Phoenix activity in a Company involves the incorporation of a second company from the remains of a failed company. Phoenix activity can either be legal or illegal. Legal phoenix activities can be a means of corporate restructuring. They may include reorganization methods such as transfer to a NewCo where the creditors of the old company may opt to either agree to take a debt in the new company, take up equity in the new company, or both.

On the other hand, illegal Phoenix activity occurs when directors of an insolvent company form another company with a similar directorship and transfer assets to the new company at a price below the market value, thereby prejudicing the interests of the creditors of the company. Often, such illegal activities are geared towards evading tax and avoiding debts legally owed to creditors by the company, which may also include claims by the company’s employees

Some of the ways through which regulators and stakeholders can identify illegal phoenix activities include the following:-

• Where businesses are conducted in complex corporate groups to avoid payment of debts and taxes;
• Controllers who have dealt with several failed businesses over a period of time;
• Operating business and accounts under the old company name to maintain customer goodwill;

Nevertheless, even in the above cases and in instances where there are multiple failures and a new company has retained the same directors and controllers, that in itself is not proof of illegal phoenix activity for the reasons that: –

• Where one is an expert in a specific field, and a business fails, they may tend to start another company in the exact location and perhaps retain some of the assets and employees from the old business; and
• Such a person may want to retain their customers and business goodwill to have a customer base for the new business.

What must be established in cases of suspected illegal phoenix activity is whether the intention of the directors and controllers of the company is to evade paying debts and taxes. For instance, where a business has incurred tax losses and debts, and such liabilities are not carried forward to ensure the

interests of the creditors and the tax man are catered for despite the reorganization of the business, an inference can be drawn that the formation of the new company was solely meant to evade such liabilities. The intention is the crux of differentiating between legal and illegal phoenix activity.

At Riskhouse International, we have a multidisciplinary team that consists of insolvency & restructuring lawyers, forensic auditors, and accountants who offer advisory services in company reorganizations and investigations into matters involving fraudulent activities in insolvent companies with the aim inter alia to provide support in Personal Bankruptcy and Corporate Insolvency Litigation.

To learn more about this service, you can reach us by email at info@riskhouse.co.ke

A Company is considered insolvent if it cannot pay debts as they fall due or in the usual course of business. In Kenya, the Law regulating Insolvent Companies’ affairs is the Insolvency Act, No. 18 of 2015 [hereinafter “the Act”]. Section 384 of the Act provides the test for insolvency and describes the instances where a Company will be deemed as unable to pay its debts.

Under Section 384 [1] of the Act, a Company shall be deemed unable to pay its debts if: –

1. A creditor to whom the company is indebted for 100,000.00 or more has served on the company a written demand requiring the company to pay the debt within 21 days, and the company has failed to meet the demand to the reasonable satisfaction of the creditor; or
2. A monetary decree or order has been passed against the company, and the company has failed to satisfy such decree or order in whole or in part; or
3. It is proved to the satisfaction of the Insolvency Court that the company is unable to pay its debts as they fall due.

The situation described in section 384 [1] [c] above is often described as equity insolvency or cash-flow insolvency.

Further, in section 384 [2], a company is also regarded as unable to pay its debts if it is proved to the Court that the value of the company’s assets is less than the number of its liabilities. This includes contingent and prospective liabilities.

According to the English Supreme Court in BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL Plc [2013] UKSC 28, a company in the situation described in section 384 [2] is often said to be “balance-sheet” insolvent. Still, that expression is not to be taken literally because a company’s statutory balance sheet, prepared following company law requirements, may omit some contingent assets or liabilities.

There are so many instances where creditors and members of the Company resort to insolvency proceedings to recover a debt, yet the test under section 384 has not been met. While creditors are at liberty to use insolvency proceedings as a means of debt recovery, insolvency proceedings cannot be used to arm-twist a party into complying with their obligations to satisfy a debt. Similarly, the Insolvency Court cannot be used by debtors as a means to shield themselves from their obligation to pay debts.

