KENYA: THE NEED FOR CHANGE: THE TRANSFER OF BUSINESSES ACT AND ITS APPLICATION IN THE SALE OF DISTRESSED ASSETS
An important consideration in the sale of a business in Kenya (as opposed to the sale of shares of a company) is compliance with the Transfer of Businesses Act (Cap. 500) (TBA), which protects creditor interests against the possibility of asset stripping.
The TBA provides that whenever any business or portion of a business is transferred, the buyer is liable for all the liabilities incurred in the business by the seller unless a notice is given in accordance with the TBA – by publication in the Kenya Gazette and in two national newspapers – and a two-month period lapses from the publication date. Even if no notice is issued under the TBA proceedings may not be brought against the buyer in respect of liabilities after the end of six months from the date that the transfer occurred. These statutory limitations are especially important in the context of a sale of a business where there are unsecured creditors who would not ordinarily have knowledge of an intended sale.
However, a company undergoing reconstruction under the Companies Act, or the sale of an asset in relation to the realisation of a security (e.g., a charge), is specifically excluded from the notice requirements of the TBA. Even so, a recent decision by the High Court has rung alarm bells for parties to transactions involving distressed sales.
The High Court case involved a claim by a creditor, Afrasia Bank Limited, against SBM Bank (Kenya) Limited who had purchased certain assets from Chase Bank (in statutory receivership). In 2016, Afrasia Bank deposited USD 7.5 million with Chase Bank. Shortly after, Chase Bank was placed under receivership by the Central Bank of Kenya (CBK). Certain assets and liabilities were then sold to SBM Bank by the receiver, the Kenya Deposit Insurance Corporation (KDIC). The sale process included a notice from SBM to the CBK and the CBK then publishing a notice of the intended sale in the Kenya Gazette. However, it seems that this was not a notice as prescribed by the TBA.
Afrasia Bank sued SBM Bank for its deposit and interest. Afrasia Bank argued that because SBM Bank had not published a TBA notice, SBM Bank was liable for the deposit and interest earned. The High Court agreed with Afrasia Bank and ordered SBM Bank to pay.
The High Court decision highlights two significant legislative problems for distressed sales of assets: (i) a buyer would have to wait two months from the publication of the TBA notice to ensure no liabilities will attach to the business. Given that time is of the essence in distressed sale transactions, this requirement is counterproductive; and (ii) it causes uncertainty regarding how creditors should be dealt with in distressed sales.
The TBA needs to be explicitly excluded from distressed sales under Kenya’s insolvency laws and statutes that provide regulatory step-in rights for a company in distress. Furthermore, laws such as the Insolvency Act and other statutes that deal with distressed businesses already cover how creditors should be dealt with when a company is insolvent. Imposing additional obligations on parties to a distressed sale, as the TBA does, undermines the effectiveness of such legislation and causes commercial uncertainty.
The Afrasia case makes it imperative that the TBA is amended to make it clear that transactions involving sales of distressed assets conducted under a statutory framework, such as administration, company voluntary arrangements and other measures allowed under the Insolvency Act, and exercise of powers by regulators such as the KDIC (in respect of CBK-regulated financial institutions) and the Insurance Regulatory Authority (in respect of insurance providers) do not have to comply with the notification requirements under the TBA.