The business of insurance, although primarily a matter of private contract, is characterised as one that is vested in public interest, as was held in the case of Commission on Administrative Justice v Insurance Regulatory Authority and Another [2017] (eKLR). Consequently, it is subject to government regulation under the Insurance Regulatory Authority, whose main purpose is to protect the public as insurance consumers and policy holders. As such, the insolvency of an insurance company ought to be navigated in a manner that ensures the stability of the insurance sector, while simultaneously safeguarding the private interests of creditors. The question that then arises is: which of the laws enables the courts and stakeholders to achieve this outcome?

The criteria used to determine whether a company should stay in operation or undergo liquidation is the insolvency test, which is the legal and financial evaluation of an organisation’s financial soundness, taking into consideration the company’s assets, liabilities and compliance with regulatory solvency requirements. 

The Insurance Act

On one hand, the Insurance Act, Cap 487, Laws of Kenya (Insurance Act) provides that the solvency of an insurance company ought to be assessed based on its adherence to the solvency margin outlined in section 41 of the Insurance Act. This margin, also known as the capital adequacy ratio, refers to the minimum excess on an insurer’s assets over its liabilities, and is currently set at 100%. Consequently, if an insurance company does not meet the solvency margin, section 122 of the Insurance Act permits any person other than the Commissioner of Insurance to institute an application for liquidation against them. In line with this, section 61 of the Insurance Act requires all insurance companies to publish their annual balance sheets in at least two national newspapers at the end of the financial year.

A person who applies for the liquidation of an insurance company is also obligated by section 121 of the Insurance Act to join the Commissioner of Insurance, who serves as the CEO of the Insurance Regulatory Authority, as a party to that suit. The purpose of this is to enable the Insurance Regulatory Authority to carry out its mandate of regulating the insurance sector while simultaneously protecting the public as insurance consumers and policyholders.

The Insolvency Act

One would assume that the insolvency of insurance companies would be governed exclusively by these provisions, considering the Insurance Act’s tailored focus on the insurance industry. However, the ruling of Judge W.A Okwany in the case of Salesio Kinyua Njagi and Nine Others v Invesco Assurance Company Limited [2021] (eKLR) held otherwise.

In that case, the petitioners instituted liquidation proceedings against an insurance company pursuant to the provisions of the Insolvency Act, Cap 53, Laws of Kenya (Insolvency Act). They relied on the provision that permits a person to liquidate a company if it has not paid its debt of KES 100,000 within 21 days of it being demanded. According to section 384 of the Insolvency Act, a person can institute liquidation proceedings if a company is unable to pay its debts, meaning that:

• a company is indebted for KES 100,000 or more but has not paid the debt within 21 days of a demand being served upon it;
• a company is unable to pay its debts as they fall due; or
• the value of a company’s assets is less than its liabilities.

However, the insurance company objected to this test, arguing that insolvency of an insurance company cannot be prosecuted under the Insolvency Act in isolation, and to the exclusion of the Insurance Act. The company also protested that the Commissioner of Insurance, who ought to be involved in liquidation proceedings of an insurance company for the protection of the insurance sector, was not involved in the proceedings.

Initial finding

However, the judge determined that there was nothing that excluded insurance companies from the operation of the Insolvency Act. She relied on section 3(2) of the Insolvency Act, which provides that the Insolvency Act applies to “natural persons, partnerships, limited liability partnerships, limited liability partnerships, companies and other corporate bodies established by any written law”. Consequently, she held that by virtue of that section, a debtor could institute liquidation proceedings against an insurance company because an insurance company is a company as defined in that section. The petitioners were therefore granted the liquidation orders as sought, evidently protecting only the private interests of the petitioners and without due regard for the interests of the other policyholders or the protection of public interest.

Subsequent appeal

The petitioners then applied to have those liquidation orders set aside, claiming that the insurance company had since paid the debts owed to them. Justice A. Mabeya, who received the subsequent application to set aside the liquidation orders, expressed great concern about this process. In his ruling, he emphasised that once a petitioner has decided that a debtor company should be liquidated, it is insensitive for the petitioner to turn around and say, “Oh, wait a minute, I have received my money back. Hold the process.” This is because once an advertisement for liquidation has been made, as is required by law, the implications can cause irreparable harm by damaging the reputation of the insurance company, especially where it eventually pays its dues and the creditor no longer sees the need to have the company liquidated. Additionally, Justice Mabeya cautioned creditors against using liquidation proceedings to twist companies’ arms to pay their debt, because the repercussions to the public are substantial.

Reversing the liquidation orders

In determining whether to lift the liquidation orders, Justice A. Mabeya took a different approach from the initial determination. He considered whether it was in the best interest of the public to keep the insurance company under liquidation and consequently reversed the liquidation orders on those grounds. He further emphasised that liquidation orders should only be issued if it is in the interest of the public and in all fairness not to let the company sink into further debt.

What is evident is that there is a discrepancy in the application of the law around insolvency of insurance companies. The sole application of the Insolvency Act overlooks the unique needs and complexities of the insurance industry that are in turn addressed by the Insurance Act. In fact, one may argue that an action to liquidate an insurance company on account of one creditor’s private interests defeats the purpose of the insurance sector, as well as the function of the Insurance Regulatory Authority in preserving the sector.

Section 121 of the Insurance Act states that “For the purpose of section 384 of the Insolvency Act (Cap. 53), an insurer is taken to be unable to pay its debts if at any time the requirements of section 41 (which relate to margins of solvency) are not observed by the insurer.” Was the intention of this provision to remove insurance companies from the tests enshrined in section 384 of the Insolvency Act?

Conclusion

The question of which legal provisions should be applied to the insolvency of insurance companies is one that requires clarity and permanent resolve in order to create a more equitable legal environment for insurance companies and their clients.

Either way, creditors that are owed money by insurance companies have the alternative of pursuing debt recovery proceedings and attaching the assets of the company to recover sums owed. Taking this approach, as opposed to rushing to the extreme of liquidation proceedings, would create a more favourable outcome for all parties involved, since it would enable the creditor to recover their debt while maintaining the standing and reputation of the company and safeguarding the interests of the public in the insurance sector.

In conclusion, it is apparent that the interest of the public is of great concern to the insurance industry, necessitating its consideration when filing liquidation proceedings against such companies. It is imperative to have clarity on the law that ought to govern the prosecution of insolvency of insurance companies, to ensure that the process safeguards the integrity of the insurance sector while simultaneously protecting the private interests of creditors.