My Company Can’t Pay Its Debts: What Are the Options Before Liquidation?

Directors of a struggling Kenyan company often assume there are no options before liquidation once debts cannot be paid on time. Since the Insolvency Act, 2015, that has not been true. The Act introduced rescue procedures, the main options before liquidation, so that a viable business under short-term pressure does not have to be wound up just because it has reached the point where it must act.

Administration: A Pause to Restructure

Under section 521 of the Insolvency Act, 2015, a company is “under administration” while the appointment of an administrator has effect. Section 522 sets the objectives: to maintain the company as a going concern, to achieve a better outcome for creditors as a whole than liquidation would, or to realise property so as to make a distribution to secured or preferential creditors. The administrator must perform the functions as quickly and efficiently as is reasonably practicable (section 524) and is an officer of the Court (section 525).

Section 523 says an administrator can be appointed in three ways: by an administration order of the Court (sections 530 to 533), by the holder of a floating charge (section 534), or by the company or its directors (section 541). Only an authorised insolvency practitioner may be appointed (section 526). Banking, finance and insurance companies cannot be placed in administration under this Part (section 529). Administration buys time and breathing room; it does not itself write off debt.

What the Moratorium Actually Stops, and What It Does Not

The administration moratorium is often misunderstood as a blanket freeze, which overstates it. Under section 559, while a company is under administration, no resolution for its liquidation may be made and the Court may not order its liquidation. Under section 560, a person may take steps to enforce security over the company’s property, repossess goods held under a credit purchase transaction, exercise a landlord’s right of forfeiture by peaceable re-entry, or begin or continue legal proceedings (including execution and distress) only with the administrator’s consent or the Court’s approval.

The moratorium does not erase the underlying debts. What it buys is time and a level playing field: no single creditor can jump the queue while the administrator works out whether the business can be rescued. Section 561 also provides an interim moratorium once an application for an administration order has been made.

Company Voluntary Arrangements: Negotiating a New Repayment Plan

A company voluntary arrangement (CVA) lets the directors propose to the company and its creditors a composition in satisfaction of its debts or a scheme for arranging its financial affairs (section 625(1)). The proposal must provide for a supervisor, and only an authorised insolvency practitioner may be appointed to supervise (section 625(2) and (3)). The proposal is considered at meetings of the company and of its creditors, and once approved at those meetings and by the Court, it takes effect as a voluntary arrangement binding on the company and its creditors (sections 629 and 630). Banks, financial businesses and insurers are ineligible for the pre-insolvency moratorium used to prepare a voluntary arrangement (section 639).

A CVA is generally a lighter-touch option than administration. It works best where the underlying business is sound and creditors can be persuaded that a structured plan beats forcing liquidation. Our article on restructuring debt through a company voluntary arrangement explains the process in more detail.

Secured Creditors and Floating Charges

A secured creditor does not need the company’s cooperation to take action. Under section 534, the holder of a floating charge may itself appoint an administrator, subject to the restrictions in section 535, and section 560 requires the administrator’s consent or the Court’s approval before security is enforced once a company is under administration. A company negotiating with a secured lender therefore has less leverage than it might assume, and should read its security documents carefully before assuming it controls the timetable.

When Liquidation Still Becomes the Answer

Liquidation remains available, and sometimes it is the right outcome, where the business is not viable even with breathing room or where a voluntary arrangement or administration has failed. Section 424 sets out when a company may be liquidated by the Court. The grounds include a special resolution for liquidation by the Court, failure to commence business within twelve months or suspending business for a whole year, inability to pay debts, a voluntary arrangement not taking effect when the moratorium ends, and cases where the Court considers liquidation just and equitable. Directors who act early are generally in a stronger position than those who keep trading regardless; our article on whether directors can be personally liable when a company becomes insolvent covers that exposure.

Cost and Timeline of the Options Before Liquidation

None of these routes is free or instant. Administration and a CVA both need an authorised insolvency practitioner, whose fees are a cost to the company, and an administration will usually take months rather than weeks while the administrator investigates the business, prepares proposals and consults creditors (sections 564 to 573). A CVA’s timeline depends on how quickly creditors can be brought to a vote once the proposal is ready.

Directors weighing these options against negotiating informally with a few major creditors should note that the formal routes exist for situations where informal negotiation has failed, usually because there are too many creditors, or creditors too unwilling to cooperate, for a private arrangement to work. Bring an authorised insolvency practitioner in early rather than after a route has already been chosen, because the practitioner’s assessment of the company’s real financial position may change the choice.

Public Notice and Reputation

Rescue is not confidential. A company’s business documents must state that its affairs are under administration (section 562), and the administrator’s appointment must be announced (section 563). That is a genuine reputational consideration to weigh alongside the legal and financial ones.