Before 2015, an insolvent company in Kenya faced a stark choice: find private accommodation with its creditors, or be wound up. The Insolvency Act, 2015 changed that by introducing administration as a formal rescue mechanism, and the High Court’s handling of Arvind Engineering Limited’s administration shows how the process is meant to protect a company’s chance of survival while it works out how to deal with its creditors.

What administration is

Administration is a court-recognised process in which a licensed insolvency practitioner, the administrator, takes over management of an insolvent or near-insolvent company with the statutory objective of either rescuing it as a going concern, achieving a better outcome for creditors as a whole than an immediate liquidation would, or, failing both of those, realising the company’s property to make a distribution to secured or preferential creditors. The administrator must pursue the objectives in that order, moving to the second or third only where the first genuinely is not reasonably practicable.

An administrator must be a qualified insolvency practitioner, and can be appointed by the company itself, its directors, the court on application, or the holder of a qualifying floating charge over the company’s assets. Once appointed, the administrator’s powers effectively displace those of the directors for the duration of the administration; the directors remain in office but can no longer exercise the powers that now belong to the administrator.

How the process works

The moment a company enters administration, a moratorium takes effect: no resolution may be passed and no order may be made to liquidate the company, and creditors cannot enforce security, repossess goods, or start or continue most legal proceedings against the company except with the consent of the administrator or the permission of the court. That protection is the practical reason directors and creditors turn to administration, since it buys the company breathing room that simply is not available outside a formal insolvency process.

The administrator is required to prepare a statement of the company’s affairs and set out proposals for achieving the purpose of the administration, and to send those proposals to creditors, the company, and the Registrar within eight weeks of the administration beginning. A creditors’ meeting to consider the proposals generally follows within ten weeks of the administration’s start, unless the administrator’s proposal states that the company has sufficient property to pay every creditor in full, that there is insufficient property to make any distribution to unsecured creditors, or that none of the statutory objectives can be achieved, in which case a meeting is not required. Where a meeting is held, the proposals may take the form of a voluntary arrangement or a scheme of arrangement, and creditors vote on whether to approve them, with modification possible by agreement between the administrator and the meeting.

Administration is time-limited: it automatically ends one year after it begins unless the court extends it or the creditors consent to an extension, which keeps the process from becoming an indefinite substitute for a decision on the company’s future. It can end in several ways depending on how the underlying business fares, including a return of the company to its directors once the objectives are met, a move into liquidation if rescue proves impossible, or dissolution if there is nothing left to distribute.

Arvind Engineering: administration tested in court

In In re Arvind Engineering Limited, Insolvency Petition 03 of 2019, the High Court dealt with an application concerning the company’s administration under the Act, illustrating how the courts engage with the administration framework once a company is inside it, including the kinds of disputes that can arise between the administrator, the company, and its creditors over how the administration should proceed. Kenya’s other high-profile administrations, including ARM Cement and Nakumatt Holdings, tell a similarly instructive story: administration gives a distressed company a structured chance to trade through its difficulties, but the outcome still depends on whether the underlying business is viable once the moratorium and professional management are applied to it. Where the business model itself is broken, administration can delay the end but rarely prevents it, which is why the choice between proposing a CVA and entering administration should turn on a realistic assessment of whether the company needs a repayment plan or a change of management to survive.

Administration compared with the alternatives

The advantage administration offers over a straight liquidation is the moratorium: creditors are held back from enforcement action while the administrator works out whether the company can be saved, sold as a going concern, or wound down in an orderly way that produces a better result than an immediate liquidation would. That protection comes at a cost. Control of the company passes out of the directors’ hands to the administrator for as long as the administration lasts, and because administration is a matter of public record, suppliers, customers, and lenders will generally become aware that the company is in administration, which can affect trading relationships even where the underlying business remains sound.

Compared with a company voluntary arrangement, administration is the heavier-handed option: a CVA leaves the directors in charge and relies on creditors agreeing to a repayment proposal, while administration removes management control entirely and imposes a binding moratorium regardless of whether every creditor consents. Directors considering their options should weigh whether the company needs the breathing space and change of control that administration provides, or whether a negotiated repayment plan under a CVA would achieve the same result with less disruption.

How We Can Help

Clay & Associates Advocates advises directors, creditors, and floating charge holders on the administration process, from the initial decision to place a company into administration through to creditors’ meetings and any court applications that arise during the administration. Our guide to company voluntary arrangements 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 whether administration is the right route for your company or for one owing you money.

Sources: Insolvency Act, 2015, sections 522 to 570 (administration of companies); In re Arvind Engineering Limited, Insolvency Petition 03 of 2019, [2019] KEHC 12266 (KLR).

Frequently asked questions

Who can put a company into administration?
The company itself, its directors, the court on application, or the holder of a qualifying floating charge over the company’s assets can appoint an administrator.

What happens to the directors once administration begins?
The directors remain in office but lose the power to manage the company, which passes to the administrator for the duration of the administration.

How long does an administration last?
Administration automatically ends one year after it begins unless the court or the creditors agree to extend it.

Can creditors still sue the company while it is in administration?
Generally not. The moratorium that takes effect on administration prevents most legal proceedings and enforcement action against the company without the consent of the administrator or the permission of the court.