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

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

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

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

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