Case in point: – a debtor may file an application praying for an administration order to enjoy the interim moratorium provided for under Section 561 of the Insolvency Act. The interim moratorium will typically operate as a temporary halt on specific transactions and adverse actions against the company, such as execution.

In such an instance, the insolvency proceedings would amount to a sham and can be deemed contrived.

At all times, it is upon the debtor who invokes the jurisdiction of the Insolvency Court to prove that, indeed, the company is unable to pay the debts owed. This was the position of the Court in the matter of Ali Jillo Fallan (Insolvency Cause 6 of 2018) [2021] KEHC 8 (KLR) (Commercial and Tax) (10 September 2021) (Ruling), where the Court held that to establish insolvency; it must be shown that the debtor’s liabilities as a fact exceed his assets and not merely that they might do so, and clear proof of this must be adduced. For this reason, the debtor must furnish the Court and the creditors with a statement of financial position.

Where the debtor proves inability to pay debts, the burden then shifts on the creditor opposing the insolvency proceedings to verify that the debtor is indeed able to pay its debts, the proceedings are a sham, or irregularities exist in the financial reports. This can be determined from an inspection of the statement of financial position, which is a right granted to all creditors.

In such an instance, the creditors can seek an order from Court for an independent forensic audit of the company’s financials to be carried out to determine whether the company is in financial distress. This will provide an independent and accurate analysis of the company’s financials and guide the Insolvency Court on the next steps.

At Riskhouse International, we have a multidisciplinary team that consists of insolvency lawyers, forensic auditors and accountants who can help detect any financial irregularities through a thorough financial audit. We investigate matters relating to fraudulent financial statements and other accounting frauds; potentially fraudulent payments; revenue-related irregularities such as revenue overstatement or understatement; matters involving fraudulent disbursements, cash larceny and skimming; and inventory frauds with the aim inter alia to provide support in Personal Bankruptcy and Corporate Insolvency Litigation.

The constant fight to deter financial crimes by government institutions such as the Central Bank of Kenya (CBK) and Financial Reporting Centre (FRC) as well as international agencies has been a frustrating one as financial criminals adopt new technologies and modern tactics to commit unlawful acts. Financial crimes such as fraud, corruption, money laundering, drug trafficking and identity theft have become prevalent over the recent years leaving businesses with no option but to comply with various laws and regulations to safeguard their entities.

In Kenya, financial institutions are required to comply with various Acts and regulations by the CBK in a bid to strengthen their AML/CFT programs. These laws include the Proceeds of Crime and Anti Money Laundering Act (POCAMLA), Proceeds of Crime and Anti Money Laundering Regulations 2013 and the Prevention of Terrorism Act 2012. Organizations without the right policies, processes and systems become easy targets of financial criminals. Adequate customer due diligence and KYC procedures as well as proper customer risk assessments and risk categorizations cannot be overlooked. Identity of company’s beneficial owners is paramount as these have the ultimate controlling stake of the legal entities.

In July 2019, the Kenya’s Statute Law (Miscellaneous Amendments) Act, 2019, made amendments to the Companies Act, 2015, by introducing Section 93 A, which requires every company registered in Kenya to prepare and keep a register of its beneficial owners. The register unveils the beneficial owners’ personal information, the control nature or ownership they have in the company and the date they became beneficial owners. The aim is to promote transparency in the company’s ownership structure.

Shell banks have been on the rise as launderers seek tactical ways to conceal their acts. Shell banks have no physical presence in the country of incorporation or licensing. They are not affiliated to any known financial group. Most financial institutions prohibit transacting with such entities, and form part of their sanctions list. There are various sanction issuing competent authorities that financial entities can leverage on in strengthening their financial sanction regime and customer screening mechanisms. The United Nations Security Council (“UNSC”); the United States Office of Foreign Assets Control (“OFAC”); the Her Majesty’s Treasury, United Kingdom (“HMT”); the European Union (“EU”) and World Compliance Check are among well-known sanction issuing authorities.

