Corporate Insolvency in Kenya: Liquidation and Restructuring Options

Financial distress does not have to mean the end of a business. Kenya's Insolvency Act, 2015 replaced an outdated framework that focused almost entirely on winding up companies, and introduced a modern rescue culture. Directors, creditors and investors now have a range of tools, from administration and company voluntary arrangements to liquidation, each suited to different situations. This article explains corporate insolvency in Kenya, the options available to a struggling company and the risks for directors.

Key takeaways

A company is insolvent if it cannot pay its debts as they fall due, or if its liabilities exceed its assets.
The Insolvency Act, 2015 offers rescue options, namely administration and company voluntary arrangements (CVAs), as well as liquidation.
Administration gives the company a moratorium that stops creditors from enforcing their claims while a rescue is attempted.
Liquidation may be voluntary (by members or creditors) or ordered by the court.
Directors who continue trading when they know insolvency is unavoidable may be personally liable.

When is a company insolvent?

The Insolvency Act treats a company as unable to pay its debts if, among other things:

a creditor owed more than KES 100,000 serves a written statutory demand and the company fails to pay, secure or settle the debt within 21 days;
execution of a court judgment against the company is returned unsatisfied; or
it is proved that the company cannot pay its debts as they fall due (the cash flow test), or that the value of its assets is less than its liabilities (the balance sheet test).

Rescue option 1: Administration

Administration is the principal business rescue procedure under Part VIII of the Act. An insolvency practitioner is appointed as administrator to manage the company's affairs.

Objectives

The administrator must pursue, in order of priority:

maintaining the company as a going concern;
achieving a better result for creditors as a whole than would be likely if the company were liquidated; and
realising property to make a distribution to secured or preferential creditors.

Who can appoint an administrator?

An administrator may be appointed by the court, by the holder of a qualifying floating charge, or by the company or its directors.

The moratorium

Once a company is in administration, creditors cannot enforce security, repossess goods, start or continue legal proceedings, or pass a resolution to liquidate the company without the administrator's consent or the court's permission. This breathing space allows the administrator to stabilise the business, negotiate with creditors and look for a buyer or a restructuring solution. Several well-known Kenyan businesses, including retailers and manufacturers, have entered administration in recent years with the aim of preserving value.

The administrator's proposals

The administrator prepares a statement of proposals for achieving the purpose of administration, which is put to creditors for approval. The proposals may involve continued trading, a sale of the business, a CVA or, if rescue is not possible, an orderly exit through liquidation.

Rescue option 2: Company voluntary arrangement

A CVA is a binding agreement between a company and its creditors to restructure its debts, for example by paying a percentage of what is owed over time. Key features:

the directors (or the administrator or liquidator) propose the arrangement, supervised by an insolvency practitioner acting as supervisor;
it must be approved by the required majority of creditors and by members;
once approved, it binds all creditors who were entitled to vote, including those who voted against;
it cannot affect the rights of secured or preferential creditors without their consent; and
a moratorium may be available for eligible companies while the proposal is considered.

A CVA allows the directors to remain in control while the company trades out of its difficulties.

Liquidation

Liquidation (winding up) brings a company's existence to an end. A liquidator collects and sells the company's assets, investigates its affairs and distributes the proceeds to creditors in the order set by law.

Type	When used	Key features
Members' voluntary liquidation	The company is solvent and the members want to close it	Directors make a declaration of solvency that debts will be paid in full within 12 months; members appoint the liquidator
Creditors' voluntary liquidation	The company is insolvent and its members resolve to wind it up	Creditors have a say in appointing the liquidator and overseeing the process
Liquidation by the court	A creditor, the company, a director, a member or the Official Receiver petitions the court	Usually because the company cannot pay its debts; the court appoints a liquidator

Order of payment

Broadly, the proceeds of liquidation are applied in the following order: costs and expenses of the liquidation; preferential debts, including certain amounts owed to employees and some statutory deductions; holders of floating charges (subject to a portion set aside for unsecured creditors); unsecured creditors; and finally the shareholders. Holders of fixed charges are paid from the proceeds of their secured assets.

Director duties and personal liability

When a company is in financial difficulty, directors must take into account the interests of creditors. The Insolvency Act exposes directors to personal liability in several situations:

Fraudulent trading: carrying on business with intent to defraud creditors.
Wrongful (insolvent) trading: continuing to trade when a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, unless they took every step to minimise loss to creditors.
Misfeasance: misapplying company money or breaching duties.
Unpaid statutory deductions: directors may face personal exposure for unremitted taxes and employee deductions.

The court can also set aside certain transactions entered into before insolvency, such as preferences (payments that put one creditor in a better position than others) and transactions at an undervalue, and can disqualify directors.

What directors should do when a company is in distress

Get accurate, up-to-date financial information and cash flow forecasts.
Hold regular board meetings and minute decisions and the reasons for them.
Take early advice from insolvency lawyers and licensed insolvency practitioners.
Avoid paying some creditors in preference to others, especially connected parties.
Do not sell assets below market value or take on new credit without a realistic prospect of repayment.
Engage with lenders and key creditors early; an informal restructuring may be possible.
Consider whether administration or a CVA could preserve the business.

Options for creditors

Creditors can serve statutory demands, petition for liquidation, appoint administrators (if they hold a qualifying floating charge), vote on proposals and CVAs, and submit claims in the insolvency. Secured creditors should review their security documents to understand their enforcement rights and the effect of any moratorium.

Frequently asked questions

Can a company continue trading in administration?

Yes. A key purpose of administration is to keep the business running while a rescue plan is developed, and the administrator manages the business during this period.

Are directors personally liable for company debts?

Generally no, because a company is a separate legal person. However, directors can become personally liable for fraudulent or wrongful trading, personal guarantees and certain statutory debts.

How W.O.A. Advocates can help

We advise companies, directors, creditors and insolvency practitioners on restructuring, administration, CVAs, liquidation, debt recovery and insolvency litigation. Speak to our insolvency and restructuring team as early as possible, when more options are available.