Up until 2015, a company in financial distress was met often with the liquidation culture (ignited voluntarily, or by a creditor or subject to the courts supervision): See Part VI of the Companies Act (Cap 486) (repealed).

A company that was unable to pay its debts but did not want to ascribe to the liquidation culture had the option of either compromising with its creditors and/or undergoing reconstruction of the company through amalgamation or merger with another company and the liabilities duly transferred. See Sections 207-210 of the repealed Companies Act (Cap 486)

However, we now have the concept of administration of companies which was substantively invited into our jurisdiction and laws by the Insolvency Act No. 18 of 2015. This Act came into force on 11th September 2015.

Administration is a tool intended to offer breathing space for insolvent companies whilst also availing better returns and packages for creditors which are not ordinarily available in liquidation. It also gives Companies going through financial turmoil an opportunity to put their acts together. This allows them to continue operating instead of the earlier practice of abruptly killing them as was the case in the previous statutes (now repealed). It is an alternative rescue process which leads to a stay of past and future legal proceedings as envisaged by Section 560 & 561 of the Insolvency Act hence making it cheaper for the company.

Company administration provisions are not unique to our jurisdiction. They exist in most common law jurisdictions: see for example United Kingdom’s Insolvency Act 1986 (as amended by the Enterprise Act 2002), the Canadian Companies’ Creditors Arrangements Act, Uganda’s Insolvency Act of 2011 and Part 5.3A of the Australian Corporations Act 2001.

It is worth noting that any administration processes intended to operate as a business rescue avenue must be tailored for our particular social and economic conditions. Consequently, even though Part VIII of the Insolvency Act is almost the equivalent of the UK Insolvency Act 1986, care must be taken when interpreting and applying the same. It may otherwise not thrive with the same gusto. As Lord Denning would put it “…you cannot transplant it [English Law] to the African continent and expect it to retain the tough character which it has in England”.

The statutory indexation of administration of insolvent companies is captured under Part VIII of the Insolvency Act.

Pursuant to Section 522 of the Insolvency Act the objectives of Administration include;

•  to maintain the company as a going concern;
•  to achieve a better outcome for the company’s creditors as a whole than would likely to be the case if the company were liquidated (without first being under administration); and
•  to realize the property of the company in order to make distributions to secured or preferential creditors.

A person qualifies to be appointed as an administrator of a company only if the person is an authorized insolvency practitioner. Section 523 of the Insolvency Act provides that a person may be appointed as an administrator of a company:-

• by an administration order of the Court;
• by the holder of a floating charge; or
• by the company or its directors under Section 541.

Nonetheless, an administrator is an officer of the Court, whether appointed by the Court or not. Once appointed he/she is required to perform administrative functions in the interest of the Companies’ creditors as a whole.

Once appointed he or she is entitled to all the records of the Company and is required to present a proposal to the creditors on their plan to salvage the company. He/ she must set a date for the creditors meeting and invite all the creditors that he/she knows of, having had access to the books of the Company. At the Creditors meeting, the Administrator must present their proposal to the Creditors who shall vote on it. The process of Administration is discussed comprehensively under Division 8 of the Insolvency Act and its Regulations.

• Instances when an Administrator cannot be appointed

Section 527, 528 and 529 of the Insolvency Act provides for instances where an administrator cannot be appointed.

A person is not to be appointed as an Administrator of a Company in the following instances:

1. If a company is in liquidation because of a resolution for voluntary liquidation or a liquidation order;
2. If the Company is a bank;
3. If the Company enters into contracts of insurance or carries on insurance business.

It should be noted that the functions and powers of Administrators are specified in the Fourth Schedule of the Insolvency Act.

Conditions for making administration orders
Section 531 of the Insolvency Act provides that the Court may make an administration order in relation to a company only if satisfied—

that the company is or is likely to become unable to pay its debts; and
that the administration order is reasonably likely to achieve an objective of administration.

Who may make an application to the Court for an administration order in respect of a company
An application to the Court for an administration order in respect of a company may be made by the following persons:

the company;
the directors of the company;
one or more creditors of the company;
a combination of persons specified in paragraphs (a) to (c);
any other person of a class prescribed by the insolvency regulations.

What is the effect of Administration Orders?
Section 558 of the Insolvency Act clearly states that if an administration order is confirmed by the Court in respect of a Company, an application for liquidation of the Company may not be made and any application for liquidation that is already pending in court will be suspended for the period during which the Company is under administration.

