By Ndung’u Ngichiri
Almost a decade ago, legal, legislative and business stakeholders were all joined in a shared mission to facilitate the reform of the then Companies Act in Kenya.
These stakeholders were clear that the Companies Act, Cap 486, needed swift reform to facilitate compliance with the law based on the contemporary business environment.
Thanks to their efforts, the Companies Act,2015 and the Insolvency Act, 2015, were assented to around September 2015, ushering in a new era in the legal management of business organisations.
The objects of the Companies Act 2015 were outlined as being to facilitate commerce, industry and other socio-economic activities by enabling one or more natural persons to incorporate as entities with perpetual succession, with or without limited liability, and to provide for the regulation of those entities in the public interest, and in particular in the interests of their members and creditors.
On the other end, the object of the Insolvency Act 2015 was to establish and provide for the operation of a framework for the efficient and equitable Administration of the estates of insolvent natural persons, unincorporated entities comprising natural persons, the assets of insolvent companies and other bodies corporate, that maintains a fair balance between the interests of those persons, entities, companies and bodies and those of their creditors.
Most importantly, unlike the earlier Companies Act, Cap 486, the Insolvency Act, 2015 introduced the concept of Administration for insolvent firms, which was a better concept than the previous placement of firms under receivership. Under the earlier laws, companies placed under receivership had barely managed to survive liquidation.
However, with the Insolvency Act of 2015, the law provided that in the case of insolvent companies and other corporate bodies whose financial position is redeemable, the Act would be applied to enable those companies and bodies to continue to operate as going concerns. Ideally, the law’s framers were clear that, ultimately, such firms would be able to meet their financial obligations to their creditors in full or at least to the satisfaction of those creditors. The spirit of this law also envisaged that placing firms under Administration would help achieve a better outcome for the creditors as a whole than would likely be the case if those companies and bodies were liquidated.
For this reason, stakeholders in the local business space celebrated the developments as they believed the new laws would provide flexibility to rescue or resuscitate ailing firms.
Nearly eight years later, the Administration provisions of the Insolvency Act 2015 have, however, yet to achieve the desired effects. Hitherto leading firms such as Mumias Sugar, Nakumatt Holdings, Tusker Mattresses, Athi River Mining, and Midland Hauliers, among others, have all been placed under Administration with little to show for their efforts.
Only Kaluworks Ltd has feebly managed to exit Administration status under unique circumstances based on a mutual understanding between the firm and its creditors to lift the Receivership.
Among other reasons, the Insolvency Act 2015 has failed to impress due to misuse by powerful creditors; some were eyeing asset-stripping options. Many of the firms placed under Administration could have fared better under management action rather than through the hands of Administrators.
The recent attempt by Equity Bank Kenya to place TransCentury Group under Receivership is a case in point. Looking at all TransCentury operating fundamentals, I am not convinced that placing the firm under Receivership provides a win-win position for the creditor and the firm.
In my view, qualified insolvency is always a factor of poor capitalisation and is best handled through strategic recapitalisation. All other experiments hardly seem to provide the medicine dearly sought and tend to leave the sickly firms in a worse-off position to the detriment of innocent stakeholders.
Mr Ngichiri is a practicing accountant and public policy analyst.
