Kenya's modernised legal system ensures a fair marketplace

Kenya is a constitutional democracy with a multi-party political system. In 2008 the government launched Vision 2030, a development blueprint for the country with the aim of turning Kenya into a middle-income economy by 2030. Vision 2030 is based on three pillars, namely an economic pillar, a social pillar and a political pillar. The economic pillar aims to achieve an average GDP growth rate of 10% per annum for the next 25 years. The social pillar seeks to build “a just and cohesive society with social equity in a clean and secure environment.” The political pillar aims to realise a democratic political system founded on issue-based politics that respects the rule of law. Following Vision 2030, Kenya enacted a new constitution (the constitution) in 2010, which addressed longstanding political and socio-economic problems that had hindered progressive development.

The constitution heralded two fundamental changes to the Kenyan legal environment. On a governance level it created a devolved system of government, transferring power from the national level to 47 newly created county governments, and on a legislative level it affected virtually every law in Kenya. Since 2010 Parliament has passed more than 158 new acts and 749 pieces of subsidiary legislation to bring Kenya’s governing laws in line with the constitution.

The Legal System

As a former British colony Kenya’s legal system is modelled on the British system, and there are three arms of government: the executive, the legislature and the judiciary. The executive holds office for a five-year term after which a general election is held. The next general election is due to be held in August 2017.

The legislature comprises of two houses: the National Assembly and the Senate. Both houses comprise of elected representatives and women representatives. In addition, the Senate has youth and persons with disabilities representatives. In total there are approximately 417 officials.

The judiciary consists of the judges of the superior courts, magistrates, other judicial officers and staff. The superior courts are the Supreme Court, which is the highest court, the Court of Appeal, the High Court, the Employment and Labour Relations Court, and the Environment and Land Court. The lower courts consist of the Magistrate’s Court. There are also specific tribunals established under various statutes to deal with specific matters.

Kenya is part of the EAC. Other members include Tanzania, Uganda, Rwanda, Burundi and South Sudan. The EAC is similar in principle to the EU, with members of the EAC seeking to implement a common market which enshrines four freedoms: the free movement of people, goods, services and capital within the common market. Notable integration developments include the implementation of a single tourist visa for Kenya, Uganda and Rwanda launched on February 20, 2014 and the execution of an EAC Monetary Union Protocol, geared to establishing a single currency area in the EAC by the EAC Heads of State in November 2013. Equally, in 2016 the EAC Summit launched the e-passport, which is set to be issued from January 2018. Kenya is also a member of the COMESA, a trading block of 20 African countries.

Streamlining Legislation

Ease of doing business and governance issues are cited as the biggest challenges to development in many developing countries, however, Kenya has made significant steps on both fronts. The country recently overhauled its company law legislation through the enactment of a new Companies Act and Insolvency Act. The new Companies Act adopted many provisions of the UK’s Companies Act 2006, bringing Kenyan company law in line with modern business practices. Other significant legal developments include the introduction of the Competition Act 2010, that sought to address anti-trust issues, a new Mining Act 2016, and various acts to enable public-private partnerships and public procurement process. These have sought to streamline processes and reduce the number of licences required to do business.

Parliament has also passed legislation relating to anti-bribery and corruption, along with corporate governance codes issued by industry regulators. In addition, Kenyan regulators such as the Competition Authority of Kenya and the Communication Authority of Kenya have been taking a more active role in regulating markets to ensure that there is a fair market place for all participants. Such legislation is a welcome development, making the legislative framework in Kenya more robust and sophisticated.

Recent Changes

In addition to implementing the Companies Act and Insolvency Act in September 2015, Kenya has enacted a new Companies Act and a new Insolvency Act in a move to modernise the existing legal framework and increase the ease of doing business in the country. These two acts do not have a specific start date, as they were operationalised in stages. However, as of June 15, 2016 both acts were fully in force. During the course of the implementation process, the government has actively sought and received stakeholder feedback regarding areas that could benefit from improvement or amendment for both acts. In relation to the Companies Act, a committee has also been formed to obtain recommendations from practitioners and other stakeholders on the areas that may need to be amended to ensure the act reaches its full potential.

