Rehabilitating insolvent corporates

Corporate insolvency is an important but often ignored area of law that companies should be aware of, because there are times that businesses face difficulties which threaten their financial status, says Julie Mulindi.

Poorly managed corporate distress may lead to multiple claims being filed by creditors in court or arbitration. Insolvency law provides reprieve to such claims and an avenue for the proper management of companies that are in distress, to either rescue redeemable companies or liquidate them.

Mulindi says many Kenyans are not aware of the corporate rescue mechanisms available before they are forced to shut their doors.

Statistics provided by the Kenyan insolvency regulator showed that during the height of Covid-19, when most businesses could have benefitted from corporate rescue mechanisms, there were about 91 liquidations, 22 administrations and no voluntary arrangements.

Mulindi attributes the poor uptake of corporate rescue mechanisms to the legacy of Kenya’s previous insolvency legal framework, which only provided for the winding up or liquidation of companies. “Consequently, when most companies run into financial or management troubles, they elect to shut down the business and liquidate the companies instead of incurring more debts.”

She also highlighted that the courts have observed that there is a liquidation culture which is still prevalent in Kenya, where the treatment of debts by creditors is punitive and Victorian rather than rehabilitative.

Mulindi, however, encourages distressed companies and creditors to consider corporate administration, which gives a lifeline to companies. This is achieved by giving a company breathing space to adjust its affairs and manage creditor claims through a moratorium or a legal ringfence against legal action being taken against the company, to allow it to turn around.

“Timing is critical. The sooner a company identifies its indicators of financial distress and takes the right measures and implements clear turnaround plans, the better the chances of survival,” she commented.

Mulindi recommends that companies, whether they're in financial distress or not, have good financial reporting, because it's there that the indicators of financial distress can be identified.

Mulindi concluded that good corporate governance and engaging a professional, such as a lawyer from Gikera and Vadgama Advocates, as soon as possible will also give a company the chance to resuscitate itself.

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