate equally in the company’s dividends. If the organization is wound
up, the proceeds are again allocated equally.
Ordinary shares carry voting rights but rank after preference shares with
regards to rights to capital, in the event that the business is wound-up.

2. Preference shares – are shares that entitle the owner to receive a priority fixed
amount of dividend every year. This is received ahead of individuals that hold
ordinary shares. It is also usually a percentage of the nominal value (the value
stated when the shares were issued). No voting rights.

3. Non-voting shares – ordinary shares that carry no right to vote and no right to
attend general meetings. These shares are usually given to employees so that
remuneration can be paid as dividends for the purposes of tax efficiency for
both parties.

4. Redeemable shares – are issued on the terms that the company will/may buy
them back at a future date. This is either fixed or set at the director’s discretion.

5. Management shares – these carry a smaller nominal value than other classes
and/or provide multiple voting rights. They are often held by the original
members as a way to retain more control of the business than newer members.

5
KENTIENO
2024

6. Deferred ordinary shares - Offer dividend rights to the holder only after
dividends have been paid to all other members who hold different share
classes.

Ways of raising capital for a company

• Debt – charges, debentures, movable property security, fixed or floating

charges, unsecured loans.
• Equity – contributions, sale of shares.

Members rights

• Receive proposed written resolutions.

• Circulation of written resolutions.
• Require directors to call a general meeting.
• Require circulation of a statement.
• Appoint proxy to act in a meeting.
• Receive a company’s annual returns & financial statements.

Process for share transfer – required documentation to effect changes

• Transfer deed
• Share transfer forms
• Special resolution
• Statement of nominal capital
• Annual returns
• Stamp duty payment – assessed, marked and franked.
• Company CR 12
• Certificate of Incorporation
• Affidavit if members resign
• Notice and consent of appointment of new directors
• Notice of beneficial ownership

6
KENTIENO
2024

e) Beneficial ownership
Need and process of disclosure of Beneficial Ownership of Companies in Kenya

S 93A of the Companies Act; Companies (Beneficial Ownership Information)

Regulations 2020.

Beneficial owner means the natural person who ultimately owns or effectively
controls a company.

A company's beneficial owner is any natural person who:

• either directly or indirectly holds at least 10% of the issued shares of the company;
• exercises at least 10% of the voting rights in the company;
• holds a right to appoint or remove a director of the company; or
• exercises significant influence or control over the company.

f) Meetings and resolutions

General meetings

S 275A – companies to conduct AGM; failure an offence.

S 285 – contents of notice of general meeting:
• Time and date of meeting.
• Place of meeting.
• Means of joining meeting – if hybrid or virtual.
• General nature of the business to be dealt with (agenda).

Grounds to challenge a resolution

• Lack of notice.
• Against principles of good corporate governance.
• Opposition by minority.

Procedure in challenging a resolution

• File a derivative action claim – form of representative suit.

• Seek leave to bring a derivative action.
• Upon grant of leave, file case.

7
KENTIENO
2024

g) Annual returns

S 705 – 708, Companies Act

Filed on company’s anniversary or per last return date.

Contents of the annual return

• Company details – name, address, type, directors, authorized signatory,

financial statements.
• Capital and shareholders – statement of capital, number of shares, nominal
value of shares, members, changes in membership, share transfers and any
other changes.

h) Comparison
Advantages of a Public Limited Company over a Private Limited Company

1. Access to Capital

• Can raise capital by issuing shares to the public through a stock exchange such
as the Nairobi Securities Exchange (NSE).

• Can issue various types of shares and debentures to the public, which provides
more opportunities to raise funds compared to a private company, which is
limited to private sources of capital.

2. Transferability of Shares

• Liquidity: Shares in a PLC are freely transferable, making it easier for

shareholders to buy or sell shares without the consent of other shareholders.
This provides liquidity and attracts more investors.

• Valuation: The public trading of shares provides a market valuation, which is

often more transparent and can be beneficial for the company in terms of
acquiring loans or other forms of credit.

3. Visibility and Prestige

• Public Image: A PLC generally has a higher profile and prestige compared to
a private company. Being listed on a stock exchange enhances the company’s
credibility, making it easier to attract investors, partners, and customers.

• Trust: The regulatory requirements for a PLC, including the need for regular
audits and public disclosure of financial information, can increase trust among
investors, lenders, and the public.

8
KENTIENO
2024

4. Continuity and Stability

• Perpetual Succession: Like private companies, PLCs have perpetual

succession, but their structure and the ability to raise capital publicly often
make them more stable and sustainable in the long term.

• Wider Ownership Base: The dispersed ownership in a PLC reduces the risk of
sudden disruptions due to the departure or death of a few key shareholders,
which is more common in private companies.

5. Growth and Expansion Opportunities

• Mergers and Acquisitions: PLCs have better opportunities for mergers and
acquisitions due to their ability to offer shares as consideration in such
transactions.

• Global Expansion: The ability to raise significant capital and gain international
investors makes it easier for PLCs to expand globally, which is often more
challenging for private companies.

6. Regulatory Framework

• Credibility through Regulation: PLCs are subject to stricter regulatory

requirements, including adherence to the Capital Markets Authority (CMA)
regulations and the NSE rules. While this may seem like a disadvantage, it can
work as an advantage by enhancing the company's credibility and ensuring
transparency.

Difference between a company and an LLP

Aspect Company LLP

Legal framework Companies Act, 2015 LLP Act, 2011
Legal status Separate legal entity Separate legal entity
Formation Requires memoranda and articles Requires LLP agreement.
of association
Management By board of directors By partners
Liability Limited to amount invested in Limited to capital
shares contribution
Taxation Subject to corporate tax and Profits taxed at the
withholding tax on dividends partner level
Compliance Stringent regulatory requirements Fewer regulatory
requirements

9
KENTIENO
2024

Suitable for Larger businesses, public Professional firms; small

companies and medium businesses.

i) Conversion
Private to Public

Section 74, Companies Act 2015

• Application for conversion that contains:
✓ statement of company’s new name after conversion
✓ statement of the company’s proposed secretary
• Application accompanied by a copy of:
✓ special resolution converting to public company;
✓ company’s articles as proposed to be amended;
✓ balance sheet;
✓ valuation report;
✓ net assets.
• Lodge application with Registrar of Companies.
• Application should have a statement of the company’s new name after
conversion; appoint a company secretary.

Public to Private Limited Company

Section 77 – 81, Companies Act 2015

• Pass a special resolution for conversion.

• Ensure that no application has been made for cancellation of the resolution
seeking to convert.
• If there has been no cancellation application made, then
• Ensure that the memorandum and articles of the company have been changed to reflect
the change of name and the change from public limited company to private
limited company.
• Register the resolution with the Registrar of Companies
• Registrar to issue certificate of incorporation on registration of conversion.

10
KENTIENO
2024

B. Partnerships

a) General Partnership
Definition

S 2(1), PA 2012 – the relation which subsists between persons carrying on a business
in common with a view of profit.

General characteristics

• Governed by the PA 2012.

• Has no legal personality of its own.
• Each partner is liable for any debts or judgments taken on by the business or
the other partners.
• Unlimited liability – the partners share in all assets, profits, financial and legal
liabilities.
• All partners take part in management of the partnership.
• Do not have strict rules of formation.
• No formal requirements other than section 16 Partnership Act 2012 – ‘Accounting
and Partnership Records’.
• Governed by private partnership agreement with default rules in PA 2012
applying in absence of a specific agreement.
• An individual partner does not have authority to execute a deed on behalf of a
partnership unless he or she has been expressly authorized to do so by deed.
• Low cost of operation.
• Not required to hold annual meetings of the owners, issue partnership interest
and keep personal assets separate from business assets.

Duties and obligations of partners

• Fiduciary duties – trust and good faith.

• Duty of disclosure – to disclose material information
• Duty of due diligence – every partner must be aware of partnership business.

Specific duties

• Keep and render true and accurate accounts.

• Indemnify the firm of any loss occasioned by his wilful neglect or fraud.
• Not to carry on competing business.
• Not use firm property for private purposes.

11
KENTIENO
2024

• Share losses and profits equally.

• Act within scope of authority.
• A partner is not entitled to remuneration from the partnership for acting in the
business of the partnership.

Steps in the formation of a partnership

• Apply for a no-objection letter.

• Apply for registration through BRS. Details to include:
✓ Proposed 5 names.
✓ Nature of business.
✓ Registered office details.
✓ Ownership details.
✓ Relevant accompanying docs – statement of particulars, no objection
letter, ID copies, KRA PIN Certificate
• Pay the requisite fees
• Registration certificate offered
• (For law firm) Share registration certificate and professional indemnity policy
to LSK with letter requesting them to update your portal details to reflect that
you are now practicing under a firm.

Liability in partnership

S 4, Partnership Act

• A partnership is bound by an act done by a partner who is carrying on the

business of the partnership.
• A partnership is not bound if the partner was acting without authority of the
partnership.
• A partner who has unlimited liability is personally liable for the whole amount
of any obligation incurred by the partnership while he is a partner.

Benefits of a partnership

• Each party is individually liable.

• Unlimited liability – jointly liable. Share in all assets, profits; financial & legal
liabilities. S 4(1), Partnership Act.
• No strict rules of formation.
• No filing requirements.

12
KENTIENO
2024

Effect of changing a general partnership into an LLP on the capital base & liability

• All partners are entitled to share equally in the capital and profits of the
partnership.
• Partners individually liable for acts before registration of LLP.
• S 10(4), LLP Act – a partner is not personally liable for the wrongful act or
omission of another partner of the LLP.
• S 10(5), LLP Act – if wrongful act or omission is done in the course of the
business of the LLP, the partnership is liable.

Ceasing to be a partner (s 27)

• Death
• Expelled as partner by co-partners
• Partnership is dissolved
• Court order
• Bankruptcy order/sequestration
• Resignation
• Breaking up of partnership – partners fall below two, term expires

Conversion of Partnership to LLP

• Lodge a statement of particulars – PIN, ID/passport, photos, cert of registration.

• Pay prescribed fee.
• Consideration of application by registrar.
• Registration of conversion and issuance of certificate of registration.

(Same process applies to conversion of limited company to LLP)

13
KENTIENO
2024

b) Limited Partnership
Governed by the Partnership Act 2012

Registration A limited partnership must be registered with the registrar of

companies. A written memorandum sets out the following:
• Firm name
• Nature of business
• Particulars of limited partners and their contributions
• Date of commencement

Composition S 4(2), PA 2012 – a limited partnership must have at least:

of members • one general partner; and
• one limited partner.

