The global financial crisis in 2008 led market regulators to introduce restructuring laws which enable struggling and debt-laden companies to recover from financial distress.
Kenya adopted the Insolvency Act in 2016. The law provides two options to insolvent firms; administration and Company Voluntary Arrangement (CVA).
Under Administration, the court appoints an administrator to assist the company in the restructuring process while in Company Voluntary Arrangement the struggling firm negotiates with its creditors in an out-of-court agreement.
A recent study by Botho Emerging Markets Group indicates that most creditors prefer to restructure insolvent firms rather than liquidate them which may lead to losses of up to 85 percent.
In the past three years, notable Kenyan firms such as Nakumatt, Deacons, Uchumi, ARM Cement and Kenya Airways have applied the Insolvency Act in an attempt to return to profitability.
The report by Botho shows that the restructuring process has yielded several benefits such as improved business environment, increased creditor confidence and enhanced access to credit for businesses. However, Kenya lags in the amount of time taken to resolve insolvency cases at an average of 4.5 years compared to South Africa at 2 years, Rwanda at 2.5 years, and Sub-Saharan Africa average rate of 2.9 years. Additionally, the recovery rate for creditors is quite low at 31 per cent.
Both Group notes that “equal treatment of all creditors is generally preferred over dividing them into classes in restructuring plans.” According to the study, during Nakumatt’s restructuring process, the administrator created two categories of creditors; preferential creditors, and non-preferential creditors.
The retailer’s creditors rejected the decision, resulting in a delay in resolving the firm’s debt problems.
Botho Emerging Markets Group recommends that Kenyan regulators “create fast-tracking procedures for any administration-related cases in court” to speed up the recovery process for struggling companies.
Additionally, Botho proposes the creation of early intervention measures to help identify companies that could be facing financial problems at an early stage.
Liquidity tests and asset quality tests can be used to determine the financial stability of listed companies and to provide solutions before the firms become insolvent.