Section 593 of the Insolvency Act provides that the appointment of an administrator automatically ends at the end of twelve (12) months from and including the date on which it took effect. However, Section 594 of the Act provides for circumstances where the administrators’ term can be extended. This includes:

1. on the application of an administrator, the Court may by order extend the administrator’s term of office for a specified period; and
2. an administrator’s term of office may be extended by consent for a specified period not exceeding six months. The consent to be sought is that of each secured creditor of the company and if the company has unsecured debts—the consents of creditors of the company holding debts amounting to more than fifty percent of the company’s unsecured debts (disregarding debts held by any creditor who does not respond to an invitation to give or withhold consent).

The Administrator of a Company shall make an Application to the Court for an order terminating the Administrator’s Appointment on forming the belief that:

1. The objective of the administration cannot be achieved in relation to the company or the company should not have entered administration;
2. If a creditors’ meeting requires the administrator to make such an application; or
3. If the administrator believes that the purpose of administration has been sufficiently achieved in relation to the company.

On the hearing of an application made under this section, the Court may make an order terminating the administrator’s appointment with immediate effect or from a specified later date; an order dismissing the application; or an interim order.

The struggling supermarket chain, Nakumatt Holdings was handed a lifeline to fight for its recovery after the High Court allowed the appointment of an Administrator vide a ruling delivered on 22^nd January 2018. See Insolvency Cause No. 10 of 2017.

The move blocked possible liquidation and gives the cash strapped Nakumatt headroom to structure a recovery plan even as creditors and suppliers push to be paid their dues.

The struggling supermarket chain, Nakumatt Holdings was handed a lifeline to fight for its recovery after the High Court allowed the appointment of an Administrator vide a ruling delivered on 22^nd January 2018. See Insolvency Cause No. 10 of 2017.

The move blocked possible liquidation and gives the cash strapped Nakumatt headroom to structure a recovery plan even as creditors and suppliers push to be paid their dues.

The struggling supermarket chain, Nakumatt Holdings was handed a lifeline to fight for its recovery after the High Court allowed the appointment of an Administrator vide a ruling delivered on 22^nd January 2018. See Insolvency Cause No. 10 of 2017.

The move blocked possible liquidation and gives the cash strapped Nakumatt headroom to structure a recovery plan even as creditors and suppliers push to be paid their dues.

Loss making ARM Cement has been placed under administration in a move aimed at giving the firm a lifeline to recover by keeping away creditors from attaching its property.

ARM Cement a publicly traded on the Nairobi Securities Exchange became the second major company to benefit from the Insolvency Act after the cash strapped Nakumatt Holdings in January 2018.

Fashion retailer Deacons East Africa has sunk into administration forcing capital markets regulator to suspend its shares from trading on the Nairobi Securities Exchange.

The Board of Deacons appointed Peter Kahi and Atul Shah of PKF Consulting as Joint Administrators of the company citing financial turmoil that it is facing.

Deacons became the third listed company after ARM Cement to invoke the Insolvency Act.

A company going into Administration is not an ideal situation; however it is a better position than if the Insolvency Act, 2015 was never passed. Companies would be liquated at an alarming rate. The essence of an administration order is to rescue companies which were insolvent and the interests of the creditors which are of paramount importance.  If there was no likelihood of turning around an insolvent company, there would be no justification of appointing an administrator over such a company.

However, it is implied in the provisions of Section 522 (1) (b) that acknowledgement of an order for Administration of an Insolvent Company is not a permanent bar to the liquidation of the company.  In other words, even when an Administrator is appointed, the company may still be liquidated later, if the Administration was not successful in meeting its objectives.

It is a considered opinion that an Administration Order would not be entirely beneficial to all creditors than a liquidation of the company could achieve, it is in the interest of justice that the Administration process be closely supervised by the court.

For now, all eyes will be on the administrators of Nakumatt Holdings Limited, ARM Cement Plc. and Deacons Plc. These companies shall set precedence for other companies likely to undergo the same process depending on their outcome.

It is my belief that the legislators of the Insolvency Act sought to assist companies that are on the verge of being run down to be restored to their original state by introducing administration of companies. This Act has shown us that investors and potential investors can afford to have confidence in the Kenyan capital market as there are systems put in place to protect their investments.