Membership A limited liability company may be admitted as a

limited partner.

The limited A limited partner shall not take part in the management of the
partner partnership business.

The liability of this partner is limited to the amount of capital

contributed. He cannot therefore be sued for debts or other
liabilities of the firm.

The Limited Partner is subjected to the following incapacities:

• He cannot withdraw or receive back his share during the
subsistence of the firm.
• He does not bind the firm.
• He is not deemed to be an agent of the other partners.
• He may not take part in the management of the business
and if he does, he becomes a general partner for the
duration and may be sued for debts and other liabilities
arising.
• His death, bankruptcy or insanity does not lead to
dissolution.
• He cannot dissolve the partnership by notice.
• A person may be admitted as a partner without the
consent of the limited partner.
• Differences between partners are resolved by a majority of
the general partners.
• The discharging of his interest by a court order for a
private debt does not lead to dissolution.

14
KENTIENO
2024

General • Unlimited liability as provided in S. 4(2)(a) Partnership Act

Partner 2012.
• Responsible for the day-to-day management of the
partnership
• Fully liable for the debts and liabilities of the partnership.

Other characteristics

• No formal requirements for filing of returns other than S. 16 Partnership Act

2012 – ‘Accounting and Partnership Records’
• Governed by private partnership agreement with default rules in PA 2012
applying in absence of a specific agreement. There are no constitutional
documents.
• A limited partnership has no legal personality and so will usually contract with
third parties through its general partner(s).
• The general partner must be given express authority, conferred by deed, to
execute the proposed deed on the LP’s behalf.
• An LP does not have separate legal personality so it cannot hold assets in its
own name.

Formation procedure

S 68 – 69, PA 2012

• Application to Registrar with details such as:

✓ Name of partnership
✓ Names & addresses of proposed general partners
✓ Names of proposed limited partner and capital contribution
✓ Location and address of proposed office
• Statement signed by general partner(s)
• Registration and issuance of certificate.

15
KENTIENO
2024

c) LLP
Definition and Legal Framework

S 2, Limited Liability Partnership Act, 2011. An LLP is a body corporate with a separate
legal personality from its partners, capable of suing and being sued in its own name.

Benefits of a Limited Liability Partnership

1. Limited Liability Protection – The liability of each partner is limited to their capital
contribution. This means that personal assets of the partners are protected from the
business's liabilities.

2. Flexibility in Management - Partners can decide the internal management structure

and operational procedures through a partnership agreement. This flexibility allows
for efficient decision-making, and management tailored to the specific needs of
the business.

3. Tax Benefits – Unlike corporations, LLPs are not subject to corporate tax. Instead,
the income is taxed at the individual partner level, which can result in significant tax
savings. This pass-through taxation avoids the issue of double taxation that
corporations face.

4. Ease of Formation and Compliance – Forming an LLP is relatively

straightforward and less cumbersome. The registration process is streamlined, and the
compliance requirements are less stringent. This ease of formation and compliance
makes LLPs an attractive option for small and medium-sized enterprises (SMEs).

5. Perpetual Succession – An LLP continues to exist regardless of changes in its

partnership. The death, insolvency, or retirement of a partner does not affect the
continuity of the LLP. This feature ensures stability and longevity of the
business.

6. No Maximum Limit on Partners – This allows for greater flexibility in raising

capital and bringing in new partners with diverse skills and expertise. It also
facilitates the growth and expansion of the business.

16
KENTIENO
2024

7. Separate Legal Entity – This means it can own property, enter into contracts, and
conduct business in its own name. This separate legal status provides credibility
and can enhance the business's ability to raise capital and enter into commercial
transactions.

Contents of an LLP Deed

• Partnership name
• Parties
• Nature of business
• Commencement and duration
• Duties & responsibilities
• Capital structure
• Partnership property
• Banking & accounts
• Management & voting
• Dispute resolution
• Termination & winding up
• Admission of new partner

Liability of Partners in an LLP

S 10, LLP Act

(1) Solely obligated to an issue arising from contract, tort or otherwise.

(2) A person is not personally liable, directly or indirectly, for an obligation
referred to in subsection (1) only because the person is a partner of the LLP.
(3) Subsection (1) shall not affect the personal liability of a partner in tort for the
wrongful act or omission of that partner.
(4) A partner is not personally liable for the wrongful act or omission of another
partner of the LLP.
(5) If a partner of an LLP is liable to a person other than another partner of the
partnership as a result of a wrongful act or omission of that partner in the course
of the business of the LLP or with its authority, the partnership is liable to the same
extent as that partner.
(6) The liabilities of an LLP are payable out of the property of the LLP.

17
KENTIENO
2024

S 11, LLP Act

• A partner of an LLP is an agent of the LLP

• The partnership is not bound by anything done by the partner if he had no
authority to do what he did.

Legality of addition of a new partner by another partner without authorization of

other partners.

S 11(2), LLP Act. An LLP is not bound by anything done by a partner in dealing with
a person if:

• the partner has no authority to act on behalf of the LLP;

• the person with whom the partner is dealing has notice that the partner does
not have authority to act on behalf of the LLP.

Cessation of partnership in an LLP

S 13, LLP Act

• By complying with the requirements of the LLP agreement – on cessation.

• In absence of such agreement, giving 90-day notice of resignation.
• Death
• Dissolution of partnership

Procedure for removal of a partner from an LLP

• S 27(b) Partnership Act – co-partners may expel partner.

• S 29(1)(a) – majority of partners may expel partners upon a court order.
• S 29(2) – issue partner with a notice of not less than 3 months.
• S 44(1) – on application of one the partners, court may make order to remove
partner, break partnership.
• S 44(2) – court shall have regard to:
✓ Partners’ capability of performing duties.
✓ Effect of partner’s conduct on the business.
✓ Any breach of a term of the partnership agreement.
✓ Fraud, misrepresentation or non-disclosure.
✓ Any event making it unlawful to remain a partner.
✓ Any losses incurred.
✓ Any other ground the court considers appropriate.

18
KENTIENO
2024

Summarily:

• Make an application to court for removal of partner.

• After court order is made, issue a 3-month notice.
• Expel him/her.
• File the resolution with the registrar of partnerships.

Benefits of an LLP over a company

• Flexible in management & control – management exercised by general partner.

• Expeditious decision making – without undue formalities in meetings unlike
companies.
• Benefits from incorporation and acquisition of a legal personality – can hold
property etc.
• Tax-efficiency – partners are taxed at an individual level; no corporation tax.
• Lower compliance/regulatory requirements – unlike companies, no need to file
annual returns, hold an AGM etc.
• Enables partners to raise capital from other sources.
• Easier dissolution – striking off/winding up
• Suitable for smaller businesses.
• Perpetual succession.
• No limit to the number of partners.
• Limited liability protection – personal assets of the partners are protected from
the business's liabilities.
• Combines characteristics of both a company and partnership.

Advantages Disadvantages
GP Ease of formation Unlimited liability – puts personal
Flexibility in management assets at risk.
Potential for disputes.
Limited lifespan (dissolves if one
partner withdraws).
Difficulty in raising capital –
investors may be hesitant to invest
in a business where partners have
unlimited liability.

19
KENTIENO
2024

LP Limited Liability for LP – Unlimited Liability for GP

protecting their personal assets Complex formation and
from the partnership’s debts. compliance
Attracting Investors – inclusion of Limited Control for LP: have no say
investors who do not wish to in the management
participate in management.
Flexibility in Management –
General partners manage the
business, while limited partners
can invest

LLP Limited Liability for All Partners – Complex Formation and

all partners have limited liability, Compliance – LLPs require formal
protecting their personal assets registration and adherence to
from debts and obligations. regulatory requirements
Separate Legal Entity – it can own Disclosure Requirements – LLPs
property, sue, and be sued in its must file annual returns and
own name. maintain proper accounting records
Flexibility in Management – Potential for Internal Conflicts –
Partners can manage the business As with any partnership, there is
directly or appoint managers potential for conflicts among
Tax Benefits – Similar to general partners, especially if roles and
partnerships, LLPs are not subject responsibilities are not clearly
to corporate tax. Profits and losses defined.
are passed through to the partners.
Perpetual succession – Continuity
and stability.

20
KENTIENO
2024

Comparison
Feature General Partnership Limited Partnership LLP
Legal Framework Partnership Act, 2012. Partnership Act, 2012. LLP Act, 2011.

Liability Unlimited for all partners. General partner – unlimited Limited for all partners – S 10, LLP
Limited partner – limited to Act.
investment. S 4, LP Act.
Separate legal No No Yes
personality
Management All partners General partner All partners

Perpetual No No Yes
succession
Accounting Yes Yes Yes
records
requirement
Taxation Partner level Partner level Partner level; no corporate tax

Formation Partnership agreement – oral or Partnership agreement LLP Deed/Agreement

written
Suitability Small businesses, professional Investors seeking limited liability Professionals and businesses
firms without taking part in seeking limited liability and
management. flexible management

21
KENTIENO
2024

Dissolution
General • Break up
Partnership • Majority agreement
• Exercise of express power
• Occurrence of events like – death, bankruptcy
• Court order

Limited • Expiration of fixed term

Partnerships • End of venture
• Illegality
• Application on grounds of – incapacity, breach of
agreement, insolvency, just and equitable reasons.

LLP • Striking off by registrar

• Winding up

Conversion of a partnership to a company

• File a Notice of Cessation at the Registrar of Companies → document notifies

Registrar that owners of the partnership wish to stop using a particular
business name.
• Notice of Cessation is to be presented with the Original Certificate of
Registration of the Partnership.
• Once the Notice of Cessation is approved, reserve the name to use for the
company they intend to incorporate (done through writing a letter to the
Registrar asking him to confirm whether a company by that name exists, and if
not, to reserve the name).
• You need the following documents to register the new company:
o Memorandum and Articles of Association
o Statement of Nominal Capital + Stamp Duty Form
o Notice of location of registered office

22
KENTIENO
2024

2. MERGERS AND ACQUISITIONS

Legal framework
• The Competition Act, 2012
• Companies Act, 2015
• Competition (General) Rules 2019
• The Capital Markets Takeovers and Mergers Regulations, 2002
• The Capital Markets Act

Mergers

Difference between merger and acquisition

Merger – S 2 & 41(1), Competition Act.

