The Insolvency Act was assented into law in September 2015 and came in to assist insolvent companies in strategizing on the best possible solution to bring the company back to financial stability rather than liquidation, with a view to preserving businesses, jobs and tax base as much as possible. Prior to 2015, stakeholders faced the possibility of losing a significant amount, especially in the event that the company’s liability value was higher than the total assets held. The Insolvency Act of 2015 seeks to create a more robust and effective insolvency framework in Kenya by:
- Ensuring a fair balance between the insolvent entity and the creditors by providing a framework for the efficient and equitable distribution of the assets of the insolvent entity,
- Enabling insolvent companies whose financial position is redeemable to continue operating as a going concern so that they may ultimately meet their obligations,
- Providing a better outcome for the creditors than what would likely be the case if the insolvent entities were declared bankrupt or liquidated, and
- Providing for an orderly manner of liquidating the assets of an insolvent company that are irredeemable and ensuring efficient and optimal distributions of the assets for the benefit of the creditors.
Summary of Various Insolvencies:
The table below shows a summary table of various insolvencies in Kenya;
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Cytonn Report: Data on Various Insolvencies |
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|
Company |
Amount Owed (Kshs bn) |
Amount Recovered (Kshs bn) |
Recovery % |
Total Haircut |
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|
Secured |
Unsecured |
Secured |
Unsecured |
Secured |
Unsecured |
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|
Kaluworks |
9.1 |
3.5 |
2.7 |
* |
29.7% |
* |
78.6% |
|
ARM Cement |
8.3 |
9.0 |
5.5 |
0.7 |
66.3% |
7.8% |
64.2% |
|
Nakumatt |
5.2 |
30.6 |
5.2 |
0.0 |
100.0% |
0.0% |
85.5% |
|
Tuskys |
* |
19.6 |
* |
6.7 |
* |
34.2% |
65.8% |
|
Chase Bank bond |
|
4.8 |
|
0.0 |
|
0.0% |
100.0% |
|
Imperial Bank bond |
|
2.0 |
|
0.0 |
|
0.0% |
100.0% |
|
Britania Foods |
1.3 |
* |
* |
* |
* |
* |
* |
|
Average |
|
82.3% |
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|
*Not disclosed |
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Source: Cytonn Research
Challenges facing insolvency practice
While insolvency practitioners play an important role in rehabilitation and maximizing the value of the debtor’s assets, the practice involves a number of challenges, such as:
- Poor track record – the biggest challenge with insolvency in Kenya today is a poor track record; there is not a single case of successful restructuring. The Insolvency Act was to supposed to lead to a better outcome for creditors and all stakeholders, with a view to preserving maximum value, jobs and tax base. However, the insolvency regime has proven to be more of an orderly winddown or bankruptcy process; the only advantage over the previous regime is that the winddown or bankruptcy is orderly, but the benefits of business survival are yet to be realized.
- Getting into administration too late – Most companies go through the administration route when their situations are so dire that there is little or no hope of recovery or returning the company back to its profitability. This limits the available options for restructuring to turn around the company hence leading the focus to shift to liquidation rather than rehabilitation. Early involvement allows insolvency practitioners to explore a wider range of potential solutions, such as debt restructuring, refinancing, or negotiations with creditors. Additionally, the longer a company operates in financial distress, the more likely its assets may deteriorate or become devalued. This weakens the practitioner's leverage to negotiate favourable terms with creditors, suppliers and stakeholders. Kaluworks started experiencing financial challenges in 2020 and therefore got into administration at a favourable time in 2021. After 1 year, they were able to get out of the administration process with both the creditors and the company agreeing on terms suitable to all stakeholders, which has led the company to remain in operation,
- Liquidation being the most popular option – the lack of knowledge around administration given that most creditors, and even regulators and businesses, are yet to understand or accept administration as a legitimate business restructuring option. Compared to other restructuring options, liquidation provides a clear and definitive outlook due to its simplicity and therefore, creditors, suppliers and stakeholders have a straightforward process of how the value will be realized and distributed. Additionally, the liquidation process is faster compared to the other restructuring process and is thus preferred by most creditors. 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,
- High Insolvency costs – Insolvency process requires engaging professionals such as lawyers and accountants, who may demand a significant amount of fees to offer their services. This may end up eating into the value that the creditors will receive, given that such services are given first claim preferential priority once the value for the business is realized. 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 the 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,
- Managing Stakeholders' Interests - Insolvency practitioners often need to balance the interests of various stakeholders, including creditors, shareholders, employees, and regulators. Conflicting interests can make decision-making and negotiations challenging. 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 a 100.0% loss, yet an equity restructuring would have given them value, which is now being enjoyed by competitors such as Carrefour,
- The complexity of Cases - Insolvency cases can be extremely complex, involving multiple stakeholders, intricate financial structures, and various legal and operational issues. Managing and unravelling these complexities requires a high level of expertise and experience. Additionally, Insolvency practitioners handle large volumes of information, which may be time-consuming and delay them in achieving their objectives,
- Economic Uncertainties - Economic instability and uncertainty can lead to an increase in business failures, resulting in higher demand for insolvency services. However, predicting economic trends accurately can be challenging, making it difficult for insolvency practitioners to anticipate and plan for their workload. This weighs down on the success rate of insolvency practitioners as some challenges are beyond their control.
- Negative publicity around administration - Administration, especially when not well understood by all stakeholders, poses a risk to business continuity. This is because the process often attracts negative publicity and uncertainty, which deals inadvertent blows to the business and may lead to total collapse, and
- Lack of goodwill from companies in distress – Transparent and accurate information is crucial for making informed decisions and developing effective strategies. However, there are a number of instances that insolvency practitioners have stated that there is a lack of cooperation with companies in distress in terms of sharing information with them. This leads to the insolvency practitioner having a limited understanding of the company’s financial health and consequently leads them to make impaired decisions. The Office of the official receiver has also noted that there are rising cases where company owners obtain court injunctions just to stall the process as they strip company assets, during which litigation drags in court.
Recommendations and Conclusion
Improving insolvency practice involves addressing various aspects of the process to enhance efficiency, transparency, stakeholder cooperation, and overall effectiveness. This includes:
- Need for a success story to change the narrative – there is an urgent need for a success story to change the negative perception of the industry as business undertakers
- Early Intervention - Addressing financial distress early can lead to more viable and cost-effective solutions. Timely action might help prevent the situation from deteriorating further and becoming more complex,
- Transparent Communication - Clear and open communication among stakeholders and insolvency professionals can help streamline processes and avoid misunderstandings that might lead to additional costs,
- Efficient Asset Realization - Developing a well-thought-out strategy for selling assets can help maximize returns and minimize associated costs. Efficient marketing and sales processes can reduce unnecessary expenses,
- Appropriate Professional Selection - Selecting experienced and reputable insolvency professionals with relevant restructuring experience and who offer reasonable fees can help manage costs while still ensuring high-quality services,
- Streamline Regulatory Frameworks - Governments and regulatory bodies can work to create clear and consistent insolvency regulations that facilitate efficient processes while ensuring creditor protection and fair treatment of stakeholders.
In conclusion, the Insolvency Act of 2015 seeks to create a more robust and effective insolvency framework in Kenya, foster a conducive business environment, and protect the interests of all stakeholders involved in the insolvency process. It provides a mechanism to restructure debts, reduce financial pressures, and maintain business continuity. However, the success of a restructuring process depends on the company's ability to adhere to the repayment plan, gain creditor support, and effectively implement its restructuring efforts.
