Administration was introduced by the Insolvency Act, No. 18 of 2015 as an alternative to liquidation, with the following key objectives;
- To maintain the company as a going concern,
- To achieve a better outcome for the company’s creditors than liquidation would offer, and,
- To realize the property of the company and make distributions to secured or preferential creditors.
A business is said to be insolvent when it cannot be able to raise enough cash to meet its obligations. Generally, there are two types of insolvency i) Where the company’s liabilities are more than the assets, and, ii) Technical insolvency where the assets exceed liabilities but cannot be easily liquidated to pay off the obligations that are due. However, mere insolvency does not afford enough ground for lenders to petition for involuntary bankruptcy of the borrower, or force liquidation of the business. On the contrary, Kenyan laws provide for administration as an alternative on how a technically insolvent business can be assisted to get back to its feet and be able to service its creditors’ obligations and protect the interests of the other stakeholders.
In this week’s topical, we took a focus on Administration as a business restructuring option in Kenya. We did this by taking a look at the various companies that have experienced financial distress and consequently invoked the Insolvency Act.
The table below gives a summary of the case studies conducted;
|
Company |
Date entered into Administration |
Administrator |
Was administration successful? |
|
Nakumatt Holdings |
January 2018 |
Peter Kahi |
No |
|
Athi River Mining |
August 2018 |
George Weru and Muniu Thoithi |
No |
|
Kaluworks Limited |
May 2021 |
Pongangialli Rao |
Yes |
Kaluworks Limited is the only company in the table above that successfully exited administration. Below is a table with a summary of Kaluwork’s administrator distributions after conclusion of the process:
|
Kaluworks’ Limited disbursement to creditors (Kshs bn) |
||||
|
Lender |
Amount owed (Kshs bn) |
Amount paid (Kshs bn) |
Amount written off (Kshs mn) |
Haircut |
|
NCBA |
4.3 |
0.6 |
3.8 |
88.0% |
|
Cooperative Bank |
4.8 |
0.6 |
2.6 |
55.0% |
|
Other Creditors (CPs) |
3.5 |
-* |
-* |
100.0%* |
|
Total |
12.6 |
1.2 |
6.4 |
51.0% |
|
*Not disclosed |
||||
Source: Administrator’s filings. CPs stands for Commercial Paper
Key learnings
From the above case studies, it is key to highlight the following points about administration,
- Administration offers struggling businesses a second chance to reorganize themselves and come out stronger and viable businesses,
- Administration offers a better deal for creditors as compared to other restructuring options such as liquidation given that it allows continuity of a trade or business which goes a long way in preserving the assets of a company. Similarly, it is easier for a business to source for finances to restore operations as a financier will view it more as a rescue than a gone case,
- It encourages entrepreneurship by providing a path to redemption in the case of a viable venture that has run into turbulence and just needs room to restructure and re-strategize. Research has shown that the availability of reorganization frameworks encourages entrepreneurship, and,
- Administration allows a company in operation to continuously chart its way out of administration by allowing for the Company Voluntary Agreements, a schedule or restructuring plan fronted by the Company to pay back its creditors, should they adopt the plan.
Additionally, we identified key challenges which in our view, have led to most administrations not being as successful:
- Getting into administration too late: As was the case with Nakumatt, it got into administration too late when it was too late to resuscitate the business,
- Administration costs are too high: As was the case with ARM, spending Kshs 2.5 bn on administration costs is too high, given that it was over 40.3% of amount recovered. It is important the administration costs are kept low to ensure creditors recover meaningful amounts and service providers align with the interest of creditors,
- Administrations take too long: In the case of ARM, it started in 2018 and ended in 2022, almost 5 years, this can only be beneficial to the service providers around the administration, and not the creditors. It would be helpful if administrations were conducted and closed as fast as possible,
- Creditors failure to collaborate: In the case of Nakumatt, the retail creditors who held the commercial paper were not collaborative with the administrator and insisted on either full refunds or liquidation. They ended up with 100.0% loss, yet an equity restructuring would have given them value, which is now being enjoyed by competitors such as Carrefour,
- Failure to accept reality by shareholders: In the case of Nakumatt, shareholder management wanted to stay in control and would not cede control to possible new investors until it was too late to bring in new investors as the business had unraveled by the time they were willing to cede control,
- Lack of knowledge around administration: Many creditors, and even regulators and businesses, are yet to understand or accept administration as a legitimate business restructuring option, and,
- Lack of leadership to align interests: Administration has various actors, whose interests may not be aligned. Each administration requires firm leadership to align all the conflicting interests to face one direction in the interest of restructuring the business.
While evaluating the administration process, it is paramount for the stakeholders to view and approach it from a Win-Win mindset and be open to the various possible options to get the business back on track and return value to all stakeholders. Liquidation as an option gives the least value for all stakeholders. In the case of Nakumatt, unsecured lenders got zero while the secured lenders got very little out of the sale of assets. Similarly, for ARM, the creditors recouped slightly more than a third of their investments, underlining Liquidation as a first resort is not viable. Companies under administration and moratorium after invoking the Insolvency Act, are not subject to debt repayment obligations, as the administrators focus purely on the best possible resolution strategy to the creditors and to the shareholders. This, in our view, encourages entrepreneurship by giving business owners time to restructure and possibly regain financial stability in case of financial distress when faced by unprecedented challenges.
For more information, please see our Administration as a Business Structuring option Topical.
