Promoting Philanthropy in East Africa

Trust and Foundations Law Review Process

  1. Trustees (Perpetual Succession) ActCap164 of the Laws of Kenya 

The proposed amendments to The Trustees (Perpetual Succession) Act, Cap 164 of the Laws of Kenya are summarized into the following key themes. 

  1. Change of Name and consolidation – The Trusts and Foundations Act 
  • The changes proposed to Cap 164 would expand its mandate from incorporated Trusts to include Foundations. It is therefore appropriate that the changes include an amendment to the name. 
  • It is proposed that the updated act be re-named ‘The Trusts and Foundations Act’ 
  • Updating the existing Cap 164 to include the registration and regulation of both trusts and foundations means that we would have one law to govern trusts and foundations. 
  1. The Regulator 
  • At present, the registration of Trusts and Foundations is disparately regulated and depends on the statute under which the entity is registered. For example, incorporated trusts are registered under the Lands Ministry and regulated by the Minister of Lands. This applies to all incorporated trusts even though most of these are charitable institutions that have little to do with land matters. Societies and NGOs are regulated by the Registrar of Societies and NGOs by the NGO Co-ordination Board. 
  • We propose that all Trusts and Foundations be registered under the proposed ‘Trusts and Foundations Act’. 
  • In keeping with best practices as carried out in Hong Kong and incorporating best practices from the UK Trust Registration Service, it is proposed that Trusts and Foundations be Regulated under the existing Business Registration Service of Kenya. The main reasons for this proposal are as follows: 
    • The BRS is the regulatory center for companies- including companies limited by 
    • Companies limited by guarantee are commonly used as foundations in 
    • Kenya and around the world. Thus, the BRS already has practical experience in regulating entities that function for both private and public benefit. 
    • In the arena of AML and Counter-terrorism financing, the BRS is already leading the way in regulating the beneficial ownership of companies (see above). It would be in keeping with their existing synergies to extend the same principle to foundations and trusts in a similar manner as the Trust Registration Service of the UK. 
    • BRS is leading the way in providing world-class automated services that removes some of the barriers to entry in the registration of companies, providing and updating important information. It would be wise to take advantage of the existing platform to include trusts and foundations. 
  1. Separate Legal Entities with Perpetual Succession 
  • The updated law would recognize foundations and trusts as corporate entities with separate legal identities. This means that these entities would be able to own property of any kind, enter into contracts, employ workers, sue, and be sued in their own right. 
  • The updated law would also grant to foundations and trusts perpetual succession similar to that enjoyed by companies. This means that the law against perpetuities would not apply and these entities can exist for as long as they need to be subject to compliance with the law. 
  • Perpetual succession would give trusts and foundations certainty of existence and provide confidence to the founders and partners of these institutions. 
  1. The role of Founders & Protectors 
  • In keeping with best practices around the world, we propose that the updated law recognize the role of Founders and Protectors. 
  • The law would recognize the role of the Founders and permit them certain rights and privileges in respect of the trusts and foundations they create. This recognition would act as an incentive to wealthy individuals and institutions to create foundations or trusts knowing that their rights in respect of the institutions they have created are enshrined in law. 
  • Protectors are persons who are appointed to protect the fundamental purpose and objects of the foundation and trust. They are usually not involved in the day-to-day running of the 
  • Institution but should be consulted on vital matters that may affect the fundamental purpose/ object or even existence of the trust or foundation. 
  • The updated Act should have a register of Founders and Protectors. For Protectors, the updated act may even go as far as setting out a qualification criterion. 
  1. Governing bodies 
  • The updated Act will recognize and name the appropriate governing bodies for foundations and trusts. e. foundations are run by councils and trusts are run by trustees. 
  • It will make it mandatory for foundations and trusts to have a governing body. 
  • The updated Act may (subject to debate) stipulate whether or not there should be 
  • Local/qualified representation on the governing bodies. 
  1. Governing documents 
  • In the updated Act and its schedules will be the requirements for the legal documents necessary for the creation of a foundation or trust. 
  • The documents needed are proposed as follows: 
    • Application Form – format to be specified in regulations to the updated Act as specified from time to time. 
    • Charter/Trust Deed 
    • AML & Counter-terrorism financing information form with annexures as specified in the regulations to the Act updated from time to time. 
  • People, giving and working together
  • Compliance with AML& Counter-terrorism financing regulations. 
  • Borrowing from the Companies Beneficial Ownership Regulations and the 5 AMLD, the updated Act and its regulations will mandate the collection of relevant information detailed in Section 4 above. 
  • The updated Act will authorize the BRS to collect this information periodically (every year) and to provide access to this information to permitted bodies and persons in line with data protection laws and regulations. 
  • Compliance with AML and Counter-terrorism financing regulations will provide the government assurance as to the purpose and activities of trusts and foundations, will provide transparency to the creation and use of trusts and foundations, and will give confidence to donors and partners of these trusts and foundations. 

