Lessons from new UK companies debt restructuring proposals

Capitalism without insolvency is like Christianity without hell. Even if a company spends itself into insolvency until it doesn’t recover, creditors would still suppose the company would’ve recovered if their debts were paid.

The United Kingdom on August 28, 2018 through its Minister for Small Business, Consumers and Corporate Responsibility, Kelly Tolhurst, published new proposals designed to introduce a pre-insolvency moratorium.

The reforms if fully implemented will ensure that financially distressed companies first seek a debt restructuring specialist to help rescue or restructure the company debts unlike seeking administration where an insolvency practitioner would focus on the assets of the company for an “equitable” distribution while favoring creditors.

The proposals intend to bring in the concept of “debtor in control”, whereby a distressed company obtains the benefit of a pre-insolvency moratorium whilst its existing management remains in total control of the business.

Kenya being a business hub with new companies cropping up every day as blue-chip companies are on spiral downfalls, hitting financial rock bottoms i.e. Nakumatt Holdings, ARM Cement et al, it’s important to borrow few notes from the new UK debt restructuring plan.

Whether it’s a kitchen-table start-up or massive multi-national company, no investor or creditor ever wants to see a company in trouble, even though at times insolvency is inevitable. Having a read of the UK’s government proposal document on debt restructuring plans, it’s time Kenya should also followed suit.

The proposals are ground-breaking and introduce an innovative mechanism into a company’s debt restructuring plan. Kenya’s corporate insolvency regime is already highly regarded, but going by the fast-paced, complex corporate world, it’s time we asked ourselves whether-and-how-the system can be improved.

Our Insolvency Act, 2015 currently provides for an automatic interim moratorium once an administration order has been issued or when an application has been made and has not yet been granted; or the application has been granted but the administration order has not yet taken effect or where the company enters into a voluntary arrangement.

Shorn of the peripheral details, I will loosely highlight just two aspects of the UK’s government’s proposals that Kenya should borrow: The introduction of the preliminary(pre-insolvency) moratorium as a standalone gateway for all companies. This could be useful especially in operating a company’s debt restructure, as it will be available to all solvent companies.

A company is eligible to apply for this moratorium if it will become insolvent if action is not taken, but which is not yet insolvent and is able to carry on business.

This option shall only be available if a company is in financial distress, and the test being; (1) That the company is facing a potential insolvency, and if nothing is done then the company will be declared insolvent; (2) That the company is capable of rescue, the test being that, rescue is more likely than not; and finally (3) The company can demonstrate that it has sufficient funds to carry on its ordinary business during the moratorium.

The introduction of the pre-insolvency restructuring moratorium, which is ideally modeled in the same parameters as the “administration moratorium” for financially distressed, but ultimately viable companies will not only improve our insolvency regime but will also ensure appropriate protection for creditors.

A financially distressed company will be required to simply file an application in court seeking a pre-insolvency restructuring moratorium.

This will resemble the current procedure for an out of court appointment of an administrator. The company’s supervisor or monitor (not an administrator or insolvency practitioner) will then file their consent to act and confirm that they have assessed the eligibility tests and qualifying conditions and are satisfied that the company has met them.

The UK also makes another interesting proposal, that there be a provision requiring essential suppliers to continue supplying services or goods to a financially distressed company on existing terms and not to use termination clauses or demand “ransom” payments.

This basically will ensure that “Debtor companies” are allowed to designate certain contracts as ‘‘essential”, thus incapable of termination on the grounds of insolvency alone. However, this position needs to be fleshed out as there remain certain issues of concern and doubt.

It does not provide the right level of protection for suppliers and creditors.In my view, insolvency is a litigious yet sometimes contentious process, needless to say expensive.

The pre-insolvency moratorium would be more effective and would serve itsrestructuring and turnaround purpose if it’s separate and independent from the Insolvency framework. However, the test for entry into a pre-insolvency moratorium should exclude companies that are already insolvent and directors should not misuse this moratorium to delay an inevitable insolvency.

BASTON WOODLAND, Advocate of the High Court of Kenya.