A company facing financial distress in Kenya has more options today than a straight choice between struggling on and being wound up. The Insolvency Act, 2015 introduced company voluntary arrangements as a formal, court-backed way for a company to renegotiate its debts with creditors while continuing to trade, and Uchumi Supermarkets PLC’s use of the mechanism since 2020 is the clearest real-world demonstration of how it actually works.

What a company voluntary arrangement is

A company voluntary arrangement, commonly called a CVA, is a proposal by a company’s directors, administrator, or liquidator setting out how the company intends to pay its creditors over time, put to a creditors’ meeting for approval under Part IX of the Insolvency Act. If approved, the arrangement binds every creditor entitled to vote at that meeting, including those who voted against it or did not attend, and the company avoids liquidation while it works through the agreed repayment plan.

A CVA is supervised throughout by an authorised insolvency practitioner, who is proposed by the directors when the proposal is put forward but can be replaced by the creditors as part of any modification they make at the meeting. Once approved, that supervisor becomes responsible for implementing the arrangement and monitoring the company’s compliance with it. Banking and insurance companies cannot use this route; it is available only to ordinary trading companies.

How the process works

The directors, administrator, or liquidator prepares a proposal describing the company’s assets and liabilities, the terms it is offering creditors, and the person it proposes as supervisor. Where the proposal is made by the directors of a company that is not already in administration or liquidation, the proposed supervisor reports to the directors on whether the proposal has a reasonable prospect of being approved and implemented, and whether meetings of the company and its creditors should be summoned to consider it.

If the supervisor recommends proceeding, meetings of the company’s members and of its creditors are convened under section 627 of the Insolvency Act. Every creditor who was given notice of the meeting is entitled to vote, and the proposal is approved if a majority in value of those present or represented, in person or by proxy, vote in favour, subject to safeguards protecting secured and preferential creditors from having their priority position altered without consent. Once approved by the creditors, the arrangement takes effect immediately and binds the company and every person who was entitled to vote at the meeting, whether or not they attended or voted against it, under section 630. A dissenting creditor or member who believes the arrangement unfairly prejudices their interests, or that a material irregularity occurred at either meeting, may apply to the High Court under section 631 to have the decision revoked or suspended.

Throughout the life of the arrangement, the supervisor implements its terms, collects the agreed payments, and reports periodically as the arrangement requires. False representations or fraudulent conduct by company officers in connection with a CVA proposal is a criminal offence under section 632, which reflects how seriously the Act treats the integrity of the process given that creditors are being asked to accept less, or slower, payment than they are strictly owed.

Uchumi Supermarkets: the mechanism in practice

The clearest illustration of a CVA at work in the Kenyan market is In re Uchumi Supermarkets PLC, Insolvency Petition 25 of 2018, in which the High Court considered the retailer’s restructuring under the Act. Uchumi had been trading at a loss for several years and faced mounting creditor pressure, but rather than being wound up, the company pursued a court-supervised arrangement that allowed it to keep operating while negotiating repayment terms with its creditors. The case is a useful reference point precisely because it involved a listed, publicly known company working through the statutory process in real conditions, rather than a hypothetical example, which is why it remains the go-to Kenyan authority when directors ask what a CVA actually looks like once it moves from the page to the boardroom.

The broader lesson from Uchumi’s experience is that a CVA works best when it is proposed early, before the company’s cash position has deteriorated so far that creditors have lost confidence in the business’s ability to trade its way back to health. A proposal put forward after suppliers have already begun refusing credit, or after a statutory demand has been served, is a harder sell to a creditors’ meeting than one put forward while the company still has some room to manoeuvre.

Advantages and limitations

A CVA lets the company’s existing directors stay in control of day-to-day operations, in contrast to administration, where an appointed administrator takes over management. It is generally faster and less expensive to put in place than administration or liquidation, since it does not require a court-appointed administrator running the business throughout, and it avoids the reputational and operational disruption of a formal insolvency proceeding becoming public knowledge as long as suppliers and staff can be kept informed sensibly.

The limitations are practical rather than statutory. A CVA depends entirely on creditors agreeing to accept the proposal, and a company with a poor trading history or an unconvincing turnaround plan will struggle to secure the necessary majority. Once in effect, the arrangement also affects the company’s standing with new suppliers and lenders, who may be reluctant to extend fresh credit to a company known to be operating under a formal arrangement with its existing creditors. And because a CVA does not, by itself, impose a moratorium on all creditor action in the way an administration does, secured creditors retain more scope to act against their security than they would if the company had gone into administration instead.

How We Can Help

Clay & Associates Advocates advises directors and creditors on structuring, proposing, and responding to company voluntary arrangements, including drafting the proposal, liaising with the proposed supervisor, and representing clients at creditors’ meetings and in any subsequent application to the High Court. Our guide to corporate administration covers the alternative rescue route available under the same Act, and our guide to members’ voluntary liquidation and deregistration covers the exit routes available to a solvent company. Contact our insolvency and restructuring practice to discuss a proposal for your company or a response to one affecting you as a creditor.

Sources: Insolvency Act, 2015, Part IX (sections 624 to 635); In re Uchumi Supermarkets PLC, Insolvency Petition 25 of 2018, [2020] KEHC 9859 (KLR).

Frequently asked questions

Who can propose a company voluntary arrangement?
The company’s directors can propose a CVA at any time. If the company is already in administration or liquidation, the administrator or liquidator proposes it instead.

Does a CVA stop creditors from suing the company?
Not automatically. A CVA does not impose the same blanket moratorium that administration does, so secured creditors in particular retain more scope to act against their security unless the arrangement’s terms address this directly.

What happens if a creditor votes against the proposal?
If the proposal is still approved by the required majority at the meeting, it binds every creditor entitled to vote, including those who voted against it, subject to their right to challenge the decision in the High Court on limited grounds.

Can any company use a CVA?
No. Banking and insurance companies are excluded from this route and must use the regimes that apply to regulated financial institutions instead.