At Riskhouse International we examine the effectiveness of your Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) programs by offering; AML/CFT Health Check & Independent Assessments; KYC Diligence, Screening & Remediation; AML/CFT Analytics, Monitoring & Investigations; and AML/CFT Training & Awareness.

The intense increase on prices of commodities across the region should be a concern to trademark owners. Counterfeiters might take advantage and imitate the protected brands in order to make the goods available to consumers at subsidized prices, yet the most valuable assets of a business are its brand name and reputation. 

This act of counterfeiting is detrimental to the brand owner’s interest given that such owners have invested a lot to establish a reputable brand and its trademark to increase its demand in the market.  

A manufacturer has an obligation to ensure that commodities introduced in the market comply with the relevant Kenyan standards as required by the Kenya Bureau of Standards. The manufacturer also has a duty to comply with certain statutory duties such as paying revenue to the government. Unfortunately, the introduction of fake products into the market, disrupts the free flow of protected brands and places intellectual property owners at a great disadvantage. 

The aim of IP Investigation is to counter illicit IP trade practices by investigating the source of counterfeits, identify the supply chain as well as establishing the main perpetrators. The owner of a trademark has remedies, both of civil or criminal nature, against the perpetrators under the various IP laws and the Anti – Counterfeit Act, 2008. Such strong actions, through investigation and enforcement, would enhance the brand value of the organization. 

At Riskhouse International, we have a robust Intellectual Property Crime and Infringement Investigation team who are ready to provide you with Investigation services, tailored to your expectations. We conduct anti-counterfeit investigations, online trademark watch, brand reputation analysis, sample test purchase, brand market monitoring and survey, brand competition analysis and trademark infringement investigation. In addition, we aim to provide excellent comprehensive written investigation reports with detailed recommendations to help you strengthen your brand reputation and prevent violation of Intellectual Property Rights in commerce. 

Identity theft in Kenya has been on the rise as technology is constantly evolving around the globe. There are many forms of identity theft used by fraudsters to steal money from citizens. The most common type being SIM swap.

SIM swap is a fraud that occurs when fraudsters replace and take control of a victim’s phone number. Since it is a data sensitive process that requires verification by the service provider, fraudsters can obtain the victim’s information from a variety of techniques such as phishing, vishing, spoofing, dumpster diving, social engineering, and any other cyber related attacks.

In Kenya, the most used techniques are vishing. Vishing occurs when fraudsters typically call the victim masquerading as their service provider offering fraudulent upgrades or other information related services. They then instruct the victim to confirm a few personal details for the upgrade or service to take effect. Once this is done, they apply denial of service attack to access the victim’s account and transfer the money to their receiving accounts.

Alternatively, they can instruct victims to switch off their phone after accessing their Personal data such as PIN (personal identification number) and passwords. They then use data to call the service provider and request their number to be swapped to a blank SIM. Upon verification, the victim’s SIM card is deactivated with no signal. During this time, the fraudsters are in control of the phone number and can operate the victim’s bank accounts, mobile money and other credit facilities.

Another emerging trend used for identity theft in Africa and Kenya is spoofing. Fraudsters use the official service providers active number with a slight difference of the prefix. For example (+254 instead of 07). They easily prey unsuspecting victims since the number appears genuine and when instructed to give out mobile money details for upgrades, the victims cooperate and end up being swindled. During this time, the fraudsters give step by step instructions compromising the victims into transferring money to their agent or phone numbers unsuspectingly.

To prevent SIM Swap identity theft, it is important to observe the following:

• Limit the personal information you share online such as full names, address, or phone number on public sites;
• Do not reply to unknown texts, emails, or calls that ask for personal information as this could be phishing attempts;
• Strengthening use of strong password or pin management;
• Use of multifactor authentication for access control;
• Use of updated anti-virus software’s for your devices;
• Avoid use of unsecured domains which are controlled by unknown intruders;
• Avoid use of unsecured public Wi-Fi which are a toll-free venue for fraudsters to gain access to personal data on mobile devices; and
• Avoid using your mobile phone numbers as a recovery option for accounts and passwords, rather use another email ID.

