Mark Twain once stated that the only certainties in life are death and taxes. In the 21st century, we can add one more certainty to the list – the corporate financial crisis. In the life cycle of any business, there is a phase when it might face financial distress. This does not always lead to the end of the life of the company. Many companies have been able to pull through financial trouble and continue operations as viable businesses.
However, pre-2015, the assumption made in Kenyan corporate insolvency laws was that the financial crisis led to the liquidation of companies. Part VI of the repealed Companies Act, Cap 486, contained extensive provisions on liquidation of companies. However, there has been a significant shift from this perception and a rescue culture has now been adopted. Insolvency law and practice in Kenya is currently governed by the Insolvency Act, 2015, the Insolvency Regulations, 2016 and the Insolvency Act (Amendment) (No. 2) Regulations. The current laws have attempted to strike a balance between liquidation provisions and the need for provisions that envision rescue strategies for companies in distress.
Two main rescue strategies have been laid out in our laws – company voluntary arrangements and administration. Part IX of the Insolvency Act provides for company voluntary arrangements and moratoria on debt payments when directors propose these arrangements. These arrangements mean that the directors of a company make a proposal to the company and to its creditors for a voluntary arrangement under which the company enters into a composition in satisfaction of its debts or a scheme for arranging its financial affairs. In making such a proposal, the directors shall provide for the appointment of a person to supervise the implementation of the voluntary arrangement. Only an authorized insolvency practitioner may be appointed to supervise a voluntary arrangement.
However, this article will focus on the second corporate rescue strategy in our laws, that is, the administration of companies.
Administration of insolvent companies
The Insolvency Act provides for the administration of insolvent companies to manage the company and pay off its debts. Section 522 of the Insolvency Act identifies the following objectives of administration:
i. To maintain the company as a going concern;
ii. To achieve a better outcome for the company’s creditors as a whole than would likely be the case if the company were liquidated
iii. To realize the property of the company in order to make a distribution to one or more secured creditors.
This means that a company that faces financial trouble can go through the administration process with the hope that it can be maintained as a going concern. This shift to corporate rescue is significant as it acknowledges the possibility that the company in distress can be revived or rehabilitated to its previous profitable state. If the objectives of administration are not achieved, the company can still move into liquidation.
A company enters into administration when the appointment of an administrator takes effect. Administrators are appointed by floating charge holders or by the company or directors.
When a company is under administration, there is a moratorium over insolvency proceedings and other legal proceedings while the administration order is in effect. This means that proceedings such as a resolution for liquidation of the company may not be made, persons may not enforce security over the company’s property or attempt to repossess goods under a credit purchase transaction, inter alia.
During administration, the officers of the company provide the administrator with a statement of affairs. The administrator will be required to set out proposals on how to achieve the objectives of the administration. These proposals must be sent to the creditors, the company and to the registrar within 60 days from the date on which the company entered into administration. The administrator convenes creditors meeting within 70 days from the date on which the company went into administration. The object of the creditors meeting is the approval of the administrator’s proposals with or without modification. The administrator is expected to report the outcome of the meeting to the court.
The appointment of an administrator automatically ends at the end of twelve months from and including the date on which it took effect unless the administrator applies for an extension of time.
The objectives of administration are not always achieved if the company cannot, despite best efforts, be rescued. Where administration does not work, the company might still be liquidated.
Case studies of administration as a corporate rescue strategy
This article will examine two case studies of administration as a corporate rescue strategy under our current corporate insolvency laws. In the first instance, the company was able to be maintained as a going concern while in the second instance, the company ended up moving into liquidation.
Athi River Mining (ARM) Cement
Athi River Mining (ARM) Cement is a Kenyan manufacturing company listed at the Nairobi Securities Exchange, with operations in Kenya, Tanzania and Rwanda. The firm specializes in the production of cement, fertilizers, quicklime, and other industrial minerals. ARM Cement, once a stable company, started experiencing difficulty in 2016, as the firm’s revenue lines started decreasing. Unable to service their obligations, the company was then placed under administration in August 2018, with PWC’s Muniu Thoithi and George Weru appointed as the administrators. The administrators, having full control held a creditor’s meeting in October 2018, where creditors voted to give the administrators up to September 2019, to revive the company.
The Insolvency Act thus enabled the company to remain operational as it undertook its turnaround strategy and focused on ensuring the company attains good financial health. It was eventually taken over by National Cement Company Limited in October 2019.
Nakumatt Holdings Limited
Until 2017, Nakumatt Holdings Limited was the largest retailer in Kenya with 62 branches across Kenya, Tanzania, Uganda and Rwanda. The retailer began to have serious financial cash flow difficulties and was unable to meet its financial obligations to its landlords, suppliers and employees. The High Court appointed an administrator to explore business recovery avenues for Nakumatt Holdings as a going concern. The objective was also to attempt to achieve a better result for the retailer’s creditors than would have been possible if it had been liquidated. The administration order took effect but there was a lot of acrimony between the administrator and the creditors during the administration period which resulted in the creditors rejecting the administrator’s recovery plan. The administrator’s tenure was extended for another 12 months to enable him to undertake a financial audit of Nakumatt and convene a creditor’s meeting and report back to court the results of the meeting.
In January 2019, the administrator ruled out the possibility of resuscitating the retailer and convened a creditors meeting which voted to liquidate the retailer.
Corporate rescue strategies, and in particular administration, have introduced a good rescue culture for companies in Kenya facing financial distress. Where administration has failed to maintain the company as a going concern, the companies have still been able to proceed with liquidation. In cases where the administration has been effective, the preservation of companies becomes a desirable outcome alongside maximum realization for the creditors than would
otherwise be possible under liquidation. The corporate rescue culture has therefore afforded struggling businesses a second chance to reorganize and come out stronger as a viable business.