In today's tough business climate many companies are feeling the squeeze on their cashflows. In times like these companies often try informal agreements with lenders and other creditors to stay afloat. But when these efforts don't cut it, they face two choices: either to use the rescue processes outlined in the Kenyan Insolvency Act or call it quits and opt to close down and liquidate.
However, liquidation is like a death sentence. It means shutting down the company and trying to pay off debts if there is any money left. Often, there isn't enough cash to go around, leaving creditors and shareholders facing big losses.
Administration is one of the rescue processes outlined in the Insolvency Act, which borrowed heavily from other countries’ practices of allowing a managed insolvency and business rescue procedure such as the UK and South Africa. It's like calling in a financial lifeguard to save a drowning company.
In an administration, financially troubled companies get the protection of a statutory moratorium which gives them a break from creditors trying to collect debts. This breathing room is crucial as it can provide enough time to try to get back on track.
Administration typically lasts for one year, unless extended by a court order or with the agreement of the company’s creditors. During this time, the directors hand over the reins to the administrator, who takes charge of the company's operations.
The administrator has a lot of power, including the authority to keep the business running, sell assets, and handle legal matters on behalf of the company.
There are two ways to appoint an administrator: the "in court" and "out of court" routes. In the out-of-court route, the administrator can be appointed by the shareholders, directors, or a creditor holding a qualifying floating charge. The court route involves the appointment of an administrator through an administration order, usually at the request of the company, its directors, or its creditors.
The administrator must be a licensed insolvency practitioner. This ensures that they have the know-how to handle the job effectively. However, there are currently less than 30 licenced insolvency practitioners in Kenya.
Despite the potential benefits of administration, not many companies are using it in Kenya, and where it has been used, there have been few success stories: think Nakumatt, Deacons, Mumias Sugar. While the examples cited often have had other ‘back stories’ to their business failure, a key factor in success is timing. Administration is often initiated in the late stages of financial trouble when it's harder to turn things around. Plus, some company boards are hesitant to give up control early on. Administration is also seen as costly, but this is especially true when it is used too late.
There are potential solutions to this conundrum. One is the pre-insolvency moratorium procedure introduced in 2021. It gives companies a 30-day timeout from adverse creditor action, with the option to extend if needed. This could be used to negotiate a rescue plan before going into administration.
Another option could be the use of a pre-pack administration, where a restructuring is negotiated beforehand with key creditors and administration is then used to effect the transaction, giving the process a head start.
There's also the concept of "light-touch" administration, which has been used in various commonwealth countries. Under this process, the company's management continues day-to-day operations under the administrator's oversight. This collaborative approach could be a game-changer for companies with good governance facing external challenges beyond their control. It has had mixed outcomes so careful planning and adaptability is required.
All in all, administration can be a strategic tool if used wisely, especially in the earlier stages of financial distress when there's more time, creditor cooperation, and resources to make it work. As long as the company has a chance of being turned around for the benefit of creditors, employees and other stakeholders it is a method that merits greater consideration in these harsh economic times.