The controversial 30% local shareholding requirement for all branches of foreign companies has now been removed. The provision required a foreign company that intended to register a branch in Kenya to have at least 30% of its shares held by Kenyan citizens. It was pointed out that this was neither practical nor possible for high-value companies.

In response to the concerns, the attorney general publicly confirmed that the provision was included in error and that it would be corrected. Consequently, a motion for the proposed deletion of the provision was included in the Finance Bill 2016, and passed unanimously by the National Assembly on August 30, 2016. The Finance Act 2016 is now in force and has removed the local shareholding requirement as of January 1, 2017.

The Companies Act has brought in other key changes which include: the ability to have sole-member companies; the option for small companies not to have to appoint a company secretary; the ability for a company to operate in any field without being limited to specific objects (although a core object must still be specified); provisions allowing for share buy-backs and squeeze-outs; provisions allowing for electronic means of communications; and the removal of the concept of authorised capital.

Other authorities are streamlining their systems in order to facilitate compliance with the Companies Act. For all its challenges, the enactment of the Companies Act is on the whole a positive move.

Insolvency Act

Prior to the enactment of the Insolvency Act, companies in Kenya relied on the provisions of the old Companies Act (Chapter 486, laws of Kenya) and the principles of common law in relation to insolvency proceedings. The Insolvency Act codified the relevant principles, and is intended to provide a comprehensive basis for insolvency practice in Kenya. For events which occurred prior to the new law coming into effect, the old Insolvency Act provisions will continue to apply. The Insolvency Act repeals the Bankruptcy Act, meaning that matters pertaining to bankruptcy of natural persons are now governed by the Insolvency Act.

Kenya’s new Insolvency Act is based on the UK Insolvency Act 1986, but given the phased rollout of implementation and the breadth, there have, as expected, been a number of teething issues in putting these provisions into practice. For instance, it is unclear whether priority would go to a receiver appointed under a charge over land that is registered under the Land Act No. 6 of 2012 or an administrator appointed under the Insolvency Act who wants to take control over all the assets of a company, including land.

Increasing Efficiency

The enactment of the Companies Act and the Insolvency Act have enabled companies in Kenya to be better managed, and where necessary, have their affairs wound up in an orderly manner, with the view of increasing efficiency and ease of doing business. So far, in their formative period of being tested, a number of issues have been noted and raised for consideration by the various stakeholders. Once these matters are addressed, Kenya will definitely be a market to watch.

Foreign Investment

As with many commonwealth jurisdictions, private limited liability companies are the most common form of business vehicle used by domestic and foreign investors in Kenya. In addition, foreign investors may also opt to use a public limited liability company where a greater number of shareholders are envisaged or in certain circumstances a partnership – limited or unlimited – may provide the best vehicle for their investment. Appropriate corporate and tax structuring of investments into Kenya is vital.

Keninvest

An investor may choose to register with KenInvest, the government body established by the Investment Promotion Act 2004 to promote investment in Kenya. Registration under the Investment Promotion Act is voluntary, but an investor must intend to invest a minimum of $100,000 in order to be registered.

Upon free registration with KenInvest, an investor receives an investment certificate which is valid for one year. It entitles the investor to business licences which the investor requires to conduct business. These include import/export licences and the permission to use a standardisation mark under the Standards Act. One of the advantages of obtaining an investment certificate is that it enables the holder, after submitting its applications for the relevant licences, to operate as if it holds the necessary licences during the period when the investment certificate is valid.

Given the timelines associated with obtaining certain licences, the ability to commence operations can be extremely beneficial, however, it should be borne in mind that upon the expiration of the initial investment certificate, the investor will have to apply for and obtain renewals of any business licences in the usual manner. If the licences have not been obtained, then upon the expiry of its investment certificate the investor could be sanctioned for commencing operations without the requisite licences. However, KenInvest will usually assist the investor in the renewal process to ensure that this situation does not arise.

