Reconsider insolvency law to save companies from premature death

Statistics published by the official receiver on Kenyan insolvency matters reveal a number of interesting trends. Company voluntary arrangements and administration despite the potential for business rescue have had almost no uptake.

Liquidation despite its disadvantages remains the most popular insolvency process. For example, the liquidation of ARM Cement Limited saw secured creditors recover 62 per cent of their debt, preferential creditors 100 per cent, and unsecured creditors only 6.2 per cent. Overall, insolvency numbers have yet to reduce to pre-pandemic levels.

The Attorney General (AG) had proposed changes to the 2015 Insolvency Act. Key among these is the proposal to give insolvency officers more freedom to act. Administrators and liquidators require approvals from creditors or courts to take many steps.

This requirement, which was intended to ensure accountability, has made insolvency processes slow and inefficient. Furthermore, the 2015 Act sets a very low threshold for challenging the conduct of an administrator or liquidator and which creditors have abused.

Creditors have ground insolvency processes to a halt as they force officers to fight through relentless waves of unmerited challenges.

The A-G’s proposed changes would fix these problems. The changes would allow insolvency officers to take certain actions without approval from either the court or creditors. While increased autonomy would streamline and shorten insolvency processes, it may also increase creditor challenges.

However, this can be addressed by requiring creditors to show actions taken in insolvency processes caused them unfair harm rather than detrimental effect.

An insolvency process is not a painless exercise and requires concessions from most if not all creditors. Requiring proof of unfair harm means a creditor must show that the offending actions unreasonably affected them when compared to the other creditors.

Another change worth considering is introducing a pre-insolvency regime. This process allows businesses, which are at the moment able to pay debts but whose fortunes may change soon, to reorganise their financial affairs. Typically, a business may be able to pay trade debt while being unable to pay financial debt.

Trade debt comes from suppliers, employees, and service providers, while financial debt comes from lenders and investors. Insolvency is normally a result of pressure from financial debt, so early intervention can allow an otherwise viable business to be saved.

The courts can supervise the pre-insolvency process to ensure all creditors are treated fairly and equitably. The court can also suspend ongoing cases and prohibit new ones to allow the discussions on reorganisation to be completed.

This way, the distressed business can focus its attention and resources on reorganising to the benefit of all stakeholders including creditors.

Lastly, we should reconsider when creditors can ask a court to liquidate a company. Premature insolvency processes redirect key business resources to non-core activities which can sink an otherwise viable business.

Emmanuel Mueke and Mugambi Maingi are partners at KN Law LLP

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