Overview
- The Government Owned Enterprises Act, 2025, introduces a unified framework for GOEs, requiring many statutory bodies to convert into public companies.
- The transition creates legal and contractual uncertainty for financial institutions, particularly around borrower identity, statutory borrowing powers, and potential triggers under existing financing agreements.
- While existing contracts, security and obligations are broadly preserved, gaps remain in areas such as guarantees, regulatory approvals and re-registration of security, requiring proactive lender action.
- Financial institutions should undertake portfolio-wide reviews and engagement with GOEs and regulators to manage transition risks and ensure continued enforceability of financing arrangements.
The Government Owned Enterprises Act, 2025 (GOE Act), which came into force on 5 December 2025, centralises the legal framework governing government owned enterprises (GOEs) by repealing their individual enabling statutes and requiring reconstitution as public limited liability companies under a single regime. The GOE Act forms part of a broader coordinated legislative reform aimed at enabling Kenya’s asset recycling strategy and addressing fiscal constraints, operating alongside the Privatization Act, 2025, the National Infrastructure Fund Act, 2026, and the proposed Sovereign Wealth Fund Bill, 2026.
For financial institutions, this reform introduces material legal and operational risks across existing exposures to GOEs, including credit facilities, transactional banking arrangements, security structures, guarantees and other contractual relationships.
Continuity of Legal Identity and Succession
The GOE Act effects two distinct types of structural change:
- First Schedule entities (already constituted as companies): The GOE Act imposes a new governance and performance framework but does not change their legal form.
- Second Schedule entities (statutory corporations): Each is required to reconstitute into a public limited liability company. The successor company inherits all rights, duties, obligations, assets and liabilities automatically by operation of law.
This is not a continuation of legal personality in a strict sense given the statutory corporation ceases to exist and a new company is incorporated. Lenders should consider whether provisions in facility agreements that refer to the ‘legal existence’ of a borrower which is a GOE, or that define events of default by reference to dissolution or winding-up, could be triggered.
Impact on Existing Borrowing Relationships
Prior to the GOE Act, many GOEs derived their legal capacity to borrow, enter into financing agreements, and grant security from their individual enabling statutes. These statutes have now been repealed under the Third Schedule of the GOE Act, removing the primary statutory basis for borrowing powers. The GOE Act does not include a general borrowing power provision. Accordingly, borrowing authority for GOEs will now be derived from their articles of association and the Companies Act, Cap 486 subject to the requirement to obtain approval from the Cabinet Secretary for the National Treasury as provided in the State Corporations Act and Public Finance Management Act.
Paragraph 3 of the Fourth Schedule provides broad contractual savings, preserving existing contracts entered into by GOEs listed in the Second Schedule without requiring novation. However, existing facility agreements may include representations and undertakings tied to statutory authority which may give rise to a technical gap in authority. Amendments, waivers or confirmatory resolutions may be required to regularise this position.
Security, Guarantees and Regulatory Approvals
Security interests granted by GOEs are preserved under the Fourth Schedule. However, registered charges will continue to show the predecessor statutory corporation until updated, and lenders should proactively pursue re-registration.
The GOE Act is entirely silent on the treatment of government guarantees, letters of support and letters of comfort. Lenders should not assume continued sovereign support and should reassess GOE credit risk on a standalone basis. Existing guarantees that refer to a named statutory corporation may not automatically extend to the successor company, depending on the drafting.
The GOE Act also does not expressly provide for the transfer of sector-specific regulatory approvals, operating licences, concessions or permits. Financial institutions should review each approval on a case-by-case basis and where necessary, engage directly with sector regulators to confirm the position.
Transition Risks
The Fourth Schedule does not prescribe a deadline for the incorporation of successor companies, leaving the conversion period entirely open-ended. An audit by the Auditor-General is required before the transfer of assets and liabilities, which may surface previously undisclosed indebtedness or litigation exposure. There is no prescribed timeframe for completion of this audit.
Implications for Financial Institutions
Financial institutions with GOE exposures should consider the following immediate steps:
- Conduct a portfolio audit of all credit facilities, transactional banking mandates, security interests, guarantees and derivative arrangements with GOEs.
- Instruct legal advisers to review all GOE facility agreements for representations referencing statutory status or borrowing powers, events of default relating to change of legal form, change-of-control and change-in-law provisions, and negative pledge covenants.
- Engage GOE counterparts directly to obtain confirmation of conversion timetables, copies of performance contracts and draft articles of association for successor companies.
- Map all registered security interests against Second Schedule GOEs and prepare for proactive re-registration.
- Where credit analysis relies on government guarantees or letters of comfort, seek written confirmation from the National Treasury that the guarantee covers obligations of the successor company.
- For new facilities with Second Schedule GOEs, condition drawdown on production of executed articles of association, board resolutions from the successor company’s Board and a legal opinion confirming borrowing capacity.
Conclusion
The GOE Act represents a substantial legislative intervention that creates both legal uncertainty and commercial opportunity for financial institutions engaged with GOEs. The transition framework under the Fourth Schedule provides broad contractual savings but does not eliminate all risks. Financial institutions are encouraged to take proactive steps to review their GOE exposures and engage with relevant counterparts and regulators to manage the transition effectively.
--
Read the original publication at Bowmans
