Corporate insolvency refers to a company's inability to pay its debts when they are due. In Kenya, the 2015 Insolvency Act details an elaborate framework for addressing corporate insolvency, including liquidation and restructuring options. This paper outlines salient features of the law on corporate insolvency in Kenya.
Liquidation
Liquidation, otherwise known as winding up, is a process through which the existence of a company is brought to an end and the assets distributed between the creditors and members. Under the Insolvency Act, two types of liquidation are provided for:
1. Voluntary Liquidation: This is initiated by the company itself through a special resolution of its members. It may be a Members' Voluntary Liquidation in the case of a solvent company or a Creditors' Voluntary Liquidation in the case of an insolvent company.
2. Compulsory Liquidation: This is when winding-up proceedings are initiated by the court, usually upon the petition of a creditor, the company itself, or the Attorney General. A necessary reason for compulsory liquidation would be the inability of the company to pay its debts or when the court believes that it is just and equitable to wind up the company; this may be due to the company's failure to commence business or even suspend business within one year from the date of incorporation.
The liquidation process involves the appointment of a liquidator who controls the company's assets, realizes them, and distributes them to creditors and members according to the order of priority laid down.
Restructuring Options
There are primarily two restructuring options available for the financially distressed companies under the Insolvency Act:
1. Administration: This procedure is designed to provide a breathing space for a company to reorganize its affairs and continue as a going concern. An administrator takes over the management of the company who the court may appoint or the creditors to see that one of the following is achieved:
o Rescuing the company as a going concern
o Achieving a better outcome for creditors than liquidation
o Realizing the company's property to make a distribution to secured or preferential creditors
o During administration, legal proceedings against the company are stayed, allowing the company an opportunity to restructure its debts and operations.
2. Company Voluntary Arrangement: This procedure involves a company entering into a contract with its creditors to restructure its debts. A CVA may include rescheduling or reducing debts that the company offers to its creditors. The plan is approved by the required majority of creditors, which holds 75% of the value and binds all unsecured creditors. The supervisor, usually an insolvency practitioner, is appointed to monitor the execution of the CVA.
Landmark Insolvency Cases
Numerous landmark cases have touched on the interpretation and application of the Insolvency Act in Kenyan courts.
Conclusion
The new Insolvency Act 2015 is modern legislation in Kenya. It provides an extended and more powerful framework for dealing with distressed companies, balancing the interests of debtors, creditors, and other stakeholders in a manner that fosters a culture of corporate rescue and restructuring.
Effective implementation of the Act also calls for enhanced institutional capacity in terms of training insolvency practitioners, judges, and other stakeholders. It also requires a mindset change from a punitive approach to a rehabilitative approach to corporate insolvency.
A strengthened framework for corporate insolvency can contribute to business continuity, job
preservation, and competitiveness for Kenya as an investment destination. It could also support
building a more resilient and vibrant corporate sector.