How new set of regulations will change the business landscape

Six new legislations are set to transform Kenya’s business landscape and thrust the country’s competitiveness to greater heights when fully implemented.
The Companies Act, the Insolvency Act and the Special Economic Zones Act, the Business Registration Service, the Companies and Insolvency Legislation (Consequential Amendments) Act 2015 and Finance Act amendments 2015 were signed into law by President Uhuru Kenyatta on Friday.

The new laws, which will replace archaic business regulations long blamed for the bureaucratic barriers in starting and running business in Kenya, have been hailed by lawyers and others business stakeholders as ‘transformative’.

The companies Act, for example, has been long overdue. Despite the change that has characterised modern business ecosystem, Kenya has been relying on an old legislation for over 60 years.

“We are removing the bureaucratic red tape that has discouraged business for long and there should be no more delays in business registrations and legal barriers in starting a company. Each one of us must now play their respective roles in placing Kenya on the path towards a first world economy,” the President said.

The new company law allows a single person to form a company, which is in contrast to the earlier legislation that required at least two directors.

Solo entrepreneurs will now have the legal backing to go it alone and form a private company as the sole member and director, giving them the advantage of the limited liability aspect of registered companies.

The old legislation under Section 4 (1) of the Companies Act Cap 486 of the Laws of Kenya required a minimum of seven persons and two persons for the formation of a public and private company respectively.

The requirement has led to the existence of several companies whose directors were included in the list of directors as matter of formality.

Industrialisation Cabinet Secretary Adan Mohamed said the laws are aimed at giving start-ups a smooth entry into the business space and allowing them to conveniently scale up.

“The old laws we have been operating under were made with the focus on big companies. This has made entry into the market by the small players very difficult. The new laws now makes it both cheaper and faster to establish a company in Kenya,” Mr Mohamed said last week after the President signed the legislations.

JOB CREATION

His Principal Secretary Wilson Songa shared similar sentiments, adding that the new laws are set to spur job creation. Under the Act, smaller companies have been given other exemptions such as operating without a company secretary.

“A private company is required to have a secretary only if it has a paid up capital of Sh5 million or more,” section 244 (1) of the Act says.
The public companies are, however, required to have at least one secretary.

A window to shift from one company class to another is also given by the new law with standards set to allow a private entity change into a public one and vice versa.

Private companies may not have to hold annual general meetings under the new law, which allows them to file resolutions only. Their public counterparts will, however, be compelled to hold AGMs.

Another fresh development in the local enterprise set up is how companies are named. Section 53 of the Act requires that an entity that is both a limited company and a public company may only be registered with a name that ends with the words “public limited company” or the abbreviation “plc”.

You will therefore begin seeing companies with the name ending PLC instead of the usual LTD. The LTD suffix is now a preserve of the private companies according to section 54.

“A company that is both a limited company and a private company may be registered only with a name that ends with the word “limited” or the abbreviation “ltd.” 55.

The Act also empowers the Cabinet Secretary to exempt private companies from using the word ‘limited’ or ‘ltd’ by way of giving a notice to the company.

The new law also delves into the corporate governance of companies. The directors, whose roles and responsibilities have largely been implied, have now been specified.

The law now compels foreign firms to include local directors in a new provision that makes it a punishable offence for them to operate without the input from local directors.

“The registrar may not register a foreign company under this part unless the company has at least one local representative in relation to whom the foreign company has complied with the prescribed requirements of the foreign companies regulations relating to local representatives of foreign companies,” section 980 of the Act says.

It goes further to say that should the local representative choose to exit, then the foreigners will have 21 days to get a replacement failure to which the company shall have breached the law, attracting a fine of Sh500,000 from each of the directors. This is if they continue operation in the country without the local representation.

INSOLVENCY LAW
The requirement is also going to create a soft leeway into foreign firms some of which come with heavy capital injections say in the mega projects being done in Kenya.

The new insolvency law gives priority to revival of distressed firms rather than the previous regime that aimed at auctioning or liquidating them. It provides for rescheduling of debt to lengthen the repayment period instead of commencing bankruptcy proceedings in court.

The legislation effectively cuts the power of creditors to dictate the terms of a settlement with banks largely affected as they have been the main creditors in bankruptcy transactions.

Instead of the position in the old law, where one could remain “bankrupt” forever, the new rules say that a debtor will automatically be discharged from debt after three years.

Division 22 (clauses 254-21l) provides that a bankrupt is automatically discharged from bankruptcy three years “after the commencement of the bankruptcy or may be discharged earlier on the application of the bankrupt,” states the new law, which also prescribes how one is discharged from bankruptcy.

ECONOMIC ZONES

Creditors, however, will have a right to object to the automatic discharge of a bankrupt. The High Court will have jurisdiction to hear and determine such an objection and will be required to quash the discharge if any of the specified grounds is established.

This provision is, however, likely to spark debate as some may see it as being lenient on people, who choose to accumulate debt with the knowledge of being freed in just three years.

The Industrialisation CS said the new law is set to save financially troubled firms from creditors whose primary interest remain recovery through the sale of assets rather than the revival of the business. Corporate turnaround will now become the focus for firms that are likely to go under.

The Special Economic Zones Act, the law billed as the first of its kind in Africa, is aimed at creating an enabling environment for global and local investors in specially designated zones.

The International Finance Corporation (IFC) manager for investment climate Frank Twariga, said the IFC and the World Bank are watching Kenya keenly for her pioneer role in enacting this law.

“It is impressive to see the government work closely with the private sector to improve the business environment. We applaud Kenya’s leadership role in this and we will be sending delegations to Kenya to come and learn how the SEZ law is implemented because it is the first one we have witnessed in Africa,” the IFC boss said.

Mr Songa said the creation of Special Economic Zones will make Kenya a regional leader in industrialisation.

BOOST EXPORTS

“We have the Dongo Kundu SEZ initiative, which is set to transform the entire country’s approach towards agro-processing. With the standard gauge railway and the nearby ports at the Coast, we will boost our exports from the products we will be processing and narrow our balance of trade, which has lately piled pressure on the local currency,” Mr Songa told Smart Company.

The challenge, however, remains in implementation of the new laws.

“Laws alone don’t make the difference, we will work together to implement the new laws and facilitate faster growth for the private sector, who in turn create jobs for our youth” Mr Kenyatta said on Friday.

The new legislations also boost Kenya’s efforts in climbing the ease of doing business rankings, including the ongoing infrastructural projects and efforts to cut the cost of electricity as well as ensure its penetration gets to 75 per cent of households by 2017.

Kenya emerged 136 out of 189 countries ranked by the World Bank on the ease of doing business. The position was worse than the position 121 attained a year before.

Kenya also trailed 14 other countries in sub-Saharan region with Mauritius leading the region at position 28 globally. South Africa, Rwanda, Ghana and Botswana completed the region’s top five.