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Make Insolvency Act attractive to save troubled businesses

By Gathoni Kariuki | November 30th 2020 at 10:15:00 GMT +0300

The Covid-19 pandemic continues to provide a challenging business environment globally. In a bid to cushion businesses from the effects of the pandemic, governments worldwide have come up with a variety of measures, most of which have been geared towards addressing liquidity shortages and enhancing access to capital.

There is, however, growing concern that some of the measures proposed will lead to a significant rise in the debt levels of many businesses, thereby predisposing the businesses to inability to pay their debts as they fall due.

The Insolvency Act, 2015 was enacted with the view of reforming the manner in which individuals and companies in financial distress are dealt with. The Insolvency Act, 2015 seeks to provide an efficient and equitable way of dealing with the affairs of insolvent persons, whilst properly balancing the interests of various stakeholders of such insolvent firms.

Central to this aim is the need to ensure a balance between preserving viable businesses and quickly liquidating companies that are not viable and redistribute capital to businesses that are more viable.

To achieve this objective, the Insolvency Act, 2015 introduced administration as an alternative to the liquidation of companies. Administration is an insolvency mechanism where a qualified insolvency practitioner, referred to as an administrator, is appointed to manage the affairs and property of a company and keep it trading as a going concern.

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Administration offers a new lease of life to companies because of the protective measures it avails. Such measures include suspension of any applications to liquidate the company; requirement to obtain leave of the court or the approval of the administrator before a secured creditor takes steps to realise their security; or before a landlord forfeits a lease; or before a person begins any proceedings against the company; or before taking any enforcement action against the company, including executing a judgment.

In addition, an administrator may in certain circumstances have the power to deal with or dispose property charged to secured creditors and deal with it as if it were not charged. 

There are, however, some factors that make administration as provided by the Insolvency Act unattractive. The most glaring one is that the owners of the business lose control of the business, as the power of management is vested in the administrator.

The administrator has wide powers, which include the power to appoint and remove directors. Further, the company does not have absolute say in who is appointed as an administrator. If a company wants to appoint an administrator without going to court, it is required to give notice to certain classes of secured creditors, who may take the chance to jump ahead of the company by appointing their own administrators. In cases where the company has initiated administration and has succeeded in appointing its administrator, the creditors retain a right to replace the administrator with their preferred administrator.

Administration also runs the risk of accelerating a company’s journey to dissolution or liquidation if the administrator forms the opinion that the objectives of administration cannot be achieved or if an administrator’s proposal does not garner approval from the creditors. These factors perhaps explain why companies would be hesitant to voluntarily take up administration, even when it would be an appropriate rescue mechanism.

Independent practitioner

As governments continue to look for ways of ensuring the survival and continuity of businesses, it would be worthwhile to consider how rescue mechanisms provided in the Insolvency Act, such as administration, could be made more attractive to businesses.

In Australia, for example, the government has come up with reforms that allow owners to retain control of their businesses by providing for an independent practitioner who helps SMEs come up with a restructuring plan, after carrying out an independent assessment of the business, but without requiring the independent practitioner to assume control.

Australia has also shortened the timelines for administration and reduced complex requirements such as numerous creditors’ meetings. The Kenyan government should perhaps consider borrowing a leaf from such regimes and reforming our law in order to encourage viable businesses in financial distress to take up available business rescue mechanisms voluntarily.

Ms Kariuki is an advocate of the High Court and a policy consultant at MMS Advocates LLP

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