Expert advice in Insolvency

This year has seen the highest rate of insolvencies, brought about by a mix of factors – so different one from one another that a meaningful analysis would need to bullet them:

  1. Impact on businesses brought about by COVID 19
  2. Influence on those businesses by COVID 19 government directives
  3. Implementation and timing of non-COVID government directives largely justified on government growth agenda and large capital investments in public infrastructure
  4. Speedy changes in technology where once dominant, leveraged players never changed their business models.
  5. New aggressive, lean, tech savvy market entrants
  6. Lending institutions and corporate financiers using Central Bank flexibility in a depressed year to clean up distressed debt
  7. Family businesses and their lack of succession planning

Whilst it is easy to blame sectors, my own view is that the hardest hit sectors are often businesses led by individuals who remained resistant to change. There are businesses in the same hardest hit sectors that quickly adapted to the new market and flourished. The sectors that we see affected in the last two years are entertainment businesses, food and beverage and nightlife, which I am sure is no surprise The other sectors are those affected by government directives such as the mandatory use of the new Chinese funded railway line, such as logistic companies and freight movers. Speculative real estate developers were also affected by a massive 20% to 25% correction in pricing as investors struggled to sell residential and commercial real estate. Market indicators reflect a correction in rental yields of 20% to 25%.

There have been some changes to the insolvency law on secured creditors, and often an insolvency petition is met with a barrage of court injunctions by the holder of distressed debt. Often the courts grant stay orders with hopes of resuscitation lying on advisers faced with getting in too late. In my own view there needs to be re-building of a trust triangle, with the untrusted distressed debt holder, a more trusted insolvency practitioner and a lenient financial institution to offer that bridge and support services much before the insolvency petitions are advertised.

It is important for the local laws to continue to adapt with regulations which allow breathing space to both companies and lenders. The Kenyan insolvency regime is quite advanced with the new 2015 law, which captures salient points from the UK system, and we have already seen good use of CVA’s and administrations and other alternative mechanisms to run businesses as a going concern for the benefit of all. These remedies differ from natural persons to companies but are aimed at giving the financially distressed entity a chance to re-organize, re-structure and create a scheme of financial arrangement to pay off creditors. The Act, however, offers limited guidance on financial strategies of business rescue, business turnaround and the help of specialists is thus required to ease and even mitigate the path to insolvency. These strategies continue to require the appointment of turn around experts and distressed debt practitioners who have the strength, skill and honesty required in complex situations.

The 2019 and 2020 World Bank Kenya Doing Business Report capture Kenya as having a strong insolvency framework and time for resolving insolvency as 4.5 years with a 30 cents recovery rate. I do agree with the strong framework and my experience is that 30 cents recovery rate is a bitter pill to swallow but often realistic.

Baker Tilly is currently trying to create a platform whose aim is to trade distressed debt. At the moment, no framework exists.

As the saying goes the word “bankruptcy” comes from a mixing of ancient Latin words bancus (bench or table) and ruptus (broken). When a banker, who originally conducted his public marketplace transactions on a bench, was unable to continue lending and meeting obligations, his bench was broken in a symbolic show of failure and inability to negotiate. Maybe it’s time we need advisers to sit on those benches much before they break.

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