Your Company Has Been Put Under Administration in Kenya: Can the Appointment Be Challenged?

An administrator’s appointment may take effect before its validity has ever been tested by a Court.

That does not make the appointment immune from challenge.

Where a secured creditor appoints an administrator directly under section 534 of the Insolvency Act, 2015, the appointment takes effect once the requirements of section 537 are satisfied. Section 540 nevertheless expressly contemplates an appointment subsequently being discovered to be invalid.

The real question is therefore not whether administration is commercially unwelcome.

It is:

Did the appointing creditor possess, and properly exercise, the statutory power to appoint the administrator?

What can make an administrator’s appointment invalid?

The direct appointment power belongs to the holder of a qualifying floating charge.

A challenge may therefore arise where the appointing creditor did not hold the qualifying floating charge required by section 534, the charge was not enforceable when the appointment was made, a prior qualifying floating charge holder was not dealt with as required by section 535, or the appointment did not comply with the statutory requirements under section 537.

These are not merely technical objections. They concern the legal authority relied upon to transfer control of the company to the administrator.

The first exercise should therefore be a review of the security and appointment documents.

A lender may hold security and still lack the power to appoint

This distinction was demonstrated in I&M Bank Limited v Mitini Scapes Development Limited [2025] KEHC 5491 (KLR).

The Bank had an all-assets debenture securing substantial lending to the company.

However, the debenture predated the Insolvency Act. The High Court held that it didnot give the Bank the statutory right to make a direct appointment under section 534 and revoked the administrators’ appointment.

The case is commercially significant because the existence of extensive security does not answer the appointment question.

A debenture must be examined to determine whether it gives the creditor the particular statutory right being exercised.

What does not, by itself, invalidate the appointment?

A challenge should be directed at the legal foundation of the appointment rather than the commercial consequences of administration.

The fact that directors oppose the appointment, believe the business can be rescued without administration, have identified a possible investor or consider the creditor’s enforcement strategy unnecessarily severe does not, without more, invalidate an otherwise lawful appointment.

That distinction is illustrated by In re Agro Irrigation and Pump Services Limited [2024] KEHC 13790 (KLR). The directors challenged the appointment while contending that investment could be obtained to address the company’s indebtedness.

The Court nevertheless found that the relevant debenture constituted a qualifying charge and declined to revoke the appointment.

The Court is therefore not simply deciding whether administration was a good commercial idea.

The primary enquiry in an appointment challenge is whether the statutory power existed and was lawfully exercised.

Who should bring the challenge?

This requires care once administration has commenced.

Section 581 restricts the company and its officers from exercising management functions without the administrator’s consent where those functions could interfere with the administrator’s functions.

In Agro Irrigation, the Court held that appointing an advocate to challenge the administration did not, by itself, amount to prohibited interference. The difficulty was that the application had been brought on behalf of the company. The Court stated that it ought instead to have been brought for and on behalf of the directors. Accordingly, directors should not assume that they retain unrestricted authority to cause the company itself to litigate after administration has taken effect.

The identity of the proper applicant should be determined before proceedings are commenced. Depending on the circumstances, the challenge may be brought by directors, shareholders or an affected secured creditor in their own capacity.

Is every complaint about an administrator a challenge to the appointment?

No.

There is an important distinction between an invalid appointment and dissatisfaction with the conduct of a validly appointed administrator.

If the complaint is that the appointing creditor lacked a qualifying floating charge, the charge was unenforceable or the statutory appointment process was defective, the validity of the appointment itself may be challenged.

If the administrator was validly appointed but subsequently acts in a manner that detrimentally affects a creditor or member’s interests, the Insolvency Act provides separate mechanisms for challenging the conduct of the administration, including section 591.

Choosing the wrong remedy may result in unnecessary litigation without addressing the real complaint.

Why should the appointment be reviewed immediately?

Administration can alter control of the company immediately.

The administrator may assume control over assets, bank accounts, contracts, employees and existing litigation while the validity of the appointment remains untested.

Any review should therefore begin with the debenture and other security instruments, the creditor’s priority, the event relied upon to make the security enforceable, and the documents lodged to effect the appointment.

The purpose is not merely to find an irregularity.

It is to determine whether the complaint concerns the validity of the appointment, the priority of competing security, or the administrator’s subsequent conduct, because each may require a different remedy.

How we assist companies, directors and secured creditors

We advise companies, directors, shareholders and secured creditors on contested administrations.

We review the security and appointment documents to determine whether the appointing creditor possessed the statutory power to appoint, whether that power was properly exercised and who should properly bring any challenge.
Where the appointment itself is valid but the dispute concerns the subsequent conduct of the administration, we advise on the appropriate remedies under the Insolvency Act.

An administrator’s appointment may take effect immediately. But immediate effect does not cure an appointment made without the statutory power to appoint.

This article provides general information on Kenyan insolvency and commercial law and does
not constitute legal advice.