• A merger involves the mutual decision of two companies to combine and form a new
entity.
• This process is usually amicable and involves the consolidation of assets,
liabilities, and operations.
• Mergers can be:
✓ Horizontal – between companies in the same industry.
✓ Vertical – between companies at different stages of production.
✓ Conglomerate – between companies in unrelated businesses.
• Both entities combine and the initial ones cease to exist.

Acquisitions

• An acquisition occurs when one company purchases another outright.

• Unlike mergers, acquisitions do not result in the formation of a new entity.
• The acquired company may continue to operate under its name or be absorbed into the
acquiring company.

Merger Acquisition
Two separate entities combine to create One entity purchases another outright.
a new joint organization.

Original entities cease to exist. Entities exist as independent legal

entities under the control of the
acquirer.
Merged entities operate under a new Acquired company operates under the
name. name of the acquiring company.

23
KENTIENO
2024

There is a mutual consent of the Decision to acquire might not be mutual

involved parties to merge. and might be hostile.

Involves entities of similar stature, size Acquiring company is larger and

and scale of operations. financially stronger than the target
company.

There is dilution of power between the Acquiring company exerts absolute

involved companies. power over the acquired one.

Merged companies issue new shares. New shares are not issued.

Reasons for merger/acquisition

• To gain a competitive advantage.

• To gain a larger market share.
• To diversify products or services.
• To cut costs.
• To survive and grow.
• To increase capabilities.
• To maximize profits (revenue synergies).

Control of an undertaking – merger

S 41(3), Competition Act

A person controls an undertaking if that person—

• beneficially owns more than one half of the issued share capital or business or
assets of the undertaking;
• is entitled to vote a majority of the votes that may be cast at a general meeting of
the undertaking, or
• has the ability to control the voting of a majority of those votes, either directly or
through a controlled entity of that undertaking;
• is able to appoint, or to veto the appointment of, a majority of the directors of the
undertaking;
• is a holding company, and the undertaking is a subsidiary of that company as
contemplated in the Companies Act;
• in the case of the undertaking being a trust, has the ability to control the majority
of the votes of the trustees or to appoint the majority of the trustees or to appoint
or change the majority of the beneficiaries of the trust;
24
KENTIENO
2024

• in the case of the undertaking being a nominee undertaking, owns the majority of
the members’ interest or controls directly or has the right to control the majority
of members’ votes in the nominee undertaking; or
• has the ability to materially influence the policy of the undertaking in a manner
comparable to a person who, in ordinary commercial practice, can exercise an
element of control.

Notifiable mergers
Competition (General) Rules 2019 – First schedule, Para 4

A merger which meets the following threshold shall be notified to the Authority –

• Combined turnover or assets of merging entities is equal to 1 billion or more

• Target company turnover and asset is 500 million and above

• Value of acquiring entity in Kenya is above 10 billion and when vertically

integrated it does not meet COMESA thresholds.

• Carbon mineral sector associated assets and reserve rights is above 10 billion

• Merging entities operate in the COMESA region and 2/3 value of its turnover or

assets is located or generated from Kenya

The main documents required to accompany the merger notification form are:

• The proposed merger agreement

• Audited financial statements for the last three years;
• Latest annual reports;
• Board resolutions and related documents regarding the merger decision; and
• A breakdown of employees and restructuring plan.

Consequence of failure to notify

S 42(3), Competition Act

Notifiable merger carried out without notifying the CAK:

• Amounts to an offence punishable by fine not exceeding 10 million or

imprisonment for a term not exceeding 5 years
• CAK may impose punishment on the merging entities in the form of fine not
more than 10% of the preceding year’s turnover.

25
KENTIENO
2024

• The merger is unenforceable.

COMESA Notification threshold

• Combined annual turnover exceeds $50 million

• Annual turnover of at least two/each of the parties equals to or exceeds $10
million

Non-notifiable mergers
Competition (General) Rules 2019 – First schedule, Part C Paras 5, 6, 7

Excluded transactions not requiring approval of the Authority:

• Combined turnover or assets is below 500 million

• Merger that meets COMESA notification thresholds

• Merger that is taking place wholly or entirely outside Kenya with no local connection

• 2/3 value of turnover or assets is not generated or located in Kenya.

Factors to be considered on the approval of mergers – after notification

S 46(2), Competition Act.

Considerations:

• It is a merger
• It is notifiable

Extent to which the proposed merger would be likely to:

• affect competition – prevent or lessen competition; trade restrictions, endanger

continuity of supplies;
• acquire dominant/strengthen dominant position;
• benefit the public – to outweigh the detriment;
• affect a particular industry sector or region;
• affect employment;
• affect ability of small undertakings to gain access to or to be competitive in any
market;
• affect ability of national industries to compete in international markets; and
• benefit to research and development.

26
KENTIENO
2024

Documents required for a merger (process)

• Letter of intent/term sheet – non-binding agreement of basic terms.

• Non-disclosure/confidentiality agreement – it puts the parties on notice that
certain matters are confidential, breach of which could derail the transaction.
• Exclusivity/’no-shop’ agreement – prevents target entity from negotiating a
sale with other potential acquirers during an agreed period of time.
• Due diligence report – verification, investigation or audit of a potential deal.
• Disclosure letter – protection from potential liabilities; source of info for buyer.
• Definitive agreement – merger/share purchase agreement. The sale and
purchase contract.
• Non-compete agreement – agreement not to engage in another business that is
a competitor to the new entity.

Key elements of due diligence

• Legal – contracts, agreements, guarantees.
• Financial – financial statements, assets, debts, cash flow & projections
• Tax – obligations, compliance, audits & reports.
• Operational – employment, facilities.

Legal due diligence

Overview of any litigation (pending, threatened or settled) & regulatory proceedings.

Litigation review may include:

• Filed or pending litigation, together with all complaints and other pleadings.
• Litigation settled and the terms of the settlement.
• Consent decrees, injunctions, judgments or orders against the company
• Insurance covering any claims, together with notices to insurance carriers
• Matters in arbitration
• Pending or threatened proceedings against the company

On the other hand, overall legal due diligence would typically involve intellectual
property, contractual obligations, legal encumbrances, legal suits.

27
KENTIENO
2024

Legal due diligence checklist/key areas

• Owners/Directors/Shareholders
• Capital structure/Value of company
• Financial records
• Assets/Liabilities
• Credit agreements, loan agreements and lease agreements.
• Security agreements, mortgages and other liens.
• Guarantees by the company of third-party obligations
• Investments in other companies or entities/Acquisitions of companies or
assets.
• Contracts, agreements and policies.
• Patents, copyrights, trademarks, licenses or assignments.
• Employees welfare/Integration
• Conflicts of interest
• Other sector specific regulations e.g. banking, insurance
• Sources of funding

Acquisitions
A corporate action in which a company buys most or all of the target company’s
ownership shares.

Acquisitions – risks and benefits of (agreeing on) a letter of intent.

Benefits

• Lays out basics of the final deal – terms and other relevant details.
• Paves way for due diligence, confidentiality & exclusivity agreements
• Evidence serious intent.

Risks

• Terms may not reflect needs of the buyer.

• Not legally binding – either party may breach.

Sample Asset purchase agreement

This Asset Purchase Agreement (“Agreement”) is made on [Date], between:

Seller: Busi Co. Ltd, a company incorporated under the laws of Kenya and having its
principal office at [Address] (“Seller”).

Buyer: Gude Co. Ltd, a company incorporated under the laws of Kenya and having
its principal office at [Address] (“Buyer”).

28
KENTIENO
2024

Recitals

WHEREAS

The Seller owns and operates a fleet of tour vans;

The Buyer wishes to purchase certain assets from the Seller for the purpose of
converting them to medical emergency vehicles;

Both parties agree to the terms and conditions set forth herein.

1. Sale of Assets

The Seller agrees to sell, and the Buyer agrees to purchase, the specified tour vans
(“Assets”) as listed in Schedule A attached hereto.

2. Purchase Price

The purchase price for the Assets shall be [Amount] payable upon execution of this
Agreement.

3. Condition and Modification of Assets

The Assets are sold “as is”. The Buyer is responsible for any modifications necessary
to convert the Assets for medical use.

4. Closing

The closing of the transaction shall occur on [Date], at which time the Seller shall
deliver to the Buyer all necessary documents and possession of the Assets.

5. Representations and Warranties

The Seller warrants that it is the lawful owner of the Assets and that the Assets are free
from all encumbrances.

6. Governing Law

This Agreement shall be governed by and construed in accordance with the laws of
Kenya.

IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
Agreement as of the day and year first above written.

[Seller’s Signature]

[Buyer’s Signature]

29
KENTIENO
2024

Takeover
Takeover – defined under the Capital Markets (Takeover and Mergers) Regulations, 2002
as a general offer to acquire all voting shares in the Offeree company.

A takeover scheme involves making an offer for the acquisition by or on behalf of a

person of:

• All voting shares in the target company

• Such shares in a company which results in the offeror acquiring effective control
in a target company.
• A shareholding of 25% or more in a subsidiary of a listed company that has
contributed 50% or more to the average annual turnover in the latest there
financial years of the listed company.
• An acquisition deemed by the Capital Market Authority to constitute a takeover
scheme.

Takeover procedure

• Acquiring effective control

• Notice & announcement – within 24 hours in at least 2 national newspapers
• Offeror’s statement – within 10 days, serve a statement to the offeree detailing
the takeover scheme.
• Takeover offer document to CMA for approval.
• Acceptance & closing of the offer.
• Announcement of acceptance.

30
KENTIENO
2024

3. INSOLVENCY PROCEDURES

A. Bankruptcy
Legal status of an individual against whom an adjudication order has been made by
the court because of their inability to meet their financial liabilities.

Section 15, IA – persons entitled to make bankruptcy application:

• Creditor
• Debtor
• Supervisor

Debtor’s application
Legal Basis
• Section 32 – 35, Insolvency Act
• Reg 18, Insolvency Regulations

Procedure
Application is by way of bankruptcy petition in Form 10 supported by:

• Supporting affidavit
• Statement of debtor’s financial position
• Application for appointment of trustee
• Notice of appointment of an interim trustee.

Notice requirement

Section 32(4) Insolvency Act – debtor to publish a notice of the application in a

newspaper circulating within his region of residence and such other publications
prescribed by the regulations.

Reg 9 Insolvency Regulations – the notice shall identify the bankrupt and state:

• residential address of the bankrupt in the period of 12 months before issuance

of bankruptcy order;
• principal trading address;
• bankrupt’s DOB;
• any other name by which the bankrupt has been known;
• business/occupation

Application must be served on the creditors to give them time to oppose by

demonstrating that the debtor is able to pay.

