Is proposed CMA Recovery Board akin to pre-insolvency proceedings?


Most jurisdictions have recently proposed pre-insolvency rules aimed at providing a “light-touch" on insolvent companies to help them come up with financial restructuring models. I once wrote a piece on how the United Kingdom introduced this concept in their Insolvency Act, and it won’t belabour if we similarly introduce and incorporate the same in Kenya.

Pre-insolvency proceedings aim at providing a pure contractual workout plan before corporate debtors become insolvent while avoiding insolvency. At the heart of it all is the fact that the debtor remains in control, unlike in formal insolvency proceedings where management and control cede to the administrator.

Companies eligible to institute pre-insolvency proceedings are those that are on the verge of becoming technically insolvent if action is not taken, but are not yet insolvent and can conduct business.

The test being that: (1) The company is facing potential insolvency, and if nothing is done then the company will be declared insolvent (2) That the company is capable of being rescued, and (3) The company can demonstrate that it has sufficient funds to carry on with its business.

In Kenya, the Capital Markets Authority (CMA) and the Nairobi Securities Exchange (NSE) proposed in its listing rules for the establishment of a Recovery Board which will see to it that financially distressed firms that are listed on the bourse are placed in a recovery board and are not immediately de-listed, as would have been the case.


Any listed company that is financially distressed or non-compliant with the listing rules risks being placed on this board until it comes up with a better restructuring plan or regularises its non-compliancy.

Looking at the proposals, the Recovery Board seeks to protect investors by cautioning them when buying shares or trading in such companies. The rules further dictate that the listed companies should come up with a restructuring plan and implement it fully or serve the risk of being compulsorily de-listed from the bourse. Though we don’t have laws that fully incorporate pre-insolvency proceedings, the proposals by CMA and the Exchange may be interpreted to provide a light legislative offering for financially distressed companies; offering a hybrid proceeding and formal rehabilitation proceeding that insolvent listed companies, and their creditors, can use to salvage their company down the demise curve.

Immediate delisting of such companies drag along with its myriad of issues and technicalities in the capital markets, therefore such placement on the Recovery Board ensures that financially distressed companies seriously pursue a restructuring plan to maximise compliance.

Its long-term effect is to ensure that insolvent companies, which are listed, come up with a surgical debt restructuring plan, and also regularise their non-compliancy, especially corporate governance issues and corporate reporting.

The establishment of the Recovery Board preserves the value of the company better than immediate de-listing that implicates all stakeholders and almost invariably results in distressed asset sales through formal insolvency proceedings.