The number of Kenyan firms facing liquidation more than doubled in seven years, highlighting weaknesses in the legal regime on insolvency.
Latest data from Kenya’s State Receiver Office shows that 46 companies are currently facing a liquidator’s hammer, up from 18 in 2015.
Of these, companies grappling with court-sanctioned liquidations increased to 34 from 13 while those under voluntary liquidation grew to 12 from five.
The damning statistics paint a grim picture of the country’s insolvency law that requires financially troubled firms to be given time to recover through an administration procedure, with liquidation being last resort.
According to the data, the number of companies under administration has risen to 16 in 2021/2022 from two in 2015/2016, and none of them is showing recovery.
Insolvency practitioners polled by The EastAfrican said reviving a company under administration has become an arduous task because, in most cases, they are called upon when companies’ financial health has deteriorated ‘beyond repair.’
“There are three objectives of any administration. Reviving a company is the first and depends to a large extent on the state of the company at the point of the intervention,” said George Weru, business recovery partner at PricewaterhouseCoopers.
“If the intervention is too late when the distress is very significant this is not practical. The administrator proceeds to the next objective which is to sell the business as a going concern. This ensures continuity of the business and saves jobs, which to me is still a success.”
Peter Kahi, a partner at PKF Consulting Ltd, says reviving a company under administration has become difficult after enforcement of the insolvency law in 2015.
“From my vast experience in insolvency matters, we are normally called in when the company is in the intensive care unit – when there is nothing to salvage; most assets have been stripped by the directors and that’s why most administrators will normally go for selling the business as a going concern or selling the assets to make a distribution to one or more secured or preferential creditors,” said Kahi
According to companies distress curve, troubled firms begin to show red flags during the underperformance stage by reporting losses, before moving to the distress stage which is reflected in the balance sheet through deteriorating financial ratios.
The last stage is when the firm plunges into a financial crisis by being unable to meet its financial obligations to suppliers, creditors and utility providers.
“Companies/directors should stop being in denial and seek professional advise once issues of underperformance are noted,” said Kahi.
According to Kereto Marima, partner in-charge of corporate insolvency and restructuring at KR Consulting Services Ltd , company administration is facing several challenges including lack of cooperation from directors and management, troubled firms running out of resources particularly financial and the top talent required to rescue the company and spurious litigation.
Other challenges include lack of understanding of the conditions that come with statutory administration.
“Not all businesses are viable and that is the reality. Only one in seven businesses generally make it past their fifth year. The lifecycle of a company has been dropping rapidly over the years as business cycles change faster,” said Marima.
Kenya’s state receiver Mark Gakuru said in February that there are rising cases where company owners obtain court injunctions to stall the administartion process as they strip company of assets.
As a result authorities want to change the law to require company management to provide security equivalent to a portion of what is owed to creditors
The government is also making changes to the Insolvency Act to stop administration by receiver managers who take years to resolve a failed business while paying themselves thousands of dollars.
The insolvency practitioners will also not get a blank cheque when seeking to extend the period of administration.
The administrators will have to explain what they have done so far and how much recoveries they have been able to make to justify their pay.
Kenyan companies that have undergone administration and failed to recover include Nakumatt Holdings, ARM Cement Plc and Deacons East Africa.
In August, Kaluworks joined Uchumi Supermarkets in implementing company voluntary arrangement plans (CVAs) with hopes of securing a deal with creditors on settlement of debts in attempts to revert to profitability.
As result Kaluwork’s administration was lifted by the courts.
Under the insolvency law a company is deemed unable to pay its debts if it fails to pay a debt of Ksh100, 000 ($826.44) or more after 21 days of a written demand.