31
KENTIENO
2024

Grounds for bankruptcy application

• Debtor appears unable to pay; or
• Have no reasonable prospect of being able to pay;
(S 32(1), IA)
• Owed sum equal to or exceeding prescribed threshold.(Bankruptcy – 500k; small
bankruptcies – 100k) S 33, IA. Reg 19, Insolvency Regulations.
• Debt is unsecured
• Debt is for a liquidated amount payable to applicant creditor.
• No statutory demand to set aside application in respect of debtor.

Grounds court considers before granting interim orders

S 304-306, Insolvency Act – Court should be satisfied that:

• The debtor intends to make a proposal.
• Debtor is undischarged bankrupt.
• No previous application has been made 12 months preceding that day.
• The supervisor designated under the debtor’s proposal is willing to act in
relation to the proposal.

Grounds to oppose bankruptcy application (Section 33, IA)

• Owed sum does not exceed prescribed threshold.

• Debtor able to pay – estate equal to or more than the prescribed threshold.
• Debtor has been adjudged bankrupt within the last 5 years.
• Proceedings stayed by statutory demand.

Reasons a person may seek declaration of bankruptcy

• Bankrupt gets legal protection from creditors.

• Bankruptcy eliminates most unsecured debts.
• Cost is relatively inexpensive compared to the cost of the debt.
• Takes pressure off the bankrupt in dealing with debts.

Implications of commencement of bankruptcy proceedings

• All proceedings to recover the bankrupt’s debts are stayed.

• Court may on application by a creditor or other person interested allow the
proceedings that had already begun before commencement of bankruptcy to
continue.

32
KENTIENO
2024

• Property of the bankrupt vests in the official receiver.

Effect of bankruptcy order

Section 13(2) Insolvency Act

• Property of the bankrupt vests in the trustee or official receiver.

• Bankrupt is restricted as to the business activities he can undertake.
• Official receiver recovers assets that the person has transferred within 2 years
preceding the bankruptcy.
• All civil proceedings by the bankrupt will be taken over by the trustee.
• Bankrupt to provide a true and accurate account of all his assets, income and
liabilities.
• Protects one from creditors commencing recovery proceedings without leave
of the court.
• It imposes certain disabilities upon the debtor:
✓ Running for elected position
✓ Cannot be director of a company
✓ Cannot enter into contracts (limited, not absolute)
✓ Cannot institute suits in their own name

Annulment of a bankruptcy order

Section 272 – 274, Insolvency Act

• It is the cancellation of a bankruptcy order which releases the bankrupt from

restrictions placed upon him by law.
• Court can annul suo moto or on debtor’s application or by person with
legitimate interest in the matter.

Grounds for annulment

Section 273(2), Insolvency Act

• Court finds that the bankrupt should not have been adjudged bankrupt.
• Bankrupt’s debts have been fully paid or satisfied.
• There has been a substantial change in the bankrupt’s financial circumstances since
the commencement of bankruptcy.
• Approval of a deed of composition or a voluntary arrangement.

33
KENTIENO
2024

Creditor’s application
Legal framework
• Section 17 – 31, Insolvency Act.
• Reg 15, Insolvency Regulations

Grounds
Creditor’s bankruptcy application - threshold.

S 17(2), Insolvency Act

• Debtor is domiciled in Kenya – S 15(3), IA.
• Debt is above prescribed bankruptcy threshold (Bankruptcy – 500k; small
bankruptcies – 100k). S 33, IA. Reg 19, Insolvency Regulations.
• Debt owed is a liquidated amount
• Debt is unsecured.
• Where debt is secured, creditor has disclaimed the security.
• No application is outstanding to set aside the demand in respect of a debt.
• Unable to pay; no reasonable prospects of being able to pay.
• No alternatives that can achieve a better outcome for the creditor.

Inability to pay test

SK Macharia v Ocean Freight case

Section 17(3) Insolvency Act – a debtor is deemed to be insolvent when they are
‘unable to pay’ their debts, meaning:

• creditor is owed 100k or more;

• issues a written demand requiring payment;
• 21 days have lapsed after service of the statutory demand;
• demand has neither been complied with nor set aside;
• execution or other process issued on a judgment decree or order is returned
unsatisfied either wholly or in part.

Procedure for creditor to apply for bankruptcy order in respect of debtor

Reg 15, Insolvency Regulations

• Serve the debtor with a statutory demand.

• After the lapse of 21 days from the date of the demand, creditor applies to court
by way of a petition accompanied by:

34
KENTIENO
2024

✓ Verifying affidavit
✓ Proof of debt
✓ Application for appointment of Trustee
✓ Appointment must be gazetted.
✓ Notice of appointment of interim trustee is given.
• Prayers:
✓ Application be certified urgent
✓ Appointment of a trustee
✓ Court be pleased to make interim orders served on the debtor to
preserve his assets
✓ Court be pleased to adjudge the debtor bankrupt
• Application must then be served on the debtor and the registrar.
• The application is then published in newspaper that circulates in the areas in
which the debtor ordinarily resides or in the gazette.
• Followed by hearing and determination of the application.
• Court upon hearing may issue a bankruptcy order if satisfied with compliance
of section 17.
• It may also decline to issue the bankruptcy order and dismiss the application
for noncompliance with the section or where it is satisfied that the debtor is able
to pay all debts.

Duties of a Bankrupt
• Section 140 Insolvency Act – to assist in the realization of the bankrupt’s
property.
• Section 141 – to disclose property acquired before discharge.
• Section 142 – to deliver property to bankruptcy trustee on demand.
• To give bankruptcy trustee accounts of records.
• To assist in the distribution of the proceeds to the creditors.

35
KENTIENO
2024

Discharge
Automatic discharge

Section 254, Insolvency Act – a bankrupt is automatically discharged 3 years after the
bankrupt lodged a statement of financial position. The Bankrupt may apply for an
early discharge.

A bankrupt is not automatically discharged if –

• Bankruptcy trustee or a creditor has objected under section 256 and;

• the objection has not been withdrawn by the end of the 3-year period.
• Bankrupt has not completed the public examination as in section 180.
• Bankrupt is undischarged from an earlier bankruptcy.

Effect of automatic discharge

Section 255, Insolvency Act – a bankrupt is released from all debts provable in
bankruptcy.

Exceptions:

• Debts incurred by fraud or fraudulent breach of trust.

• Amounts payable under Matrimonial Causes Act and Children Act

Bankruptcy offences
Section 289 – 296, Insolvency Act

• Contracting a debt without capacity to pay up.

• Materially contributing to, or increasing extent of debt e.g. through gambling,
unjustifiable spending, living extravagantly.
• Conceals or removes from Kenya any part of the bankrupt’s property.
• With intent to defraud creditors; gifts or charges bankrupt’s property.
• Presenting false/misleading financial statements.
• Concealment/falsification of any documents.
• Presenting fictitious losses or expenses.
• Obtains property on credit and has not paid for the property.
• Creates a security right/charge without having satisfied the debt.
• Does any other fraudulent act.
• Leaves Kenya without consent.

36
KENTIENO
2024

Alternatives
Alternatives to bankruptcy

Provided for under S 14, Insolvency Act.

• Voluntary arrangements
Section 303 – 315 Insolvency Act – It is a compromise agreement that gives debtor
more power over his assets than in bankruptcy proceedings.

• Summary instalment order

Section 323 – 342 Insolvency Act – this is a formal arrangement where the debtor
pays off his debts in instalments. It is an order from the Official Receiver
directing the debtor to pay his debts in full or by instalment.

• No asset procedure
Section 344 – 360 Insolvency Act – an arrangement applicable where the debtor:
✓ has no realizable assets
✓ has not previously been admitted to the no-asset procedure
✓ has not previously been adjudged bankrupt
✓ debt between 100k - 4m
✓ debtor does not have means to repay any amount toward the debts

Disqualification – S 346, IA
✓ debtor has concealed assets with intention of defrauding creditors
✓ engaged in a bankruptcy offence
✓ incurred debt knowing they can’t repay
✓ outcome would be better if not admitted

• Proposal to creditors (expedited voluntary arrangement)

Section 316 – 320, Insolvency Act – a proposal made by a debtor to creditors for
a composition in satisfaction of the debts or a scheme of arrangement of the
debtor's financial affairs.

37
KENTIENO
2024

B. Insolvency

a) Liquidation
It is the collection of assets belonging to a debtor to be applied to discharge the
outstanding debt. A company is deemed insolvent only where a court makes an order
finding it insolvent.

Grounds for making an order of liquidation (by court)

• Cash flow test – whether a company is unable to pay its debts when they
become due.
• Net asset position test – if it is proved that the aggregate of its assets is much
lower than the total of its liability.
• Solvency statement test – in the professional opinion of its directors, whether
the company will be able to pay its debts when due.
• Whether a demand or decree/judgment to pay has been made on a body
corporate and it has not disputed, been compromised or no application to set
aside within prescribed time.
• When it is not possible to continue the business of the company due to
deadlock, oppressive behaviour etc.
• When on application of AG, it is in public interest to liquidate a company e.g.
company engaging in business contrary to public policy, national security,
public morality etc.

Effect of liquidation

• Company ceases to carry out business.

• Any disposition of company’s assets after commencement of liquidation is
rendered void.
• Legal proceedings stayed.
• Directors’ powers become functus officio.
• Servants of company are ipso facto dismissed.
• Floating charges of the company crystallize and become fixed.

38
KENTIENO
2024

Voluntary Liquidation
Voluntary liquidation Creditors can apply but they are required to meet a certain threshold of money that the body
by Creditors corporate owes; creditors can meet the threshold individually or through a group.

Grounds:
• Show that they are owed.
• Application has not been brought in bad faith; e.g. pressurizing the company to pay.
• A demand was issued, and it was not met – a notice of debt beyond the prescribed minimum has been
served upon the company and the company is unable to pay within 21 days.
• Company has no reasonable prospect of paying;
• There should be no other ways of recovering debts e.g. auctioneers.
• The solvency statement satisfies the court that the company is unable to pay its debts.

