IMPLICATIONS OF COVID 19 ON INSOLVENCY


It is uncertain how long the current COVID-19 pandemic and the consequent economic downturn will last, so it is important to understand whether your business is prepared to survive a sustained period of little to no economic growth.

Once the company’s long-term business prospects have been assessed, it may appear that the company will in the long run be unable to settle its debts resulting in a state of insolvency which occurs when a company is deemed unable to pay its debts amounting to Kshs.100,000.00 or more after 21 days of a written demand being served upon it.

In such instances, it is important to devise a solution that minimizes losses, protects creditors and (where the business is still viable) develop a rescue strategy.

Such rescue strategies have been prescribed under the law and are found under the Insolvency Act No.18 of 2015 (the ‘Act’). The Act, passed in 2015 brought with it some much needed measures which saw a shift from the previous requirement of insolvent companies to be wound up for the benefit of creditors, to advocating for insolvent companies to first be administered in a bid to steer them back to profitability and the handover of control back to the directors of such companies.

1. What Rescue Strategies Are Available Under the Act?

  1. Administration of Insolvent Companies

A company is put under administration when an administrator is appointed over it. The main objective of administration is to maintain the company as a going concern and to achieve an outcome for the company’s creditors that would be better than a liquidation of the company through an administrator who is appointed either by the Court, a secured creditor or by the company itself and/or its directors.

The administrator will typically develop a plan of action to rescue the company while the administration order is in effect and will act in the best interest of all the company’s creditors.

  1. Company Voluntary Arrangements

A company voluntary arrangement is an arrangement entered into when a company is insolvent and the directors, administrator or liquidator as the case may be, make a proposal to the company’s shareholders and its creditors on the best way to save the company from liquidation.

An approved proposal shall be reported to Court as soon as practicable and shall take effect as a voluntary arrangement upon approval of the Court by way of any order and shall be binding upon the Company and its creditors. An insolvency practitioner appointed to supervise the voluntary arrangement shall be responsible for implementing the arrangement in the interests of the company and its creditors and monitoring compliance by the company with the terms of the arrangement.

  1. Liquidation of Companies

This is a last resort measure where an insolvent company is deemed irredeemable. It is commenced either through voluntary liquidation or through liquidation by the court.

Voluntary liquidation may further be categorized into (i) members voluntary liquidation and, (ii) creditors voluntary liquidation. A member’s voluntary liquidation happens when shareholders and directors agree to place the business into liquidation because it can no longer pay its bills when they fall due by way of a special resolution to that effect.

A creditors voluntary liquidation occurs when the creditors and the company nominate an authorised insolvency practitioner to be the liquidator for the purposes of liquidating the company’s affairs and distributing its assets.

Once the resolution is passed, all trading will cease and the company’s assets are sold in order to repay creditors. Secured creditors with a fixed charge generally take preference, followed by insolvency practitioner fees and then ‘ordinary’ creditors or secured creditors with a floating rather than a fixed charge.

In the case of compulsory liquidation, Liquidation by the Court is done by way of an application to the Court made by (i) the Company or its directors; (ii) a creditor or creditors including any contingent or prospective creditor; (iii) a contributory of the company;  (iv) a provisional liquidator or administrator; or, (v) the Attorney General.

2. What are the benefits of winding up or adopting the rescue strategies available under the Act?

  1. Once an administration order is made, a moratorium comes into effect and a creditor may only take steps to enforce security with the consent of the administrator or with the court’s approval.
  2. While an administration order is in effect, an application for the liquidation of the company cannot be made and any pending application for liquidation will be suspended.
  3. When a company’s directors propose a voluntary arrangement, a moratorium takes effect. The effect of this is that any steps taken to enforce any security over the company’s property can only be done with the approval of the Court.
  4. On being discharged, a bankrupt is released from all debts provable in the bankruptcy except debts incurred by fraud or fraudulent breach of trust or amounts payable under the Matrimonial Causes Act or the Children Act.
  5. Staff can claim redundancy pay through the Cabinet Secretary in charge of Labour. Members of staff will be made redundant by the liquidator, and if eligible, they can start their claim for redundancy pay and other statutory entitlements. If monies realized from the sale of company assets are not sufficient to cover redundancy payments, staff have an alternative route by which to claim what is owed. Pursuant to the provisions of the Employment Act No.11 of 2007, the Cabinet Secretary may pay out of the National Social Security Fund, the amount which, in the opinion of the Cabinet Secretary, the employee is entitled to.

3. Way Forward

  1. Don’t wait – be proactive and assess the viability of the business now and decide whether the available measures provided under the Act may be applied to your business.
  2. Seek help – if in a fix, start seeking help immediately, be it professional help in the form of advice or credit to sustain the business.
  3. Communicate – if in a fix, start engaging with relevant suppliers, customers and employees so that they are well aware of the impending difficulties the company is likely to face and agree on mutually beneficial solutions.

 

Article by Jeff Njaungiri

Lawyer, MMAN Advocates





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