How insolvency process can and should save businesses

Did you know the number of Kenyan businesses facing insolvency has more than doubled in the last seven years?

The reality is that a vast majority of these businesses won’t make it through the insolvency process intact and will likely dissolve into economic oblivion.

This links to the state of economic decline that the world is facing, but in truth, it also has a lot to do with the insolvency process and how it is perceived both by businesses and their investors.

Historically, and before Kenya introduced the Insolvency Act of 2015, it was a stigma that any company that declared insolvency had failed, and this was a huge cause for embarrassment amongst shareholders and directors.

Very rarely would you see a company come out of the insolvency process and return to normalcy.

This should not be the case anymore. We need more businesses to be saved than disappear.

Therefore we must reimagine what insolvency can mean for our economy and for the hordes of businesses that could be saved by it.

But first, let us define what it means to be insolvent.

In Kenya, according to the Insolvency Act of 2015, a company is insolvent when it is unable to pay its debts of over 100,000 Kenya Shillings after 21 days of a written warning being served.

Besides a lack of funds, a business can also become insolvent due to poor management, which makes up most insolvency cases.

However, insolvency does not equal failure, it is an opportunity to be saved.

When a company is insolvent it has a few options at its disposal, it can either seek a formal insolvency mechanism or negotiate a plan with the creditors.

Not all creditors want a business to fail–it’s not in their interest. If the business proposition is sound, then there is money to be made with the right changes.

If this is the case, then many creditors would be willing to negotiate an informal repayment deal once the company gets back on its feet and cash begins to flow once more.

If this cannot be arranged, then the business would need to enter more formalised insolvency procedures as laid out by the Insolvency Act.

This includes administration and a process known as company voluntary arrangement.

A CVA involves the restructuring of debts over terms that are agreed upon by the company and its creditors.

This becomes binding when is approved by creditors and adopted in Court.

The trick with this is that a business needs to sell the creditors on the vision of the business.

If the creditors do not believe the new strategic approach will work, then the process will fall through, and the business will likely need to be dissolved.

Then, there is administration. This is where I believe more businesses and their shareholders need to place their beliefs.

Previously, businesses would be wound up immediately after declaring insolvency.

After the Insolvency Act of 2015 came into play, procedures were provided that help ensure a company can return to profitability through the appointment of administrators.

These administrators would essentially manage the company and help it achieve more agreeable outcomes for the creditors owed.

I believe this process can work, but some fundamental changes need to be made to save our business through the insolvency process.

Most administrators are not even working on the turnaround plan in consultation with the stakeholders of the business.

So, it becomes clear whose motive takes priority.

Not employing the right administrator or insolvency consultant with the experience and skills to turn around a business has a high probability of failure for the business and all the people who depend on it.

Add the fact that we desperately require a regulated retraining programme to ensure that these professionals are always up to date on top of the latest economic challenges of the day and insolvency administration best practices.

If we could get this right, and there were more regulations in place to help us do it, then perhaps there would be more belief in the Insolvency Act of 2015 and the processes it offers.

Right now, it’s up to the businesses to ensure they have the right people by their side, and everyone involved is aligned on the objectives and the way forward – and this should include an insolvency adviser.

Partner at commercial law firm Cliffe Dekker Hofmeyr Kenya