When to restructure, not wind up: what the Insolvency Act 2015 changed

Rescue is now a legal option, not a private hope

For too long, financial distress in Kenya was treated as a route with one destination: winding up. The Insolvency Act, 2015 changed the direction of travel. It recognises that a business can be worth more alive than broken up, and gives boards structured ways to preserve value for creditors, employees and owners.

That does not mean every struggling company should be saved. It means the board should test rescue before liquidation destroys customer confidence, workforce capability and going-concern value. Under section 522, administration is designed first to maintain a company as a going concern; if that cannot be achieved, it may still produce a better result for creditors than immediate liquidation.

The right restructuring is not a refusal to face insolvency; it is a disciplined way to face it early enough to preserve value.

The practical question is timing. If a rolling three-month cash-flow forecast cannot cover secured-debt service and payroll, the board should obtain restructuring advice now—not after the bank has enforced security or suppliers have stopped delivery. That forecast must be real: include taxes, rent, critical suppliers, contingent cash calls and the cost of keeping the business open.

Four routes worth considering before the cliff edge

1. Administration. An authorised insolvency practitioner takes control and a statutory moratorium restricts enforcement, proceedings, forfeiture and insolvency action without consent or court approval. It is powerful because it creates breathing space, but the public appointment can unsettle customers and lenders. Use it where a credible trading, refinancing or sale plan needs protection.

1. Company Voluntary Arrangement (CVA). Directors, an administrator or a liquidator can propose a composition or financial arrangement supervised by an authorised insolvency practitioner. It is a route to bind creditors, but do not rely on the familiar “75% by value” line from foreign templates: Kenya’s section 629 uses a majority in number and value within each creditor group, with court oversight and protections for secured creditors. The voting design is therefore a commercial exercise, not a formality.

1. Scheme of arrangement. Under the Companies Act, 2015, a court-sanctioned compromise or arrangement can restructure debt or ownership with greater flexibility than a simple bilateral workout. It is particularly useful where different creditor or shareholder classes need different treatment, or a new investor requires a clean capital reorganisation.

1. A pre-packaged administration sale. The Insolvency Act does not create a separate labelled “pre-pack” procedure, but an administrator can sell company property by private contract. A sale negotiated before the administration appointment and completed rapidly afterwards can preserve value. The discipline is valuation, transparent process and proof that creditors are better served than by a rushed liquidation—not a quiet transfer to insiders.

The director’s dilemma is real

Boards face a genuine tension. Appointing an administrator too early can frighten customers, employees and lenders. Trading on can preserve value if there is a properly evidenced route to recovery. But optimism is not a defence.

The cliff edge arrives when directors know, or ought to know, that there is no reasonable prospect of avoiding insolvent liquidation. Section 506 of the Insolvency Act, 2015 allows a court to require a director to contribute to the company’s assets for wrongful trading, unless the director took reasonable steps to minimise potential loss to creditors. The Companies Act, 2015 duty of care, skill and diligence in section 145 reinforces the standard expected from a board that has the financial information in front of it.

At that point, directors must make decisions through a creditor-protection lens rather than treating shareholder preference as decisive. Document the forecasts, board deliberations, creditor engagement, advice received and alternatives tested. Those records may be the clearest evidence that the board acted responsibly.

How PMA Advocates LLP can help

PMA Advocates LLP helps boards assess solvency, protect negotiations and choose a workable route—informal workout, CVA, scheme, administration or sale—before value falls off the cliff. Early, candid advice gives directors more options and creditors a better outcome.