TOUGH TIMES

Administration: Alternative to businesses in financial distress

In Summary
  • One glaring failing is owners of the business lose control of it as the power of management is vested in the administrator.
  • The administrator has wide powers, which include the power to appoint and remove directors.

The Covid-19 pandemic continues to provide a challenging business environment globally. In a bid to cushion businesses, governments worldwide have come up with measures, most of which have been geared towards addressing liquidity shortages and enhancing access to capital.

There is, however, growing concern that some of the proposed measures will lead to a significant rise in the debt levels of many businesses, thereby predisposing them to inability to pay their debts as they fall due.

The Insolvency Act, 2015, was enacted with the view of reforming the manner in which individuals and companies in financial distress are dealt with. The Act seeks to provide an efficient and equitable way of dealing with the affairs of insolvent persons, whilst properly balancing the interests of various stakeholders. Central to this aim is the need to ensure a balance between preserving viable businesses and quickly liquidating companies that are not viable and redistribute capital to those that are more viable.

To achieve this objective, the Act introduced administration as an alternative to the liquidation of companies. Administration is an insolvency mechanism where a qualified practitioner, referred to as an administrator, is appointed to manage the affairs and property of a company and keep it trading as a going concern.

Administration offers a new lease of life to companies because of the protective measures it avails. These include: suspension of any applications to liquidate the company; requirement to obtain leave of a court or the approval of the administrator before a secured creditor takes steps to realise their security; or before a landlord forfeits a lease; or before a person begins any proceedings against the company; or before taking any enforcement action against the company, including executing a judgment.

In addition an administrator may in certain circumstances have the power to deal with or dispose of property charged to secured creditors and deal with it as if it were not charged. 

In Australia, for example, the government has come up with reforms that allow owners to retain control of their businesses by providing for an independent practitioner who helps SMEs come up with a restructuring plan, after carrying out an independent assessment of the business but without requiring the independent practitioner to assume control.

There are however some factors that make administration as provided by the Insolvency Act unattractive. The most glaring one is that the owners of the business lose control of it as the power of management is vested in the administrator. The administrator has wide powers, which include the power to appoint and remove directors. Further, the company does not have absolute say in who is appointed as an administrator.

If a company wants to appoint an administrator without going to court, it is required to give notice to certain classes of secured creditors, who may take the chance to jump ahead of the company by appointing their own administrators. In cases where the company has initiated administration and has succeeded in appointing its administrator, the creditors retain a right to replace the administrator with their preferred one.

Administration also runs the risk of accelerating a company’s journey to dissolution or liquidation if the administrator forms the opinion that the objectives of administration cannot be achieved or if an administrator’s proposal does not garner approval from the creditors. These factors perhaps explain why companies would be hesitant to voluntarily take up administration, even when it would be an appropriate rescue mechanism.

As governments continue to find ways of ensuring the survival and continuity of businesses,  it would be worthwhile to consider how rescue mechanisms provided in the Act, such as administration, could be made more attractive to businesses.

In Australia, for example, the government has come up with reforms that allow owners to retain control of their businesses by providing for an independent practitioner who helps SMEs come up with a restructuring plan, after carrying out an independent assessment of the business but without requiring the independent practitioner to assume control.

Australia has also shortened the timelines for administration and has reduced complex requirements such as numerous creditors’ meetings. The Kenyan government should perhaps consider borrowing a leaf from such regimes and reform our law to encourage viable businesses in financial distress to take up available rescue mechanisms voluntarily.

Lawyer and partner at MMS Advocates