Reconsidering insolvency law to save companies from premature death


Reconsidering insolvency law to save companies from premature death

Statistics released by the Official Receiver on insolvency cases in Kenya reveal a number of interesting trends. Voluntary arrangements and company administration, despite the potential for saving the company, have hardly been adopted.

Liquidation despite its drawbacks remains the most popular insolvency procedure. For example, the liquidation of ARM Cement Limited saw secured creditors recover 62% of their debt, preferred creditors 100% and unsecured creditors only 6.2%. Overall, the number of insolvencies has yet to reach pre-pandemic levels.

The Attorney General (AG) had proposed changes to the 2015 Insolvency Act. Among these, the proposal to grant insolvency officers greater freedom of action is key. Administrators and liquidators need approvals from creditors or the courts to take many actions.

This requirement, which was intended to ensure accountability, made insolvency processes slow and inefficient. In addition, the 2015 law sets a very low threshold for contesting the conduct of an administrator or a liquidator who has been abused by creditors.

Creditors have brought insolvency processes to a halt as they force officers to battle relentless waves of undeserved challenges.

The changes proposed by the GA would solve these problems. The amendments would allow insolvency officers to take certain actions without court or creditor approval. While increased autonomy would streamline and shorten insolvency proceedings, it could also increase the difficulties faced by creditors.

However, this can be remedied by requiring creditors to demonstrate that actions taken in insolvency proceedings have caused them unfair prejudice rather than a prejudicial effect.

An insolvency process is not a painless exercise and requires concessions from most if not all creditors. Requiring proof of unjust prejudice means that a creditor must demonstrate that the actions complained of affected him unreasonably in relation to other creditors.

Another change worth considering is the introduction of a pre-insolvency regime. This process allows companies, which are currently able to pay their debts but whose fortunes may soon change, to reorganize their financial affairs. Typically, a company may be able to pay its trade debt while being unable to pay its financial debt.

Commercial debt comes from suppliers, employees and service providers, while financial debt comes from lenders and investors. Insolvency is normally the result of financial debt pressure, so early intervention can save an otherwise viable business.

Courts can oversee the pre-insolvency process to ensure that all creditors are treated fairly and equitably. The court may also suspend current cases and prohibit new ones to allow the reorganization discussions to be concluded.

This way, the struggling business can focus its attention and resources on the reorganization for the benefit of all stakeholders, including creditors.

Finally, it is necessary to reconsider when creditors can ask the court to liquidate a company. Premature insolvency processes redirect key business resources to non-essential activities that can sink an otherwise viable business.

Emmanuel Mueke and Mugambi Maingi are partners at KN Law LLP

About Charles D. Goolsby

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