 

  1. Availability of Information 
  • Adopting best practices already being done by the BRS with respect to Companies, the updated Act proposes that certain information on trusts and foundations should be available to the public upon inspection. 
  • This information would be along the lines of information provided on Companies through a CR 12 form i.e. Name of the company, date of incorporation, incorporation number, and names of shareholders and directors. 
  • Under the updated Act and its regulations, a similar form may be created so that information such as Name of trust/foundation, date of registration, registration number, and names of current trustees/council members may be available upon request to an inquiring member of the public. 
  • This information should be restricted to what is necessary to establish the bona fide existence of the trust and foundation and who is running it. Other information such as beneficiaries, donors, founders’ advisers etc should be restricted to only permitted persons/entities under the Act. 
  1. The Trustees ActCap167 of the Laws of Kenya

Both Trusts and Foundations are governed and administered by a collective body of persons. This body of persons is known as the “Board of Trustees” with respect to Trusts OR “The Council” with respect to Foundations. It is also common for the governing body of Foundations to be referred to as the “Board of Trustees”. 

For ease of reference, we shall be using the term Trustees or Board of Trustees in regards to the persons or body of persons responsible for the governing of Trusts and Foundations. 

The powers and duties of Trustees are regulated under the Trustee Act, Cap 167 of the Laws. The review looks at the powers and duties of Trustees under Cap 167, compares it with similar legislation in England, Guernsey and Jersey, Hong Kong, and Singapore and distills from the exercise recommended updates to Cap 164 that would achieve the following objectives: 

  1. To have one primary statute that governs the governance of trusts and foundations whatever their purpose. 
  2. To ensure that the governance of trusts and foundations is aligned to best practices around the world people, giving, and working together
  3. To encourage the use of Trusts and Foundations as vehicles for investment thereby creating more resources for philanthropy. 

Recommendations for amendments to the Act. 

  1. Power of Investment 

Section 4, Cap 167 provides the trustee the discretionary power to invest in authorized investments, set out in subsections 4(a) to (i), and vary the investments from time to time. 

The recommendations arising are: 

  1. The Trustee’s power of investment should not be limited to authorized investments. 
  2. To guide Trustees in their investment standard investment criteria should be introduced that provides that Trustees should look at the suitability to the trust of investments proposed to be made and the need for diversification of investments of the trust, in so far as appropriate to the circumstances of the trust; and 
  3. Trustees should be required to seek proper advice for any investments with the option of the need not to do so for less complex investments if he reasonably concludes that it is unnecessary or inappropriate to do so. 
  4. Statutory Duty of Care 

The Trustees Act, Cap 164 of the Laws of Kenya does not explicitly state the duty of care that is owed by Trustees. This duty of care is a fiduciary responsibility that has been defined by judicial interpretation at common law. This gives room for uncertainty and a wide range of scope in setting and enforcing the duty of care that Trustees must exercise in the carrying out of their duties. 

The Recommendation is that Cap 164 of the Laws of Kenya be amended to include a provision for a statutory duty of care similar to that found in Section 3A of the Trustees Act of Singapore. This is in line with international practice observed in England, Hong Kong, and Singapore. Having in place a statutory duty of care would go a long way to creating certainty around the code of conduct of Trustees and the penalties for breach of that code of conduct. 

  1. Appointment and Discharge of Trustees 
    1. Section 36 restricts the number of Trustees to 4 in respect of trusts that deal with the disposition of land. The explicit exception is charitable trusts. 

The restriction on the number of trustees is a remnant of an inception trust system where trusts were primarily used as a means to safeguard land e.g. community trust land. This concept has since been overtaken by modern ways to own and manage land and other assets. To this day it serves no useful purpose and should be removed. 

Recommendations:

  1. Minimum: We would recommend a statutory minimum number of 1 trustee. 
  2. Maximum: We would recommend removing the statutory maximum limit of 4 trustees save as provided for in the constituent document of the Trust or Foundation. 
    1. Section 37 – includes the requirement for the removal of a Trustee if he/she remains out of Kenya for more than 12 months should be removed. 

The rationale for Section 37 is linked again to the conceptual concept of trusts for land. In this context, it would have been inappropriate for a person charged with trusts for land to be outside of the country for long periods of time as they would not be in a position to protect the land. 