A minimum of six entry or work permits (three for management or technical staff and three investor permits) are permitted. KenInvest may facilitate the grant of more than six work permits where an investment is higher than the minimum $100,000 and the business requires skilled expertise. It is possible, with the approval of the immigration department, to obtain more than six entry permits; however, KenInvest registration is particularly important because obtaining entry permits can be time consuming and is otherwise not guaranteed.

Tax Registration

Following the setup of a suitable investment vehicle, a foreign investor would need to register that vehicle with the KRA for tax purposes. The government has adopted a new one-stop registration system aimed at reducing setting up formalities. It is intended that all new companies will be registered for tax and for employee-related entities such as the National Health Insurance Fund (NHIF) and the National Social Security Fund (NSSF) at the point of incorporation. NHIF and NSSF registration is required where a company will have employees in Kenya.

KenInvest registration is also particularly useful for a company that has non-resident directors. Usually, the KRA stipulates that non-resident directors must hold valid entry permits to be registered for tax. This is not possible for a first-time investor who has yet to establish a Kenyan entity to procure his entry permit.

Where a company procures an investment certificate, KenInvest will issue a letter to the KRA requesting that the non-resident directors be registered for tax, notwithstanding that they do not hold entry permits.

County Business Registration

Every business is required to obtain a business permit from the county government under which it operates, register its workplaces with the health and safety authorities and procure fire safety certificates from the appropriate fire department.

A foreign investor may require all these depending on the nature of operations it undertakes in Kenya. The investor may also be required to obtain a sector-specific licence or registration depending on the sector in which it operates.

In Nairobi County there is now a unified business permit which consolidates all the licences required for running a business within the county.

Bilateral & Multilateral Treaties

Kenya has signed a number of double-taxation agreements (DTAs) that provide for double-taxation relief. Kenya currently has DTAs in force with Zambia, Norway, Denmark, Sweden, the UK, Germany, Canada, India, France and South Africa. It has also signed DTAs with Qatar, Iran, Seychelles, Nigeria, the UAE, EAC partner states, the Netherlands, Mauritius and Italy, but these DTAs have yet to come into force, as they require appropriate notifications to be made to the respective foreign governments.

The Income Tax Act limits the relief from double taxation to a company, which is resident in a country and has a DTA with Kenya where 50% or more of its underlying ownership is held by an individual (or individuals) who is a resident in that country. An exception to this rule is where the non-resident company is listed in the stock exchange of the counterpart state, in which case the 50% ownership rule will not apply in accessing treaty benefits.

Kenya has entered into 17 bilateral investment treaties (BITs), which generally cover fair and equitable treatment of foreign investors’ investments, non-nationalisation or expropriation, transferability and dispute resolution. Of the 15 BITS entered into by Kenya, only six (between Kenya and each of France, Germany, Italy, the Netherlands, Switzerland, the UK and Kuwait) are in force. The other BITs with Burundi, China, Finland, Iran, Japan, Korea, Libya, Mauritius, Slovakia and Turkey, while signed, are not yet in force.

Foreign Exchange Controls

At present there is no formal exchange control regime in force in Kenya following the repeal of the Exchange Control Act in 1995. There are also currently no requirements under Kenyan law on converting foreign currency into Kenyan shillings, or limitations on the frequency of converting Kenyan shillings to a foreign currency or vice versa. Nevertheless, under the Central Bank of Kenya (CBK) Act, there is a requirement that every payment made: a. in Kenya, to or for the credit of a person outside Kenya; b. outside Kenya, to or for the credit of a person in Kenya; or c. in Kenya (other than a payment for a current transaction) between a resident and non-resident; be effected through a bank licensed by the CBK. Each commercial bank is additionally required to submit returns to the CBK on a regular basis in relation to, among other things, foreign currency transactions. In general terms, foreign currency can be freely repatriated from Kenya provided there is evidence of a bona fide transaction, and the bank undertaking the repatriation is satisfied as to the genuineness of the transaction.

However, for any amount equivalent to $500,000 or more, the CBK requests that the relevant commercial bank in Kenya remitting the funds from Kenya notifies the central bank as to the amount and purpose of the remittance.