Company itself through Grounds

the Directors • Where the company is insolvent, directors can make an application (insolvency test).
• Where objects of company have been extinguished.
• Where a company hasn’t conducted business within prescribed period.
• Number of directors falls below the minimum

Done through a statutory(solvency) declaration/statement to the effect that: (s 398(1),(2),(4), IA)

• they have made a full inquiry into the company's affairs; and
• having done so, they have formed the opinion that the company will be able to pay its debts in full,
together with interest at the official rate, within such period (not exceeding twelve months from the
commencement of the liquidation) as may be specified in the declaration

39
KENTIENO
2024

Voluntary liquidation Basis

by members • For any reason provided a special resolution has been passed to that effect.
• Minority can apply for liquidation in case of oppression or being excluded from the
management and control therein.
• If they are a minority and company is being run or engaged in business that is unlawful,
improper or contrary to public policy.
• Only available to the minority because the majority is expected to use voting power to correct
any anomaly in the running of the business.

Grounds
• When a company is formed for a specific purpose and that purpose has since been achieved.
• When a company is formed for a specific duration and the duration has since lapsed. A
resolution requiring a special majority as prescribed by the articles of the company. If not
prescribed then 75%.
• If the directors of the company fail to file a declaration of solvency with the Registrar of
Companies.

Compulsory liquidation
Liquidation by court Section 423 – Only the HC has jurisdiction to supervise the liquidation of companies.
Section 424 – Circumstances in which company may be liquidated by Court:
• Company has passed a special resolution that it be liquidated by court.
• Company does not commence business within 12 months from incorporation
• Suspended business for a period of more than 12 months.
• The company is unable to pay its debts.

40
KENTIENO
2024

• When moratorium ends under Section 645.

• There is a deadlock
• Public company not issued with a trading certificate in more than 12 months since registration.
• Except for private companies limited by shares or guarantee, the number of members is reduced
to below two.
• Court is of the opinion that it is just and equitable that the company be liquidated.
• On application made by the AG.

Who can apply to the Court for liquidation order

• Members of company
• Directors
• Creditors
• Contributories
• Provisional liquidator
• Official Receiver
• Supervisor in a voluntary agreement
• Administrator
• Attorney General

Grounds of application for liquidation

• If the company has not commenced operation in a period of 12 months of incorporation.
• Where the company has suspended operations for a period of more than 12 months.
• When a company is formed for a specific duration and the duration has since lapsed
• Where members fall below the statutory minimum (for public companies).
• Where the company fails to comply with the provisions of the act.

41
KENTIENO
2024

• If the directors of the company fail to file a declaration of solvency with the Registrar of Companies
• Public interest – the AG may apply for liquidation if the company in its operations, business or
its members have acted illegally or in any way against public policy.
• Company is insolvent and with no reasonable prospects to pay its debts.
• A secured creditor can apply for liquidation if the company is in material breach of its security
obligations.
• Where the court is satisfied that it is just and equitable that the company be liquidated.
• The court will also consider the conduct of the parties, e.g. has the application been brought to
coerce the company into paying a debt.
• The court will also consider the records of the company, it will look at the mode of management,
e.g. is it well managed or is it salvageable?

Liquidation ends when:

• Liquidator is of opinion that there is nothing else to feasibly realize

• Liquidator must then convene before all members, creditors, contributors separately, on the statement of accounts, how much
realized, how much settled, how he distributed surplus etc.
• If they are satisfied with the accounting report, they pass a resolution adopting the report and its recommendations.
• If they are not satisfied, the liquidator can apply to the Official Receiver or court to discharge him.
• If debts are paid or no more debts, and the company is not being revived, a creditor, member or contributory can apply to the
registrar of companies to dissolve the company.
• During liquidation, business or company can be transferred to another person.
• Give a notice in the gazette that the company will be dissolved.

42
KENTIENO
2024

b) Alternatives
Administration
Nature, features & objectives (Part VIII, Insolvency Act)

Nature

S 521, Insolvency Act – Administration is the placement of a company that is under

distress to an independent qualified expert, an Administrator (insolvency
practitioner), for the purposes of reviving a company. They are also known as
turnaround artists.

S 522(1) – Objectives of Administration

• Maintain company as a going concern.

• Achieve better outcome than if company were to be liquidated.
• Collect and realize the assets of the company for the benefit of creditors.

Features of administration

• Provides protection against suits – proceedings for debt recovery stayed.

• Does not suspend operations, management & control.
• Used when reorganizing a company or the realization of its assets under the
protection of a statutory moratorium.
• Administrator appointed by an administration order – to perform their actions
as quickly and as reasonably practicable.
• Directors’ powers are limited to administrator’s approval.
• May not enter into contracts beyond a certain threshold.

Qualifications to act as an administrator

S 526 – A person may be appointed as administrator of a company only if the person

is an authorized insolvency practitioner.

S 6 – Qualifications of an insolvency practitioner:

• Satisfies the requirements of the insolvency regulations with respect to

education, practical training & experience:
✓ Holds a degree from a recognized university in Kenya.
✓ Has at least 5 years’ relevant professional experience as a member
of a professional body.
✓ Has at least 2 years’ experience in insolvency practice.

43
KENTIENO
2024

✓ Has worked under the apprenticeship of an insolvency practitioner

for at least 4 years.
✓ Satisfies the requirements of Chapter 6 of the Constitution.
• Member of a recognized professional body.
• Satisfies the requirements of the rules governing the body.
• Disqualified if: adjudged bankrupt, harbours mental or physical infirmity, is
subject to a disqualification order.

Procedure for administration

• S 532(1), IA – make an application to the Court for an administration order.

• S 532(2), IA – give notice of at least 7 days to any person who is or may be entitled
to appoint an administrator of the company.
• File a notice of appointment of the administrator in the prescribed form with the
Registrar.
• Notice of appointment accompanied by a statutory declaration made by the
Directors verifying that the Company is unable to pay its debts and has resolved to
appoint an administrator. (solvency statement)
• Attach a statement by the administrator consenting to the appointment.
• Court fixes a date to hear the application, may: make the order, dismiss, adjourn,
make interim order, make any other order as may deem fit.
• Grounds considered before making an administration order:
✓ When a company’s assets are more than its liabilities. (net asset position
test)
✓ Company’s reasons for failure other than financial reasons.
✓ Company with little history of financial default.
• If an administration order is made, takes effect at time made.

See re Nakumatt Holdings Limited (2017) eKLR – administration order declined as level
of indebtedness was beyond salvage.

Duties & powers of an administrator

S 577-590, Insolvency Act

• Remove & appoint directors of a company.

• Convene meetings of members & creditors of the company.
• Seek directions from the court regarding his/her powers.

44
KENTIENO
2024

• Ensure effective & efficient management of affairs and property of the

company.
• Distribute company’s assets to creditors.
• Make special payments in achievement of purposes of administration.
• Assume control of property of company.
• Manage affairs & property of company.
• Act as agent of the company.
• Dispose of and deal with charged property.
• Protection of secured & preferential creditor.

Limitations on Directors appointing an Administrator

S 544, Insolvency Act – circumstances a company or its directors may not appoint an
administrator:

• An application for the liquidation of the company has been presented and is
not yet disposed of.
• An application for administration had been made and is not yet disposed of.
• An administrative receiver of the company is in office.

Company Voluntary Agreements

Section 625, Insolvency Act

Proposal for voluntary arrangement

(1) Proposals made by company’s directors or an arrangement with the creditors; can
be a compromise or a scheme of arrangement

(2) In making such a proposal, the directors shall provide for the appointment of an
insolvency practitioner to supervise the implementation of the voluntary
arrangement.

Elements:

• Compromise – Company makes proposal to pay a lesser sum in full satisfaction

of its debts.
• Scheme of Arrangement – Company makes proposal to satisfy its debts by way
of instalments, acquisition, exchange of shares, takeover, etc.

45
KENTIENO
2024

4. FINANCIAL SERVICES AND PAYMENT SYSTEMS

Introduction
A payments system refers to a system or arrangement that enables payments to be
effected between a payer and a beneficiary, or facilitates the circulation of money, and
includes any instruments and procedures that relate to the system.

Importance of national payment systems

• Economic stability – ensures smooth and efficient transfer of funds.

• Financial inclusion – facilitates access to financial services for all citizens.
• Economic growth – supports commerce, trade and overall economic
development.
• Security and trust – enhances security and trust in financial transactions.

Legal and regulatory framework

• CoK 2010 – Art 46, 201 and 231
• National Payment System Act 2011
• National Payment System Regulations 2014
• CBK Act
• Banking Act
• Kenya Information & Communications Act, 1998
• Proceeds of Crime and Anti-Money Laundering Act, 2009
• Consumer Protection Act, 2012
• Data Protection Act, 2019.

Regulatory bodies

• CBK
• Communication Authority of Kenya
• Financial Reporting Centre

Key players

• CBK
• The Government
• Commercial Banks
• Financial Institutions
• Payment Service Providers

46
KENTIENO
2024

• End users

Goals of Financial Regulation

• Curb predatory practices – high cost of interest on loans, unethical debt collection
practices, abuse of personal information.
• Regulate concerns of service providers as conduits for money laundering.
• Regulate concerns that they could be used as conduits for credit information
sharing.
• Protect consumers from scammers and poorly managed institutions.
• Promote financial system competition and efficiency.
• Encouraging financial participants to disclose accurate information to investors in
a clear and timely manner.
• Ensures soundness of financial system – by acting as a lender of last resort,
mandating insurance of deposits financial institutions and limit competition
through restrictions on entry and interest rates.

Payment Systems
Large Value Payment System
Kenya Electronic Real-Time Gross Settlement System (RTGS)
Payment
Settlement System Operational Aspects
(KEPPS) • Transactions cleared and settled on a continuous basis.
• Risk mitigation through immediate settlement.

Benefits
• Immediate funds transfer – quick and timely
settlement.
• Reduced credit risk – funds settled in real time.
• Secure – employ sophisticated encryption and
authentication methods.
• Finality & irrevocability of transactions.
• Enhanced liquidity management
• Enhanced transparency – real-time transaction
tracking.

47
KENTIENO
2024

• Support for high value transactions – immediate and

secure.

Disadvantages
• Cost – expensive compared to other payment systems.
• Limited operation hours – operate during specific
business hours.

East African Cross-border funds transfer within EAC countries.

Payment Systems Operational Aspects
(EAPS) • Operates in local currencies
• Transactions through RTGS
• Available on weekdays from 8.30 am to 4pm EAT

Benefits
• Facilitates regional trade & economic integration
• Efficient and secure cross-border payments

Regional Payment Cross-border funds for COMESA countries.

