A Critical Analysis of the Efficacy of the Civil Remedies for Fraudulent and Wrongful Trading Under the Insolvency Act, 2015

Abstract

The Insolvency Act 2015 provides for the civil remedies for fraudulent and wrongful trading. Although these remedies do not, so far, have any identifiable legal problem with respect to their implementation, they are likely to encounter enforcement challenges in future, going by the history of their implementation under the repealed Companies Act. The remedies under the repealed Companies Act were rarely invoked and it was difficult to establish liability under them. The study argues that the civil remedies provided under the repealed Companies Act were inherently ineffective, and that the legal challenges which dominated the implementation of the previous remedies under the repealed Act are likely to recur in the enforcement of these new remedies provided for under the Insolvency Act 2015. The study utilized a combination of doctrinal and comparative research methodologies to conduct an in-depth desk review on the implementation of these remedies in Kenya, and to investigate the best practices which Kenya can learn from UK and Australian insolvency regimes respectively. The study reveals that the Kenyan courts adopted a complex and unstructured jurisprudence on the implementation of the remedy, the Kenyan provisions have a restricted class of potential applicants and a strict adherence to champerty rules, hindering the liquidator from accessing external funding for the claims. It also reveals that the UK has a more simplified way of determining a director’s liability and UK courts have adjusted the interpretation of these remedies to meet the demands of ‘rescue culture.’ This notwithstanding, the UK regime has too been weighed down by the common law rules on champerty and maintenance. Australia is the most ideal jurisdiction from which Kenya can learn, considering its legislative clarity on the exact time when liability attaches. In addition, Australia has a broader list of potential applicants in a claim for insolvent trading, a unique way of embracing corporate culture and a very relaxed approach on the champerty rules.