Breathing Room for Insolvent Companies?
Can Companies in Financial Difficulties/Insolvency Situations gain some Breathing Space?
The answer is yes. The Kenyan Insolvency Act introduced the legal – albeit relatively short term- relief of a statutory moratorium to help companies facing insolvency/financial difficulties. The moratorium gives time to the company to make a voluntary arrangement with its creditors while protecting the company from its creditors by giving the firm’s directors time to propose a restructuring/repayment plan to creditors. Therefore, the company is given time and crucially, breathing room in the insolvency process by legally fencing the company from claims by its creditors and other potential plaintiff’s.
What is a Statutory Moratorium?
A statutory moratorium is the temporary suspension of legal proceedings against an insolvent company preventing its creditors from making any legal claims to recover debt incurred by the company to allow the company to propose and enter into a Company Voluntary Arrangement/CVA with its creditors under which the company presents a viable repayment/restructuring plan to its creditors.
A statutory moratorium is also issued in the event a company enters into administration by order of the court; whereby the company is run as a going concern instead of being liquidated to satisfy the claims of creditors.
Obtaining a Moratorium to enable a Company enter a Voluntary Arrangement with its Creditors
If the directors of an eligible company wish to make a proposal for a voluntary arrangement, they are required to prepare a proposal outlining the terms of the voluntary arrangement with creditors as well as a separate financial statement particularizing the company’s creditors, debts assets and liabilities.
This is then presented to an authorized insolvency practitioner (called the provisional supervisor) who shall then consent to supervise any voluntary arrangement. Upon the provisional supervisor agreeing to supervise the proposed arrangement, the directors shall proceed to lodge in court the above stated documents as well as a statement by the provisional supervisor that the directors have proposed an arrangement that can viably be implemented between creditors and the company.
The moratorium automatically takes effect once these documents are lodged/filed in the court.
What is a CVA
A Company Voluntary Arrangement is an arrangement proposed by an insolvent company to its creditors outlining how the company can satisfy its creditors by repaying part or of all its debts over a defined period of time. The CVA is subject to the approval of the creditors.
How can a Moratorium help an Insolvent Company?
During the period of moratorium, the provisional supervisor of the process is mandated to call a meeting of creditors and present the proposed voluntary arrangement to the creditors for their approval (whether as proposed or with modifications). As many meetings as may be necessary to discuss the proposal may be convened by the provisional supervisor.
Further, during the moratorium period, aside from coming up with an agreed voluntary arrangement:
- Neither an application nor an order for either liquidation or administration of the company may be made.
- An action by landlord relating to non-payment of rent over the company’s premises may not be brought without the consent of the provisional supervisor or the court.
- A landlord cannot distrain for rent without consent of the court or the provisional supervisor.
- Executing court orders or attaching the company’s goods shall not occur without consent of the court or the provisional supervisor.
Duration of Moratorium
The moratorium terminates upon the approval of the CVA by either the creditors or the court. A moratorium may not be extended beyond a period of 2 months from the last meeting of creditors.
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