& Settlement
Systems (REPSS) Operational aspects
• Transactions in USD & Euro
• Integrated with RTGS
• Available in 8 COMESA countries

Benefits
• Streamlined cross-border payments
• Enhances regional economic cooperation

Retail/Low Value Payment Systems

Nairobi Clears cheques and electronic transfers.
Automated Operational aspects
Clearing House • Caps cheques at 1 million
• Cheque truncation project reduced clearing cycle to
T+1 (cheque truncation clears cheques based on
images and associated electronic payment data
without the physical exchange of cheques)

48
KENTIENO
2024

• Jointly managed by CBK & Kenya Bankers Association

Benefits
• Faster turnover of cheque funds
• Efficient processing of low-value transactions

Payments Card Include credit, debit and prepaid cards

Industry
Operational aspects
• Migration to EMV chip technology for enhanced
security.
• Secure & convenient access to funds at various points
of sale.
• Interoperability with global payment systems

Benefits
• Increased security
• Greater access to financial services

Mobile Phone Authorised as Payment Service Providers under the National

Money Transfer Payment System Act 2011 and National Payment System
Services Regulations 2014

Operational aspects
• Electronic Retail Transfers, Small Money Issuer, E
Money Issuer and Designation of Payment
Instrument.
• Integration with banking systems for seamless mobile
banking services.

Benefits
• Enhanced financial inclusion – services for the
unbanked
• Convenient & secure transactions
• Integration with traditional banking services

49
KENTIENO
2024

Challenges arising from mobile and electronic payments.

• Fraud & unauthorised transactions

• Cybersecurity threats
• Operational risks – system failures, human error

Best practices

• Encryption
• Secure communication channels
• Strong authentication mechanisms
• Continuous monitoring and anomaly detection
• Safety of customer communication

Role of CBK in National Payment Systems

• Formulate and implement policies on payment systems.
• User of payment systems – to effect its own transactions.
• Facilitator of settlement – providing settlement accounts.
• Provider of payment systems.
• Supervisor of operations.
• Provider of liquidity – facilitating efficient operation.
• Catalyst/collaborator.
• Oversight of payment and settlement systems.

How CBK will implement legislation that affords digital credit users with robust
consumer protection safeguards

• Lenders to disclose names of their top shareholders.

• Have a physical office locally.
• Require approval from CBK to increase lending rates.
• Executives vetted by CBK – meet fit and proper criteria.
• Satisfy conditions of the Data Protection Act and the Consumer Protection Act.
• Caution against false advertising – use of exclusion terms/disclaimers.
• Make their books and records readily available – for inspection and supervisory
purposes.

50
KENTIENO
2024

Procedures under the National Payment System Act, 2011.

S 12 – No person shall conduct the business of a payment service provider except an
authorized payment service provider; contrary to which, on conviction, shall be liable
to a fine not exceeding five hundred thousand shillings, or to imprisonment for a term
not exceeding three years, or to both.

Section 13 – Application for authorization

• Apply to CBK for authorization in the prescribed form.

• Pay the prescribed fee.
• CBK considers authorization – the financial condition and history of the
applicant, the character of its management, the adequacy of its capital structure
and the convenience and needs of the area to be served and the public interest.
• Grant of authorization.
• Where authorization has been granted; CBK may add, vary or substitute
conditions attached.
• Authorization shall be valid for 12 months following date of issue.

Section 14 – Renewal of authorization

An application for the renewal of an authorization shall—
• be made in the prescribed form; and
• forwarded to the Bank
• together with the prescribed fee;
• be lodged with the Bank at least two months prior to the expiry of the
authorisation.
• be considered in accordance with the provisions of section 13.

Section 15 – Revocation of authorization

Bank may by 14 days’ notice in writing revoke or suspend an authorisation if the
service provider:
• ceases to carry on business in Kenya
• goes into liquidation or is wound up
• is dissolved
• fails to comply with the provisions of the Act
• conducts business in a manner detrimental to the best interests of the public

51
KENTIENO
2024

Consumer protection per the National Payment Systems Regulations 2014

• Payment services shall provide a clear and understandable description of services –

rates, terms and conditions displayed prominently.
• Electronic retail transactions to be done in real-time.
• Advertisements precise, not misleading and comprehensive enough.
• Establish a customer care system – means to file and handle complaints.
• Keep client information confidential.

Protection of personal data and other consumer information

Data Protection – Data Protection Act; Art 31, CoK

Key Issues:

• Principles of Data
• Data protection regulations
• Data Commission and Data controllers.

Data subject rights

• Informed of the use to which their personal data is to be put.

• Access their personal data in custody of the data controller or data processor.
• Object to the processing of all or part of their personal data.
• Correction of false or misleading data.
• Deletion of false or misleading data.
• Right of erasure.
• Right of data portability.

Consumer Protection – Consumer Protection Act

Key issues in Consumer protection:

• Consumer Rights
• Unfair practices
• Consumer Agreements
• Necessary Information – clear and concise description of services
• Protection of Data
• False Advertisement – not misleading, precise, easily understood.

52
KENTIENO
2024

5. COMMERCIAL AGREEMENTS

a) Joint venture

Contractual JV
Characteristics of a contractual joint venture.

A contractual joint venture, also known as a non-equity joint venture, is a

collaboration between parties based on a contractual agreement rather than forming
a new entity. The partners agree to work together on a specific project or business
activity as outlined in the contract.

Key Features

• Contractual agreement between the partners.

• Each partner retains its separate legal status and identity.
• The contract specifies the roles, responsibilities, and contributions of each
partner.
• It outlines the terms of collaboration, profit-sharing, and dispute resolution.
• No new entity is formed – partners collaborate based on the contract

Reasons for pursuing a JV

• To access a new market

• To gain scale efficiencies by combining assets and operations
• To share risk for major investments or projects
• To access skills and capabilities

Conditions that have to be present to form a joint venture

• Contractual agreement between the partners – contract specifies the roles,

responsibilities, and contributions of each partner.
• No new entity is formed – each partner retains its separate legal status and
identity.
• Autonomy and independence – independent from parent companies.
• Shared control and governance – management & voting rights.
• Contribution of assets or resources – both parties must contribute.
• Duration & long-term operation – not for a specific short-term transaction.
• Economic viability – sufficient revenue generation.
• Market presence & purpose – active in the relevant market

53
KENTIENO
2024

Registration of a joint venture

Main documents – corporate JV:

• The articles of association of the JV.

• The joint venture or shareholders’ agreement.

Subsidiary documents:

• Management agreement.
• Contracts for purchase of assets and/or businesses.
• Loan note or stock instrument.
• Contracts for supply of goods and services.
• Intellectual property rights, contracts or licences.
• Distribution and marketing agreements.
• Service and secondment agreements.
• Guarantees.
• Property consents

Road map for entering into a JV:

• Defining the business strategy

• Determining whether JV is the right vehicle
• Screening partners – do background check.
• Developing the JV deal concept – drafting relevant clauses.
• Negotiating detailed terms and conditions
• Planning and launching the JV – incorporation.
• Evolving or terminating the JV
• Filing with the appropriate authority MOA

Considerations in creating a joint venture

Competition law considerations

• No reduction in competition – ensure not to eliminate competition.

• Independent business activities – parent companies to retain independent ops.
• Approval by competition authority – compliance depending on size.

Corporate structure and taxation

54
KENTIENO
2024

• Incorporation of a special-purpose vehicle

• Tax planning

Risk allocation & exit strategy

• Allocate risks e.g. operational failures, regulatory challenges, or market

downturns.
• An exit strategy should be outlined, including provisions for the dissolution of the
joint venture, buyout rights, or a mechanism for resolving disputes.

Full Function Joint Venture

Criteria to be satisfied in registering a Full Function joint venture.

CAK Joint Venture Guidelines

Para 8.2

A full-function joint venture (FFJV) is an autonomous entity that can operate

independently in the market. It typically combines the resources and expertise of the
two parent companies to achieve a shared commercial objective.

A full function joint venture is a joint venture that constitutes a “merger” within the
meaning of Section 41 of the Competition Act. This means that it must perform, for a long
duration (10 years or more) or on a lasting basis (for a period less than 10 years with
renewal provisions) all the functions of an existing or new autonomous economic
entity, which meets the following criteria among others.

Essential Criteria for a FFJV:

• Operating in a market and performing the functions normally carried on by

undertakings operating in the relevant markets.
• Having a management dedicated to its day-to-day operations.
• A limited partnership.
• The provision of management or advisory services, liquidity rights and access to
confidential information including data;
• The joint venture entity must have activities that go beyond one specific function of
the parents; and
• Does not wholly rely on purchase or supply agreements between it and its
parents.

55
KENTIENO
2024

b) Distributorship
Standard distribution agreement – draft

Salt Distribution Agreement

Between

Vazenda Salt Company “the Company”

And

Local Distributors Ltd “the Distributor”

Dated this 25th of October 2022

Parties

Vazenda Salt Company of P.O. Box Chumvi 123-100, is a limited company

incorporated in Kenya under the Companies Act 2015 “the Company”.

Local Distributors Ltd, of P.O. Box Kazi 124-200, is a Company incorporated in Kenya
“the Distributor”.

Recitals

WHEREAS

Vazenda Salt Company is a salt making company with intentions to distribute its
products to Western Kenya.

Local Distributors Ltd is a local distributor of goods and services is Western Kenya.

The Company desires to appoint the Distributor to focus on the market, sale and
distribution of its products in the relevant territory.

The Distributor accepts the appointment by the Company to focus its sale and
distribution of its products on the terms and conditions contained herein.

1. Duration

This agreement takes effect on the 25th of October 2022 for a period of 2 years.

2. Liability

The Distributor may claim its direct damages suffered as a result of the Company
supplying it with defective products.

The Distributor shall be solely responsible for any damages after delivery.

56
KENTIENO
2024

3. Confidentiality

The Parties shall not disclose any information to third parties that may be detrimental
to the performance of this Agreement.

4. Dispute Resolution

Any disputes arising from this agreement shall be resolved amicably through
arbitration.

5. Termination

The agreement shall be terminated in the lapse of the duration set herein or upon a
one-month notice prior.

6. Applicable law

This agreement shall be governed by the laws of Kenya.

SIGNED BY:

Vazenda – (signature)

And

Distributor – (signature)

WITNESSED BY:

(signature)

COMMISSIONER FOR OATHS

57
KENTIENO
2024

c) Franchise
Meaning of a franchise

A type of licence that grants a franchisee access to a franchisor’s proprietary business

knowledge, processes and trademarks thus allowing the franchisee to sell a product
or service under the franchisor’s business name.

Franchise – format, what it entails, suitability; legal & other considerations.

