Is receivership giving creditors hope under 2015 insolvency law?

Many of the firms placed under Administration could have fared better under management action rather than through the hands of Administrators. FILE PHOTO | REUTERS

Almost a decade ago, legal, legislative and business stakeholders were joined in a mission to facilitate the reform of the then Companies Act in Kenya.

These stakeholders were clear that the Companies Act, Cap 486, needed swift reform to facilitate compliance with the law based on the contemporary business environment.

Thanks to their efforts, the Companies Act,2015 and the Insolvency Act, 2015, were assented to around September 2015, ushering in a new era in the legal management of business organisations.

The objects of the Companies Act 2015 were outlined as being to facilitate commerce, industry and other socio-economic activities by enabling one or more natural persons to incorporate as entities with perpetual succession and to provide for the regulation of those entities.

The Insolvency Act 2015 was to establish and provide for the operation of a framework for the efficient and equitable administration of the estates of insolvent natural persons, unincorporated entities comprising natural persons, the assets of insolvent companies and other bodies corporate, that maintain a fair balance between the interests of those persons, entities, companies and bodies and those of their creditors.

The insolvency law introduced the concept of administration for insolvent firms, which was a better concept than the previous placement of firms under receivership.

However, with the Insolvency Act of 2015, the law provided that in the case of insolvent companies and other corporate bodies whose financial position is redeemable, the Act would be applied to enable those companies and bodies to continue to operate as going concerns.

Ideally, the law’s framers were clear that, ultimately, such firms would be able to meet their financial obligations to their creditors in full or at least to the satisfaction of those creditors.

The spirit of this law also envisaged that placing firms under Administration would help achieve a better outcome for the creditors as a whole than would likely be the case if those companies and bodies were liquidated.

Businesses celebrated the development of flexibility to rescue or resuscitate ailing firms.

Nearly eight years later, the Administration provisions of the Insolvency Act 2015 have, however, yet to achieve the desired effects.

Hitherto leading firms such as Mumias Sugar, Nakumatt, Tuskys, Athi River Mining, and Midland Hauliers have all been placed under Administration with little to show.

Only Kaluworks Ltd has feebly managed to exit Administration status under unique circumstances based on a mutual understanding between the firm and its creditors to lift the receivership.

Among other reasons, the Insolvency Act 2015 has failed to impress due to misuse by powerful creditors; some eyeing asset-stripping options.

Many of the firms placed under Administration could have fared better under management action rather than through the hands of Administrators.

In my view, qualified insolvency is always a factor of poor capitalisation and is best handled through strategic recapitalisation.

Mr Ngichiri is an accountant and public policy analyst.