Lessons Kenya Can Learn from US Bankruptcy Laws

Bankruptcy is a term used when an individual or company is in dire straits financially and is unable to pay creditors.

Bankruptcy has both advantages and disadvantages that can work for or against the affected company or individual. This is why the US bankruptcy laws are purposely geared towards reviving a company as opposed to liquidating it.

In Kenya, the Insolvency Act 2015 was introduced with a view of restructuring how bankruptcy is handled in the country. Under the previous regime, most companies that went under receivership had basically been committed to their death beds. The new act was introduced to turn around this notion and redefine receivership. The intention was to make receivership a recovery bay as opposed to a death sentence. Companies facing insolvency, under the new laws, are to be put in an administration where administration managers are appointed to steer the company out of debt where possible.

Since the Insolvency Act 2016 was passed, only two companies have found themselves under administration. The first company was Nakumatt Holdings Plc. which went into voluntary administration in January 2018. In August 2018, ARM Cement was also put under administration with PwC’s Muniu Thoiti and George Weru being appointed as the joint administration managers.

The administration managers for ARM Cement and Nakumatt Holding Plc. have a daunting task ahead of them. This is because the manner in which they handle the administration of the two companies will set a precedent on the direction future administration processes will take. As they get down to the real business of managing the companies under administration, here are a few lessons they can learn from US bankruptcy laws.

US bankruptcy laws, just like Kenya’s Insolvency Act 2015, are intentionally tailored to give companies a temporary breather from debt payments. The suspension of debt payments can allow businesses that otherwise couldn’t stay afloat with these obligations to turn the company around while they pursue new cost-cutting measures.

When a company files for bankruptcy, a U.S. bankruptcy law known as automatic stay makes creditors powerless to take action against the debtor. An injunction is automatically ordered preventing creditors from attaching the debtor’s properties. Even though this does not erase the debt, it postpones its collection. Administration managers under the new Kenyan laws should take advantage of this aspect and work towards turning the company around during this reprieve from creditors. Funds realized either by selling assets or raising capital from investors and shareholders should not be entirely used to pay off debts but also to revive the company since the pressure from creditors is eased during administration.

Contract renegotiation is also an area from where Kenyan companies under administration can learn from US bankruptcy laws. Under the US laws, a business that has contracts, including those with labor unions, can end its contracts in order to renegotiate more favorable terms. Administration managers should, therefore, identify which of the company’s contracts with vendors, suppliers, and debtors can be renegotiated to give the company enough elbow room to continue with its operations. This will help in reducing pressure from suppliers and vendors while ensuring the inflow of supplies necessary for the continued operation of the business is not disrupted.

Marvel Entertainment which filed for bankruptcy in 1996 came back stronger and this year alone it has released Black Panther and Avengers: Infinity Wars, the two biggest box office hits of 2018.

This is the comeback chance US Bankruptcy laws give companies.