It should be noted that the obligation is merely to notify and does not require the obtaining of any prior consent or approval. Our understanding is that the CBK collects this information for statistical purposes only, and we are not aware of any refusal to remit funds for a bona fide transaction.

For any amount below the equivalent of $10,000 commercial banks are not required to obtain any documentary evidence to support the transaction, although as a matter of practice, most remitting banks will nonetheless seek an explanation.

Compulsory Acquisition Of Property

The constitution provides that the state shall not deprive any person of property unless it is as a result of an acquisition of land in accordance with the constitution or for public purposes or public interest carried out in accordance with the constitution and any act of Parliament. In any event, full and prompt payment of just compensation must be paid to the owner of the property.

In fact, Kenya has not had a programme of nationalisation of assets and where property has been appropriated for purposes of constructing public utilities, such as roads and the new Standard-Gauge Railway project, public notices have been published and the owners have been compensated.

Real Estate & Finance

There have been a number of significant developments in the laws concerning real estate and finance in Kenya.

For some time in Kenya there has been public concern that the cost of obtaining finance from Kenyan banks is too high and as a result not available to most ordinary Kenyans. The Banking Act 2015 (the Banking Amendment Act) was assented to by the president on August 24, 2016, and seeks to regulate the banking industry in Kenya, which previously had no restriction or guidelines on the interest rates that banks are allowed to charge borrowers for various credit facilities, or the interest rates that banks offer for deposits held with them in interest-bearing accounts.

While the promulgation of the Banking Amendment Act has been seen as sign of relief for many borrowers, many in the banking industry argue that the move will see the majority of banks reduce their capacity for lending to higher-risk borrowers, which will as a result lead to a transfer of such lending from banks to microfinance institutions and informal lenders who will charge substantially higher and unregulated levels of interest.

Notwithstanding the provisions of the Banking Amendment Act, a number of issues will need to be addressed to facilitate its implementation including:

• Whether banks will be able to adapt their systems to implement the new law within the short period of time required;

• Whether the Central Bank Rate or the Kenya Bankers Reference Rate (both of which are published by the CBK will apply as the base rate to be used by banks, as it is unclear from the wording of the Banking Amendment Act;

• What the maximum rate of interest is under the Banking Amendment Act as the wording is open to variable interpretation;

• Whether the interest rate cap on lending and deposits are payable on a per annum, monthly or daily basis; and

• Whether the cap on interest rate will prevent banks from charging default interest in the event a borrower defaults in meeting its repayment obligations.

Capital Gains Tax (Cgt)

CGT was re-introduced on the sale of immovable property in Kenya in January 2015. The Finance Act 2015 was subsequently enacted and required that CGT on immoveable property should be paid before a transfer is lodged for registration at the relevant land registry.

Legally, immovable property becomes the property of the transferee once the transfer in favour of the transferee is registered against the title in respect of the property. The requirement to pay CGT prior to this legal transfer raises a number of commercial issues that parties would need to consider when entering into a property transaction: In practice, the purchase price is not released to the transferor until the transfer is registered. However, the transferor is required to pay CGT before the transfer is lodged for registration, failing which penalties accrue over and above the CGT.

At times the transferor may not have the funds to pay the CGT. In this case, the transferor would need to find an alternative source of funds or negotiate a release of a portion of the purchase price prior to the registration of the transfer to finance the payment of CGT; and who will bear the risk of the CGT payment if the transfer is not registered or if the transaction has to be reversed for any reason.

Land

The constitution required reforms to various legislation including acts concerning land. Consequently, the Land Registration Act 2012 (LRA) and the Land Act 2012 (LA) were enacted and replaced a majority of the previous legislation regulating land. The LRA and the LA abolished the office of the Commissioner of Lands (Commissioner) who was previously responsible for among other duties, issuing titles to land, varying the terms and conditions of a lease in respect of leasehold property with the consent of the registered proprietor and accepting the surrenders of lease, licences and freehold conveyances from registered proprietors.

There were also a number of grey areas between the two statutes and the National Land Commission Act regarding the functions of the National Land Commission (NLC) and the Ministry of Lands ( Ministry).

