Who is to blame in bankruptcies?

City Residents walk past the closed Nakumatt Lifestyle branch located along Monrovia Street at Hazina Towers. FILE PHOTO | FRANCIS NDERITU | NMG

Despite promulgating the most progressive insolvency law, corporate bankruptcies in Kenya are on the rise. In capitalism, bankruptcy is like the ultimate reward for bad business decision(s). It’s a way for the market to allow businesses that have made bad judgements to fail.

In fact, capitalism without bankruptcy is like Christianity without hell. However, to some extent, everybody deserves a second chance at life.

Which is why insolvency laws are enacted to provide that second chance. In Kenya, the Insolvency Act of 2015, which came into effect in January 2016, was designed to nurture and revive businesses rather than simply selling off their assets, with business rescue as the overarching theme.

First, unlike its predecessor, the Companies Act, it is quite progressive and its pronouncement on a company doesn’t automatically imply a call for a hammer on the company’s assets.

Instead, the main objective of the Act is to maintain a company as a going concern. At the core of it, resuscitating a business is the main deliverable of the administrator.

To support this objective, the Act did away with the office of the receiver and replaced it with the office of the administrator.

As set out in Section 522(1) of the Act, the administrator has three objectives: (i) maintain the company as a going concern; (ii) achieve a better outcome for the company’s creditors as a whole, than would likely to be the case if the company were liquidated (without first being under administration); and (iii) to realise the property of the company in order to make a distribution to one or more secured or preferential creditors (and this is only applicable in the event that the business resuscitation is unsuccessful).

Secondly, the Act offers some form of protection to a company. Section 560(1) (a) provides that in the administration period, security over the company’s properties is only enforceable with the consent of the administrator or approval of the court.

Essentially, if a creditor had registered a charge on a company’s properties-both moveable and immovable, realising such a charge requires some pre-approval.

Additionally, during the business resuscitation period, which is initialed at 12 months, with the option of extending for a further six months (at the court’s behest), a debtor is handed a reprieve from having to immediately honour creditors’ demand notices.

It is quite puzzling that not a single business placed under administration has come back to life, which begs the question of whether the problem lies with the practitioners of the law and needs further enhancements.

For instance, since 2016, about 30 prominent businesses have been placed under receivership by creditors out of which none has successfully roared back to life.

These include names such as ARM Cement, Nakumatt, Tuskys Supermarkets, Deacons, Kaluworks and more recently Transcentury and East Africa Cables.

Commercial banks lead the pack in calling on the hammer on businesses, being the leaders in working capital intermediation.

Between 2019 and June 2023, Equity Bank, KCB, NCBA and DTB have accounted for three-quarters of businesses placed under administration by commercial banks (with Equity Bank alone accounting for a third).

Are administrators to blame?

The current law calls on a receiver to be an orchestra conductor, skillfully harmonising the various stakeholders, creditors, and management, to orchestrate a recovery strategy that breathes new life into struggling enterprises.

Basically, administrators should be some sort of turnaround specialists. Another discourse should be on the law itself.

An essential addition should be the provision of a temporary shield of a moratorium. This protective cloak can grant a business some breathing space to regroup, restructure, and rebuild without the constant fear of aggressive creditors swooping in.

Additionally, the business resuscitation period can be extended to 36 months, with the option of extending for a further six months.

Resuscitating a business can sometimes be a marathon and not a sprint, especially where exogenous factors played a part in the failure of the business.

The writer is a thought leader.