A company in financial distress is not automatically a company for the scrapheap. Since 2015, Kenyan law has offered rescue tools that try to save a viable business rather than break it up. Company administration in Kenya is the main one. This guide explains administration, the moratorium that protects the company, and the voluntary-arrangement alternative.
This guide is for directors, shareholders, lenders and creditors of a company in financial difficulty, and for their advisers. If rescue is not possible, see our guide to liquidation and winding up. If you are a director worried about personal exposure, see our guide to directors’ duties in insolvency.
Before 2015, a company in serious trouble had few options but to be wound up. The Insolvency Act, 2015 changed the philosophy. It introduced modern rescue procedures aimed at keeping a viable business alive, preserving jobs and value, and giving creditors a better return than a fire-sale liquidation would. Administration is the centrepiece of that rescue regime.
Administration places the company in the hands of an administrator, a licensed insolvency practitioner, who takes control from the directors and works to a statutory objective. Under section 522 of the Act, the administrator must try to achieve one of three things, in order of preference: to rescue the company as a going concern; failing that, to achieve a better result for the creditors as a whole than an immediate liquidation would; and failing that, to realise the company’s property to pay the secured or preferential creditors. So the first aim is genuinely to save the business, and only if that cannot be done does the focus move to the creditors.
In practice, the feature that makes administration work is the moratorium. Once the company enters administration, an automatic stay applies: creditors cannot start or continue legal proceedings, enforcement or a liquidation application against the company without the court’s permission. This freezes the pressure and gives the administrator room to negotiate, restructure or sell the business as a going concern. For a company being chased by creditors, the moratorium is often the difference between rescue and collapse.
In practice, there are three routes into administration. First, the court can make an administration order on the application of the company, its directors or a creditor. Alternatively, a creditor holding a floating charge can appoint an administrator out of court under section 534. Finally, the company or its directors can appoint one themselves under section 541. Once appointed, the administrator must put proposals to the creditors within 28 days, and administration generally runs for up to 12 months unless it is extended.
| Route into administration | Who uses it |
|---|---|
| Court order (section 522) | Company, directors or a creditor apply to court |
| Out-of-court, floating charge (section 534) | A qualifying secured creditor |
| Out-of-court, company or directors (section 541) | The company or its directors |
Administration is not the only rescue tool. A company voluntary arrangement, under sections 625 to 634, lets a company propose a binding compromise to its creditors, supervised by an insolvency practitioner. If the required majority of creditors approve, the arrangement binds them all, including those who voted against. A voluntary arrangement suits a company that can trade on and pay a restructured level of debt over time, without the fuller intervention of administration.
What is company administration? A rescue procedure where a licensed insolvency practitioner takes control of a distressed company to try to save it as a going concern.
What does the moratorium do? It stops creditors suing or enforcing against the company without the court’s permission, giving the administrator space to work.
What are the administrator’s objectives? To rescue the company as a going concern; failing that, a better result for creditors than liquidation; failing that, to realise property for secured or preferential creditors.
What is a company voluntary arrangement? A binding debt-restructuring deal agreed with creditors and supervised by an insolvency practitioner.
When should we act? Early. Rescue options narrow as the cash runs out, so take advice before the company is on the brink.
For example, the costly mistakes are leaving it too late, so that by the time advice is taken there is nothing left to rescue; assuming liquidation is the only route when administration or a voluntary arrangement could save the business; and directors continuing to trade without appreciating their personal exposure as insolvency approaches. Others overlook the strict timelines once administration begins.
Our insolvency and restructuring team advises companies, directors, lenders and creditors on business rescue: administration, company voluntary arrangements and the alternatives under the Insolvency Act, 2015. We move quickly to protect value and to guide directors through their duties. To discuss a company in difficulty, contact John Maina or Kenneth Likoko, Partners, at OLM Law Advocates LLP.
This article is a general guide only and is not legal advice. Please seek advice on your specific circumstances.
OLM Law Advocates LLP advises companies, directors, lenders and creditors on business rescue, administration, liquidation and personal insolvency.
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