Subsequently, a dispute arose between the NLC and the Ministry regarding the authority and functions of both entities. The dispute resulted in disruption of certain services at the land registries. On April 1, 2014, the NLC sought an advisory opinion for the determination of the functions and powers of both entities from the Supreme Court.

In rendering its advisory opinion on December 2, 2015, the Supreme Court found that:

• The NLC acts as an oversight authority over the Ministry to ensure compliance with the constitution and with legislation;

• The task of registering land titles lies with the national government through the Ministry; and

• The Supreme Court recommended that the complete set of land-related statutes be placed before the attorney general and the Kenya Law Reform Commission for a detailed review to address the various inconsistencies and imprecisions.

Labour Law

Post-independence the development of Kenya’s labour laws had generally stagnated. In 2001 a taskforce made up of members from the government, trade unions and the employers’ association was set up to review Kenya’s labour laws. The outcome of the review was the enactment of a new Employment Act in 2007 together with several pieces of supporting legislation. In addition, the constitution enshrined the concept of fair labour practices under Article 41(1). The effect of the new legislation was to shift Kenya from a pro-employer to a pro-employee jurisdiction. The country is a member of the International Labour Organisation, and it has ratified seven of the eight fundamental conventions. Under Article 2 of the constitution, ratified conventions form part of the laws of Kenya.

Fair Labour Practices

The concept of fair labour practices in Kenya prohibits discriminatory conduct against a worker on the basis of their race, sex, language, religion, political or other opinion, nationality, ethnic or social origin, disability, marital status or HIV status, and the expectation that when disciplining or terminating an employee, the employer must have a valid reason and follow a fair procedure. In addition, Kenya also has established an Employment and Labour Relations Court, which has exclusive jurisdiction over employment disputes.

Jurisprudence Developments

In Kenya jurisprudence from the Employment and Labour Relations Court has been markedly pro-employee. However, given that Kenya had historically been a pro-employer environment where workers’ rights were minimal, this shift could be seen as a rebalancing of power. As a consequence of these developments, there has been an increase in employee and union activism. It is therefore not uncommon to find corporate transactions stalled in the country as a result of employees or unions procuring injunctions based on concerns that the employees’ rights are not being protected.

Legal Developments

As part of the government’s policy to combat graft, in August 2016 Parliament passed the Access to Information Act, 2016 and the Bribery Act, 2016. Both acts make it an offence to penalise employees if they disclose information which is in the public interest or whistle blow to the appropriate authority.

The definition of penalisation broadly includes any dismissal, discrimination, denial of appointment or promotion, transfers to unfavourable working areas, or any other form of harassment or intimidation.

In addition, a proposed amendment to the Employment Act also seeks to expand some employee rights such as maternity and sick leave. This bill has undergone its second reading and is due before the committee of the whole.

Competition Enforcement

Merger regulation and competition law continue to have a significant impact on the timing and cost of investments in Kenya or investments which have a Kenyan element. There are currently two potential competition law regimes which could impact investment in the country. These are Kenya’s domestic competition law and COMESA competition law. In addition, the EAC Competition Authority has indicated that it intends to operationalise the EAC competition law regime.

The operationalisation of the EAC Competition Authority is likely to increase the notification burden on merging parties. Presently, parties must make a dual notification of a merger if they meet the relevant criteria requiring an approval from the Competition Authority of Kenya (CAK) and the COMESA Competition Commission (CCC).

A third notification may now be required where the merging parties qualify under EAC competition law. The CCC’s and EAC Competition Authority’s aim of being a one-stop shop for regional competition law issues such as merger control is yet to be achieved. In addition, the CAK and CCC initially focused on mergers, but are now increasingly turning their attention to the enforcement of restrictive trade practices.

Restrictive Trade Practices

The CAK has recently imposed a number of fines for restrictive arrangements. The quantum of the fines varies based on the circumstances of the infringement, the turnover of the company being fined and any mitigating factors which may be adduced. A number of these fines appear to have arisen as part of a sectoral review being conducted by the CAK, and the party being penalised may not have been the original subject of the investigation.