As trusts are now used for a wider variety of activities, this restriction becomes an unnecessary bottleneck. It discourages cross-border Trusts and Trusts that may have trustees that reside outside of the country. 

Recommendation – Not to throw out the baby with the bathwater, it is important that Trusts and Foundations should have at least one local representative. This will ensure that there is a direct connection to the jurisdiction in which the trust or foundation operates. To avoid the case of ‘briefcase trustees’ it is recommended that this representative should be a ‘qualified person’ as defined in the updated Act. 

In the industry, ‘a qualified person’ is a person/entity that has special qualifications that make them suitable to act as a trustee of a Trust or Foundation. In jurisdictions where Trustees are licensed to practice it requires that they be duly licensed. Alternatively, a qualified person can be any person or entity that carries out professional work that is approved under the Act such as 

Advocates, Accountants, Certified Public Secretaries, Certified Financial Analyst, OR such other professional that is qualified to provide fiduciary services and regulated by a recognized professional body. 

  1. Fit and Proper Person 

Every foundation official must be the fit and proper person to hold that position. In determining whether a person is fit and proper, some of the issues that are taken into consideration include: 

  • the competence and soundness of judgement of the trustee; 
  • the diligence with which he fulfills those obligations; 
  • whether the interest of the beneficiaries will be threatened by his position; 
  • his previous record acting as a foundation official; 
  • the rules/standards of any regulatory authority; and 
  • his record of compliance in other positions under other laws, specifically the Companies Act. 

Recommendation – In Kenya, to ensure that the trustees so appointed are “fit and proper” we may in addition to the above, borrow from the Companies Act, 2015, provisions relating to directorship, to ensure the protection of trusts administration. For instance, an undischarged bankrupt, or a person who has been issued with a disqualification order of any kind should not be eligible for appointment as a trustee. 

  1. Discharge of Trustees 

Recommendation – The law should explicitly provide that the procedures for appointment and removal of trustees should be set out in the constitutional documents of the trust/foundation. 

The revised Act should also provide for some irreducible minimums for the removal of a trustee. A good example of this is found in the Guernsey laws as follows: 

  • Resignation 
  • By the coming into effect of, or the exercise of a power under, a provision in the Constitution under or by which he is removed from or otherwise ceases to hold office. 
  • By trustees – similar procedures for removal of a director under the Companies Act, 2015, may be adopted and improved. 
  • By the court upon application by the trustees for the removal of the trustee and the 
  • appointment of replacement where the trustees have reason to believe that a trustee of a foundation is unwilling or is refusing to act; is bankrupt or otherwise unfit to act, or is incapable of acting. 
  1. Alternative Dispute Resolution 

A review and update of Cap 164 create an opportunity to entrench ADR (conciliation, mediation, early neutral evaluation, adjudication, expert determination, and arbitration) as a mechanism for resolving disputes concerning the governance of Trustees. 

This would provide a quick, efficient, and cost-effective way of dealing with governance matters of Trusts and Foundations. The confidentiality of Trusts and Foundations would also be protected as the disputes dealt with in mediation and arbitration are not a matter of public record. 

Recommendation: Our recommendation is to broaden the application of ADR mechanisms to all trust-related disputes by: 

  • Allowing Trusts and Foundations to provide for ADR mechanisms in their constituent documents. Where ADR is provided for in the constituent document, the settlement/award arising therefrom should be final and binding on the parties. 
  • Giving the courts an express option and right under the new Act, to refer disputes to ADR. The consequent settlement/award arising therefrom should also be final. This option will make it easier for the courts to refer matters to ADR (as necessary) where this is not expressly provided for in the constituent document of a trust. 
  1. Modified disciplinary measures for Trustees of Foundations and Trusts 

The current Trustees Act, Cap 164 – does not provide any specific disciplinary measures applicable to Trustees for breach of their fiduciary duty. Where a trustee defaults in his/her duty, the beneficiaries must go to court to seek the court’s intervention. Supervision of a working trust by a court is an inefficient method of ensuring good governance. 

Recommendations 

  • Codify disciplinary measures for Trustees who are in default of their duty of care and in breach of their obligations under the updated Act 
  • These penalties range from penalties and fines (both by the court and the regulator), removal (by fellow trustees or the court), blacklisting (by the court or the regulator) and criminal proceedings depending on the nature of the offence. 

The introduction of codified penalties will create confidence in the governance of Trusts and Foundations similar to the effect that codified penalties for Directors and Company officers have in creating confidence in the use of Companies.