There is no single legislation regulating franchise arrangements in Kenya. Parties

default to common law, Partnerships, Companies, IP, competition, employment etc.

Elements

• Franchisee’s business is substantially associated with the franchisor’s brand.

• Franchisor exercises control or assists franchisee in how it uses the franchisor’s
brand to conduct business.
• Franchisor receives a fee from the franchisee for the right to enter into the
relationship and to operate its business using franchisor’s trademarks.

Salient features

• Invariable terms
• One sided – franchisor has high bargaining power
• Strict requirements
• Restrictions
• Fixed fee/sales target
• Fixed duration
• Training support
• Franchise is bound by franchisor’s company policies regarding mode of
business operations
• Defined costs and expectations of a franchisee
• Relationship is based on an agreement
• Franchisee gives an undertaking not to carry on other competing business
during the franchise term
• Franchisee pays royalty to franchisor
• Franchising involves selling the same product and maintaining a similar type
of shop décor

58
KENTIENO
2024

Legal & other considerations

• Protection of franchisor’s IP – licensing and registration of trademark

• Restrictions & confidentiality
• Employment considerations
• Real property considerations – leases etc
• Exclusivity
• Payment considerations – initial fee, support fee/royalty, advertising levy,
training fees
• Term of the agreement – duration
• Operation and compliance – standards, systems & requirements.
• Liability & remedies
• Indemnification & insurance
• Disputes, choice of law & forum

Obligations of

Franchisor Franchisee
• Grant to the franchisee the right to • Pay the initial fee, the support fee, as
operate the franchise business in well as advertising, training, and
the territory and to use the other fees.
franchisor’s intellectual property. • Operate the franchisee unit in
• Support the start-up of the accordance with the franchise
franchisee’s business. agreement.
• Supply goods and services to the • In some cases, buy products for the
franchisee (subject to terms). business only from the franchisor.
• Provide the franchisee with • Use its best endeavours to promote
continuing support, in the form of and extend the franchisee’s business,
knowhow, advice, training, and and the goodwill in the business.
guidance. • Not do anything that might damage
• Participate in a central advertising the reputation of the franchise
and marketing fund. brand.
• Renew the franchise agreement at
the end of its initial term or accept
the transfer of the franchise
agreement to a third party

59
KENTIENO
2024

Clauses that should be in a franchise agreement.

• Title
• Parties
• Recital
• Definition/Interpretation
• Confidentiality
• Intellectual Property rights
• Consideration – fee, royalties
• Operational standards and control
• Grants & reservation
• Rights & obligations
• Territory location
• Training/support
• Duration/term
• Trademark/patent
• Liability & remedies
• Exclusivity agreements
• Restrictions
• Disputes, choice of law & forum
• Renewal/cancellation/termination
• Exit strategy

Advantages of franchising

Franchisor Franchisee
• Fosters expansion. • Easy way to start a business.
• Expansion without capital • Profit from proved business
investment. model.
• Cost-reduction opportunity. • Easier access to capital.
• Spreading of risk. • Reduced risk of failure.
• Retain control over business • Shared advert burden.
operations. • Franchisor support.
• Protection of intellectual and
trade secrets. Disadvantages
• Lack of independence.
Disadvantages • Reduced profit due to royalties.
• Loss of control. • Restrictions.

60
KENTIENO
2024

• Sharing of profit. • Management challenges.

• Danger of loss of know-how.
• Management challenges.

Comparison between a franchise and a distribution

• Know-how transfer – critical for a franchise to enable quality standards to be

met; no such requirement in a distribution.
• Control – franchise agreements involve a much higher degree of control over
quality and brand image; supplier will not regulate any details in which the
distributor operates his business save for turnover and stock control.
• Royalties – no royalties payable to the distributor; distributor only pays for the
items it buys from the supplier.

d) Guarantee
Draft letter of guarantee

LETTER OF GUARANTEE

[Bank Name]

[Bank Address]

[Date]

To Whom It May Concern,

We, [Bank Name], hereby issue this Letter of Guarantee in favour of Mr. Ponda Mali,
a valued client of our bank.

1. Guarantee Details

• Beneficiary: Mr. Ponda Mali

• Purpose: To support Mr. Ponda Mali’s bean exportation business
• Guaranteed Amount: [Specify the amount or credit limit]
• Validity Period: [Specify the duration of the guarantee]

2. Undertaking and Commitment

• We undertake to honour any payment obligations arising from Mr. Ponda

Mali’s transactions related to bean purchases from the specified suppliers.

61
KENTIENO
2024

• This guarantee covers any financial obligations incurred by Mr. Ponda Mali
within the agreed-upon validity period.

3. Conditions

• The guarantee shall be invoked upon presentation of a valid demand by the

suppliers, accompanied by relevant supporting documents.
• We reserve the right to verify the authenticity of the claim before making any
payment.

4. Indemnity:

• Mr. Ponda Mali agrees to indemnify us against any losses, costs, or expenses
incurred due to the invocation of this guarantee.

5. Contact Information

• For any inquiries or claims, please contact our bank at [Bank Contact Details].

We assure the suppliers that this guarantee is backed by the full faith and credit of
[Bank Name].

Sincerely,

[Authorized Signatory]

[Bank Name]

[Bank Seal]

e) Trust
Best vehicle for charitable purposes.

• Trust – arrangement where the settlor transfers legal ownership of assets to the
trustee, to hold for the benefit of the beneficiaries.
• The settlor transfers her property to the trust, which is then handled and
administered by the trustee, or administrator.
• These parties can either be individuals or legal entities.
• A trust deed is the document that details the trust's terms and conditions and
lists the parties involved.

62
KENTIENO
2024

Types of trusts

• Family – incorporated for the purpose of planning & managing personal estate.
• Charitable – exclusively for the purpose of benefiting the general public.
• Non-charitable – created for a specific purpose, whether charitable or not.

Sources of law

• English common-law.
• Created under the Trustees Act and the Trustees (Perpetual Succession) Act.
• Related statutes – Income Tax Act, Law of Succession, Land laws, the Tax
Procedures Act etc

Creation of a trust
• By deed (in writing)
• By conduct or implication
• By operation of the law

General process for setting up a trust

Persons that can make an application for incorporation of a trust:
• Settlor
• Trustee
• Enforcer
• Advocate

Process

1. Preparation of the Trust Deed by the advocate

The Trust deed shall contain the following pertinent information: name and
objectives of the Trust, full names and addresses of the Trustees and their
powers thereto. Thereafter it must be signed by all the Trustees.

2. Payment of Stamp Duty;

After preparation of the Trust Deed and the document being signed
appropriately by the Trustees, the Trust Document is submitted for Stamp
duty.

63
KENTIENO
2024

3. Registration under the Registry of Documents Act;

The trustees can commence implementing the objects of the trust as a simple
trust i.e. a duly executed trust deed once registration has been finalized at the
Registry of Documents at Ardhi House.

4. Incorporation under the Perpetual Successions Act;

After registration, the advocate shall lodge with the Minister of Lands, a
Certified copy of the trust deed and a petition for incorporation prepared in the
prescribed form.

The process takes an average of 7-10 months to procure the Certificate of

Incorporation of the trust.

Trust deed – particulars to be included

• Name of the trust

• Parties – name & address of settlor/donor, beneficiaries, trustees.
• Main object/objectives – purpose
• Trust fund
• Administration of trust – appointment, operation, powers, procedures.
• Rules and regulations
• Tenure

Relevant instrumentalities for incorporation

• Duly completed application for incorporation in the prescribed form

• A Petition to have the trust incorporated (commissioned)
• Duly Registered trust deed
• Statement of donor funding/commitment
• Title deed belonging to the trust
• Current search indicating ownership position of assets listed
• Financial statement of the organization
• Minutes appointing the Trustees
• Brief Summary of the Trust
• Curriculum vitae of the trustees or employees
• Diagrammatic representation of the common seal

64
KENTIENO
2024

• Certified copies of ID, KRA PIN and passport photos of the Settlor, Trustees,
beneficiaries and enforcers if any.

Why incorporate a trust

Incorporated under the Trustees (Perpetual Succession) Act

Trustee shall be able to:

• Have perpetual succession & common seal

• Sue and be sued
• Hold and acquire property

Benefits of trusts and trust deeds

• Ensure the smooth transfer of assets to beneficiaries.

• Avoids costs that would be associated with probate such as legal fees on determining
validity of a will.
• Confers a significant level of protection for the beneficiary assets – the legal
ownership is held by the Trustees who are bound by the Trust Deed while the
beneficial ownership rests with the beneficiaries.
• Trusts are flexible – trustees can further invest the assets in their possession as
authorised.
• Offers continuity – life is not limited to the life of the Settlor.

65
KENTIENO
2024

6. MOVABLE PROPERTY SECURITY RIGHTS

Creation
Criteria of what may be presented as a security – what constitutes valid security.

Section 2 MPSR Act – Movable asset means any tangible and intangible asset.

Section 4, MPSR Act – Scope of Application

The Act applies to security rights in movable assets, including—

• every transaction that secures payment or performance of an obligation, without

regard to its form and without regard to the person who owns the collateral;
• a chattel mortgage, credit purchase transaction, credit sale agreement, floating and fixed
charge, pledge, trust indenture, trust receipt, financial lease and any other transaction
that secures payment or performance of an obligation; and
• with the exception of Part VII, an outright transfer of a receivable.

Section 4(2) MPSR Act – Exceptions

The Act does not apply to:

• Security right in the Central Depositories Act 2000

• Creation, lease or transfer of an interest in land
• Security right in vessel subject to Merchant Shipping Act 2009
• Security right in aircraft subject to Civil Aviation Act 2013
• Lien, charge or other interest created by law
• Assets governed by other laws

Creation of a security right

S 6, MPSR Act
(3) A security agreement shall—

• be in writing
• signed by the grantor;
• identify the secured creditor and the grantor;
• describe the secured obligation; and
• describe the collateral as provided in section 8.

66
KENTIENO
2024

Obligations that may be secured and assets that may be encumbered

S 7, MPSR Act

(1) A security right may secure one or more obligations of any type:

• present or future;
• determined or determinable;
• conditional or unconditional;
• fixed or fluctuating.

(2) A security right may encumber—

a) movable asset, whether tangible or intangible;
b) parts of assets and undivided rights in movable assets;
c) generic categories of movable assets; and
d) all of a grantor's movable assets.