The highest financial penalty to have been gazetted is KSh5m ($48,800), and involved an advertising company which was charged with price-fixing and minimum resale price maintenance. The penalty arose as a result of a sectoral investigation that the CAK conducted in the advertising sector. A number of other advertising companies were additionally fined for similar practices.

In addition, the CAK has conducted a market inquiry into the alcoholic beverages sector. Fines and brief details of any contravention are usually made public through a notice in the Kenya Gazette. Separately, the CAK is also seeking to introduce filing fees for applications for exemption from the restrictions applicable to restrictive trade practices. In March 2016 the CAK conducted its first raid on the premises of two fertiliser firms alleged to have been colluding in fixing the prices of fertiliser.

Stricter Enforcement

The recent Competition (Amendment) Act 2016 introduced various amendments to the Kenyan Competition Act, including making it mandatory to provide information requested by the CAK when carrying out market inquiries.

No Block Exemptions

The CAK has not yet enacted any block exemptions, which would exempt certain types of arrangements from the restrictions applicable to restrictive trade practices. The CAK had indicated that these were intended to be enacted by mid-2016, and their enactment will be highly welcome in guiding the market.

Restrictive Trade Practices Under Comesa

undefined The CCC may soon start enforcing provisions on restrictive trade practices in the common market, following the recent publication of draft guidelines on restrictive business practices which borrow heavily from the EU’s approach to restrictive trade practices.

New Mining Law

The long-awaited Mining Act 2016 (Mining Act) was passed into law on May 27, 2016. Draft regulations intended to bring the new act into effect are currently under review by stakeholders. In the interim, the Ministry of Mines has suspended its review of licence renewals or new applications until further notice pending constitution of the Mineral Rights Board, which shall have power to review and recommend licence issuances, renewals, variations and suspensions to the cabinet secretary; and establish the procedures, forms and fees pursuant to which new licences shall be issued or renewed.

While the new Mining Act modernises the outdated legislative framework under the previous Mining Act, it still contains various provisions that may make Kenya commercially unattractive as an emerging mining hub.

Indeed, while Africa as a whole ranks ahead of Oceania, Asia, Latin America, the Caribbean and Argentina, Kenya was ranked as one of bottom-10 jurisdictions for mining investment in 2015 by the 2015 Fraser Institute Survey, which highlighted investor concerns regarding lack of transparency in the transition from the existing regime to the proposed new regime, uncertainty regarding stability of licence tenures and extensive local shareholding and free-carried interest provisions in the new law.

The new Mining Act now applies to various classes of minerals that previously did not require mining licences for extraction, including construction and industrial minerals such as sand, gravel, limestone and gypsum. All types of licence applications require local employment plans and local procurement of goods and services. The proposed regulations require detailed quarterly and annual reporting on compliance with employment, procurement, community development and production targets.

Holders of reconnaissance and prospecting licences will be required to forfeit any amounts budgeted for, but not spent in, carrying out the programme of reconnaissance or prospecting works, as the case may be, to the Ministry of Mines. Movable and immovable assets owned by mining licence holders shall automatically vest in the county and national governments upon termination or surrender of such licences.

The Mining Act creates separate licensing regimes for small- and large-scale mining operations. Small-scale operations cover less than two contiguous blocks or less than 25,000 cu metres of extraction, and are subject to relatively simple application procedures with regard to granting either reconnaissance, prospecting or mining permits. Small-scale operations are subject to a minimum 60% local shareholding requirement. Large-scale operations cover areas larger than 25,000 cu metres and are subject to more stringent licence application requirements for reconnaissance, prospecting, retention and mining licences.

Reconnaissance licence are issuable for two-year, non-renewable terms, while prospecting licences are issued for three-year, renewable terms, each within 90 days of application. Mining licences are to be issued for 25 years, renewable for a further 15 years and are to be approved within 120 days of application. Companies granted a mining licence for large-scale operations must list 20% of their equity on a local stock exchange within three years of commencing production, and issue a 10% free carried interest in all mining operations to the government.

 

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The Report: Kenya 2017

Legal Framework chapter from The Report: Kenya 2017

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