SIM Swap is one of the reasons why one should not use their phone number as a verifier for identity since it can easily be breached. It is therefore recommended that you add other layers of protection to keep your accounts and identity safe.

At Riskhouse International, our team of Cyber Security & Digital Forensic experts can provide you with a framework that covers information security management, risk awareness, users and processes training on cybersecurity fraud, vulnerability assessment and penetration testing, system audit, business continuity plan, disaster recovery plan and digital forensic investigation on system frauds. We will be able to understand your system design architecture, risk universe, vulnerability exposure and implement corrective action.

Businesses are embracing vendor relationships if not for the supply of goods, it is to simplify processes with the end goal to acquire profits and grow.

While vendors are proving to be a necessity to businesses, they can come with risks that could harm the viability of a business. The process of vendor due diligence is therefore essential; it entails examining the ‘health’ of an entity before on boarding it as part of your supply chain.

At Riskhouse International, our Vendor Due Diligence checklist focuses on the core areas below:

General information and Compliance review We confirm the legitimacy of company registration and compliance documents	ICT software review We assess the software’s in place that protects the client from data and privacy breaches and other cyber-related crimes
Financial standing review We assess the financial status of the company and its credit standing to carry out assignments.	Value Proposition analysis We assess whether the value proposition offered to you by the vendor can be attained
Assets and equipment verification We verify the existence and usability of vendors’ assets and equipment	Leadership and workforce review We assess the capability of the vendors’ human resources to deliver
Policies and Procedures review We review policies and procedures in place in relation to service delivery	Litigation history search We search for any legal matter with the vendor that could pose a reputational risk to our client

Different vendors would require different checklists, therefore, the above is not exhaustive. Outsourcing our vendor due diligence services will provide you with extensive expertise, resources, and a more in-depth analysis of your prospective vendor.

The application of science to criminal and civil laws professionally termed forensic investigation is beginning to distinguish avenues for additional skills that go beyond the traditional enquiries and report writing. There is a greater call for investigators to understand the legal process and information technology in order to achieve admissible evidence.

The role of forensic investigators has therefore expanded immensely with the current reliance on internet technologies. There is a growing need for the application of science to evidence collection at scenes of white-collar crimes such as fraud, perjury, SPAM investigations, tracking internet browsing habits and wrongful dismissal claims in order to reconstruct events, infer intentions and support litigation.

As the Corporate businesses transform to online operations, along with financial transactions, the prospective wrongdoers as well gain false sense of security as they believe that they can easily cover up their tracks. Nonetheless, sophisticated individuals can use the internet platforms to perpetrate fraudulent transactions. This is then, when the expertise of forensic investigation is called upon.

Forensic investigation involves the application of scientific method to solve suspicions of crimes such as corporate fraud and fraudulent documents. Forensic investigations aim to unravel the following types of crimes:

1. Fraud in commercial contracts with banks and financial institutions;
2. Theft, fraud or dishonesty in relation to professionals who have abused their position;
3. Fraud or false misrepresentation in a business or employment which has resulted in loss to a company or an individual;
4. Loan, insurance and mortgage fraud;
5. Data theft by ex-employees or current employees; and
6. Fraud suspicions within a company.

In order to successfully prosecute these frauds, a forensic fraud investigation is essential to gather evidence, identify the perpetrators and trace misappropriated assets.
Often, examination of financial records reveals additional offences (such as money laundering) which can be included in the private prosecution of a defendant. Through forensic investigation, complex corporate structures can be uncovered to identify additional offences and offenders.

The duties and responsibilities of investigators in the forensic methods are crucial as it involves the careful examination of evidence while ensuring that evidence is not altered, concealed, falsified, or destroyed. A diverse pool of forensic investigators and forensic tools will look at documents, signatures, fingerprints, hard drives, computers, and technologies to establish how a crime or violation took place.

It is therefore best practice that corporate businesses resolve to constant consultation with professional forensic investigators in order to be cognizant of forensic readiness and management. This concept will maximize the ability to achieve credible evidence and minimize the cost of forensics during an incident response.