Evolving Insolvency Law: A Lifeline to Debt-Laden Companies in Kenya
featured brief
Evolving Insolvency Law: A Lifeline to Debt-Laden Companies in Kenya
—
By Bathsheba Asati, Research Associate, Botho Emerging Markets Group
April 2, 2019
The 2008 financial crisis sparked a widespread assessment of global insolvency laws and identification of effective instruments available for financially distressed companies. The financial services industry’s self-examination has generated one practice that has now become increasingly popular: the introduction of restructuring options within existing insolvency laws to give failing companies a pathway to solvency. Studies have shown a positive correlation between insolvency law reform and the survival rates of distressed companies; these laws have also been found to promote job preservation.
In 2016, Kenya enacted the Insolvency Act, which now allows for insolvent companies to be rehabilitated. The Act introduced two new procedures, administration and company voluntary arrangements (CVA), commonly referred to as out-of-court restructuring. With liquidation of insolvent companies bearing potential losses to creditors of up to 85%, restructuring emerged as a preferred alternative.
However, recent high-profile cases of insolvency highlight the need to further develop this restructuring framework. Some of the recent high-profile insolvency cases include: ARM Cement, Nakumatt, Uchumi, Deacons, and Kenya Airways - who have a collective debt of over $2bn.
A successful restructuring is not only one that restores the company back to solvency, but also ensures high returns to creditors. This brief examines the emerging practices in resolving insolvency in Kenya, highlighting its shortcomings, and makes recommendations on how the process can be more balanced and efficient. The first two sections will give an overview of the benefits of restructuring, and the approach Kenya has taken to resolve insolvency. The last two parts highlight areas of intervention identified through our analysis.