By Jerameel Kevins Owuor Odhiambo
The Insolvency Act of 2015 was enacted with the promise of revolutionizing Kenya’s insolvency framework, aiming to rescue struggling businesses rather than liquidating them. However, a decade later, there has not been a single notable turnaround of a financially distressed company under this law. The Official Receiver’s office, tasked with overseeing insolvency proceedings, has yet to deliver on its mandate, raising questions about the efficacy of the current system. Despite the Act’s progressive provisions, the reality on the ground paints a grim picture of prolonged administration periods, high costs, and minimal recoveries for creditors. The lack of success stories has led to growing skepticism about the law’s ability to achieve its intended objectives.
One of the primary challenges lies in the lengthy and costly nature of insolvency proceedings. Court processes are often delayed due to backlogs and procedural complexities, while professional fees for lawyers and accountants significantly erode the value available for creditors. For instance, the administration of ARM Cement incurred costs of Kshs 2.5 billion, which amounted to over 40% of the total recoveries. Such exorbitant costs not only diminish creditor returns but also discourage businesses from seeking insolvency protection. Moreover, the lack of transparency and accountability in the administration process has led to concerns about corruption, with assets often being sold to pre-identified individuals at below-market prices rather than being used to resuscitate struggling businesses.
The role of insolvency practitioners has also come under scrutiny. While the Act introduced stringent qualifications for practitioners, their effectiveness in turning around distressed companies remains questionable. The average administration period of 4.5 years, with recoveries amounting to only a third of the business value, highlights the inefficiencies in the current system. Furthermore, the extension of administration periods has often been granted without adequate justification, leading to prolonged stagnation and further erosion of business value. The recent amendments to the Act, which require the Official Receiver to recommend extensions, are a step in the right direction but have yet to yield significant improvements.
Another critical issue is the lack of a multidisciplinary approach to insolvency. The current framework primarily relies on legal and financial expertise, often overlooking the importance of operational and strategic management in business recovery. A more holistic approach, incorporating management consultants and industry experts, could provide distressed companies with the necessary tools to restructure and regain profitability. Additionally, the Act’s focus on preserving businesses as going concerns must be complemented by robust support mechanisms, such as access to working capital and strategic partnerships, to ensure sustainable recovery.
The economic environment has also played a significant role in the rising number of insolvencies. The tough business operating conditions, characterized by high non-performing loans and declining purchasing power, have exacerbated financial distress among Kenyan companies. As of September 2024, the banking sector’s gross non-performing loans stood at Kshs 670.6 billion, reflecting a 14.4% compound annual growth rate over the past five years. This alarming trend underscores the need for proactive measures to address the root causes of financial distress, including improved credit management and regulatory oversight.
The Insolvency Act’s emphasis on voluntary arrangements and administration is commendable, but its implementation has fallen short of expectations. The lack of successful restructurings highlights the need for a more proactive and solution-focused approach. One potential solution is the introduction of pre-insolvency mechanisms, such as early warning systems and mandatory financial health checks, to identify and address financial distress before it escalates. Additionally, the establishment of specialized insolvency courts could expedite proceedings and reduce the burden on the judiciary, ensuring timely resolution of insolvency cases.
Education and awareness are also crucial in improving the insolvency landscape. Many businesses remain unaware of the provisions and benefits of the Insolvency Act, leading to delayed action and missed opportunities for recovery. Public awareness campaigns, coupled with training programs for business owners and practitioners, could enhance understanding and utilization of the Act’s provisions. Furthermore, fostering a culture of accountability and transparency among insolvency practitioners is essential to restore confidence in the system.
The government’s role in supporting distressed businesses cannot be overstated. While the Insolvency Act provides a legal framework for business recovery, it must be complemented by policy measures aimed at creating a conducive business environment. This includes addressing macroeconomic challenges, such as inflation and currency volatility, and providing targeted support to struggling industries. Additionally, the government should consider establishing a national insolvency fund to provide financial assistance to businesses undergoing restructuring, thereby reducing reliance on costly private financing.
The Act’s focus on preserving jobs and maintaining the tax base is a noble objective, but its realization requires a concerted effort from all stakeholders. Employers, employees, and creditors must work together to develop viable restructuring plans that balance the interests of all parties. Moreover, the Act’s provisions on severance pay and employee rights must be strictly enforced to protect workers during insolvency proceedings. The recent increase in insolvencies has put the spotlight on severance pay, with many employees left unpaid despite legal protections. Strengthening enforcement mechanisms and ensuring compliance with the Act’s provisions is essential to safeguard workers’ rights.
The lack of a track record of successful turnarounds under the Insolvency Act is a stark reminder of the challenges facing Kenya’s insolvency regime. However, this should not deter stakeholders from seeking innovative solutions to improve the system. The recent amendments to the Act, coupled with ongoing reforms, offer hope for a more effective insolvency framework. By addressing the systemic issues and adopting a multidisciplinary approach, Kenya can unlock the potential of its insolvency regime and create a more resilient business environment.
The Office of the Official Receiver must also undergo significant reforms to enhance its effectiveness. The current structure, which operates under the Business Registration Service, lacks the autonomy and resources needed to fulfill its mandate. Establishing an independent insolvency authority, with adequate funding and professional staff, could improve oversight and ensure the efficient administration of insolvency cases. Additionally, the Official Receiver’s role in investigating and prosecuting insolvency-related offenses must be strengthened to deter malpractice and promote accountability.
In conclusion, the Insolvency Act of 2015 was a landmark legislation aimed at transforming Kenya’s insolvency landscape. However, a decade later, the absence of successful turnarounds and the inefficiencies in the current system highlight the need for urgent reforms. Addressing the challenges of lengthy proceedings, high costs, and lack of transparency, while adopting a multidisciplinary and solution-focused approach, is essential to realizing the Act’s objectives. With concerted efforts from all stakeholders, Kenya can create a robust insolvency framework that not only rescues distressed businesses but also fosters economic resilience and growth. The statistics speak for themselves: since the Act’s introduction, the number of companies under administration has increased eightfold, yet recoveries remain dismally low. It is time for bold action to ensure that the Insolvency Act delivers on its promise.
John Kariuki 
John Kamau 
Mt Kenya Times