Description of collateral

S 8, MPSR Act

• Assets encumbered be described in a manner that reasonably allows their

identification.
• Indicate all of the grantor's movable assets within a generic category.
• A description reasonably identifies the collateral if it identifies the collateral
by— specific listing; category; a type of collateral defined in this Act; or quantity.
• Obligations secured or to be secured be described in a manner that reasonably
allows their identification.

Registration
Registration of securities (Part IV)

Section 26 MPSRA provides that the procedure for registration of a notice shall be
prescribed in the regulations. Registration is done through BRS

• Initial notice – notice is entered in the movable properties’ security registry

indicating the interest of the secured creditor over the movable property.
• Approval – confers secured creditor rights over the movable property.
• Perfection – registration of the security right. Period of effectiveness shall not
exceed 10 years.

67
KENTIENO
2024

Rights and obligations of parties to a security agreement

• Exercise reasonable care to preserve the collateral during the pendency of the
security agreement - Section 56, MPSR Act.
• Duty of secured creditor to return the collateral to register an amendment or
cancellation notice - Section 57 of the Act.
• Secured creditor’s right to inspect the collateral in the possession of the grantor
or 3rd party - Section 58 of the Act.

Effect of Registration on Third Parties and in Relation to Priorities

Registration of a security right has significant implications for third parties and the
priority of claims. The key effects include:

• Public Notice: Registration provides public notice of the security interest,

making it enforceable against third parties.

• Priority: The priority of security rights is generally determined by the order of

registration. A perfected security right has priority over unperfected security
rights and subsequent perfected security rights.

• Third-Party Effectiveness: A registered security right is effective against third

parties, including purchasers and other creditors.

Enforcement

Enforcement of security right

Begin by notifying the grantor of the default. Contents of notice:

• Nature and extent of default

• Default complained of
• Steps grantor has to take to remedy the default
• Consequences of default
• Reservation of the right to move to court for relief

S 67 (3), MPSR Act

If the grantor does not comply within the time period indicated in the notification after
the date of service of the notification, the secured creditor may—

68
KENTIENO
2024

a) sue the grantor for any payment due and owing under the agreement (S 68);
b) appoint a receiver of the movable asset;
c) lease the movable asset;
d) take possession of the movable asset (S 71);
e) sell the movable asset; or
f) pursue any of the remedies under section 65

Other remedies:

• Right of a higher-ranking secured creditor to take over enforcement.

• Collection of payment under a receivable, negotiable instrument.
• Right to redemption (debtor/grantor) – Section 69 of the Act: entitles grantor to
redeem the collateral by paying, performing the secured obligation in full
including reasonable cost of enforcement.

Challenges of IP securitization in Kenya

• Financiers unwilling to offer facility on intangible assets.

• Valuation issues – real value cannot be measured accurately for purposes of
securitization.
• Lack of proper legal framework for IP – perfection, priority and enforcement
of IP securitization.
• Enforcement hurdles.
• Infringement risk – affects the unpredictability of IP and royalty cash flow.
• Need for an active IP exchange market
• Need for more IP valuation experts

Procedure for cancellation of MPSR

S 32 - Cancellation notice

(1) The person identified in a registered initial notice as the secured creditor may, in
the prescribed manner, register an amendment or cancellation notice relating to that
registered notice.

(2) The registration of an amendment or cancellation notice is ineffective unless

authorized by the person identified in the registered initial or amendment notice as
the secured creditor.

69
KENTIENO
2024

S 33(2)(c)

The secured creditor shall register a cancellation notice if the security right to which
the notice relates has been extinguished and the secured creditor has no further
commitment to provide value to the grantor.

Draft of a security agreement containing all the important elements.

Document Outline

1. Parties Involved: Identification of the borrower and the lender

2. Loan Amount and Disbursement: Specify the loan amount and terms of
disbursement.
3. Interest Rate and Repayment Terms: Details of the interest rate applicable and
the repayment schedule over 10 years.
4. Collateral Description: Detailed description of the assets being used as
collateral.
5. Covenants: Obligations imposed such as insurance requirements for the
collateral, and maintenance of the assets in good condition.
6. Default Terms: Conditions under which default would be declared and the
consequences thereof.
7. Legal Recourse and Remedies: Outline the steps the lender can take in the
event of default, including seizure of assets.
8. Signatures and Witnesses: Spaces for signatures of both parties and witnesses.

MPSR Challenges

• Competition from unsecured creditors.

• Lack of regulatory consolidation.
• Registration of notices without conducting searches.
• Lack of standard way of description of movables.
• IP laws do not provide for collateral.
• High search fees.
• Lack of awareness of the MPSR regime.

70
KENTIENO
2024

7. TAX PROCEDURES IN COMMERCIAL TRANSACTIONS

a) Classification of taxes
Key taxes and their rationale

• Income Tax – imposed on annual gains by individuals, companies &

organisations.
• Value Added Tax (VAT) – charged in supply of taxable goods.
• Excise Duty – imposed on goods manufactured in Kenya or imported into
Kenya.
• Customs Duty – paid on the importation or exportation of goods.
• Stamp Duty – imposed on the transfer of property.
• PAYE – collected from employees’ salaries.
• Corporation Tax – levied on corporate bodies on their annual income.
• Withholding Tax – deducted at source before remitting the tax to the
Commissioner of Domestic Taxes e.g. on interest, dividends, royalties,
pensions, commission.
• Rental Income Tax – charged on rental income received from renting out
properties.

Other taxes

• Air passenger service charge

• Road maintenance levy
• Land rent and rates
• Fees and levies – export levy, railway development levy, anti-adulteration levy,
petroleum, standards, sugar development, refinery throughput, catering and
tourism.

b) Types of income and Taxation of incomes

Types of income tax

• Individual income tax
• PAYE
• Corporation tax
• WHT
• Turnover tax
• Instalment tax
• Capital Gains tax

71
KENTIENO
2024

• Minimum tax
• Digital service tax
• Residential rental income
• Advance tax

CGT
Nature
CGT – tax chargeable on the whole of a gain which accrues to a company or an
individual on or after 1st January 2015 on the transfer of property situated in Kenya,
whether or not the property was acquired before 1st January 2015. Property includes
land and buildings.

A transfer takes place on various occasions, such as:

• on the sale, exchange, conveyance or disposal in any manner (including by way

of gift) of property;

• on loss, destruction or extinction of property whether or not compensation is

received, or

• on the abandonment, surrender, cancellation or forfeiture of, or the expiration

of rights to property.

Calculation
The amount chargeable to CGT is the excess of the transfer value over the adjusted
cost of the property that has been transferred. It is this excess that is subjected to tax
at 15%.

The person that transfers the property has responsibility to account for CGT.

How to compute Capital Gains Tax

Net Gain = (Transfer Value – Incidental Costs on Transfer) – (Adjusted Cost+

Incidental Costs on Acquisition + Any enhancement cost)

Expenses for the purpose of CGT include:

• Loan/mortgage interest.
• Cost of advertising.
• Costs incurred in valuation of the property.
• Legal fees.

72
KENTIENO
2024

• Costs of enhancements.

Exemptions to CGT
• Transfer value less than 3 million.
• Transfer for the purpose of securing a debt.
• Transfer of Property within Family – between spouses, or between former
spouses as part of a divorce settlement, are exempt from CGT. Transfers
between parents and their children are also exempt.
• Transfer of Assets to an Administrator or Executor of a deceased person’s estate
for the purpose of administering the estate are exempt from CGT.
• Compulsory Acquisition by the Government
• Sale of Shares
• Transfer of Property to a Retirement Benefit Scheme
• Property Inherited or Gifted
• Property Transferred for the Purpose of Administering a Trust
• Transfer of Investment Shares
• Certain Corporate Restructurings - Restructuring within corporate groups, such
as mergers, acquisitions, or internal reorganization, may be exempt from CGT,
provided certain conditions are met.
• Transfer of Agricultural Property - Transfer of agricultural land where the area
is less than 100 acres and is located outside a municipality, gazetted township,
or urban area is exempt from CGT.
• Assets Transferred by Public Benefit Organizations - Gains arising from the
transfer of assets by public benefit organizations, such as NGOs, are exempt
from CGT if the gains are used exclusively for public benefit purposes.

Factors to be considered in adjusting value of property for CGT purposes

• Legal fees associated with the sale/transfer of the property.
• Stamp duty tax levied on the transfer of property.
• Costs associated with selling the asset – broker fees, seller commission etc.
• Valuation cost of the property.

Possible reasons CGT higher than expected

• Property may have been undervalued
• Adjusted value was miscalculated
• Costs & incidentals were miscalculated

73
KENTIENO
2024

c) Tax Planning, Avoidance & Evasion Capital Gains Tax

Measures to address tax fraud

• I-tax electronic system of filing and payment of taxes.

• Excise Goods Management System (EGMS).
• Electronic Cargo Tracking System (ECTS) for high-risk transit goods.
• Auditor’s certificate required for tax refund cases.
• Establishment of a Market Surveillance Office.
• Integrated Customs Management System.

d) Tax Dispute Resolution Mechanisms – statutory interpretation; types and

procedures of tax dispute resolution mechanisms
Appeals to the TAT (Tax Appeals Tribunal)

• Taxpayer files notice of appeal.

• Taxpayer files memorandum of appeal.
• Commissioner files its statement of facts.
• Mentions and directions from the TAT.
• Hearing of the TAT.
• Judgement.

e) Tax Procedures Act – tax returns, assessment, recovery and penalties in

relation to commercial transactions

Extension of time to submit tax return

S 25, Tax Procedures Act

i. Apply in writing to the Commissioner for an extension of time to submit the

return.
ii. Application shall be made at least 15 days before the due date for a monthly return;
or 30 days before the due date in the case of an annual return.
iii. Commissioner may grant the application if satisfied that there is reasonable cause.
iv. The commissioner shall notify the applicant accordingly at least 5 days before the
due date. Where notification is not given, the extension shall be deemed granted.
v. Only one extension may be granted per tax period.
vi. The grant of an extension shall not alter the original due date
vii. Penalties for late submission of returns shall not apply where an extension to submit
a return has been granted.

74
KENTIENO
2024

Late submission penalty

Section 83, Tax Procedures Act

A person who submits a tax return after the due date shall be liable to a penalty of —

• 25% of the tax due or 10k whichever is higher, for employment income;
• 1000 shillings for Turnover Tax; or
• 5% of the amount of tax payable or 10k shillings, whichever is the higher, for
VAT or excise duty

Recovery
The following recovery methods provided for in the revenue statutes:

• Agency notices;
• Distraint;
• Security on property;
• Seizure
• Preservation of funds
• Forfeiture provisions.

75